Home Sweet Home

By: Rabbi Max Sutton

Not So Calm After the Storm

Robert’s summer home sustained considerable damage during Hurricane Sandy, and he decided to sell the property for $2 million. Danny, who was interested in purchasing the home, made a counteroffer, claiming that although the property’s original value had indeed been $2 million, it had since sharply depreciated due to the severe damage sustained by the storm, and was now worth only $1.8 million.  Danny suggested that Robert collect the available insurance for the home’s damage, and restore the value of his property. He further offered to act on Robert’s behalf by representing him to collect the insurance, and overseeing the home’s renovation. In return, Robert agreed to sell him the home after renovation for the original price of $2 million. The two agreed, and Danny proceeded to collect the insurance, eventually using all the proceeds to restore the home’s original value.

Upon the project’s completion, Danny prepared a contract of sale for the purchase of the home. However, Robert informed him that he was reneging on the deal. Robert had received an outside offer of $2.1 million for the home, and was unwilling to honor his agreement with Danny. As compensation for Danny’s time and efforts to renovate the home, he offered him $20,000. Danny rejected the offer and came to Bet Din claiming that the home is to be sold to him for $2 million, as they had agreed. How should the Bet Din rule, in favor of Robert or Danny, and why?

Torah Law

According to the ruling of the Shulhan Aruch, a verbal agreement to transfer the ownership of real estate is not binding. Even if money is transferred for the purchase of a specific property, nevertheless, the transaction is insufficient and unenforceable. While payment for a sale is obviously required, in order for the purchase of real estate to be final, a written contract recording the pertinent details of the transaction is required.   

By Torah law, in instances in which an employee is assured a specific item as payment for his labor, the employer retains the legal right to withhold the item and provide monetary compensation in its place. Although the worker performed the task assigned to him with the intent of collecting the item as his wages, nevertheless, since he does not yet have possession of the item, the employer may renege and pay the item’s cash value.  If the item’s value increased after the employee completed his labor, the employer is required to reimburse the worker with wages based on the current value of the item.  The employee’s labor is considered payment for the specific item assured to him, and while his employer maintains the right to renege, the compensation due is based on the present value of the item.  Many halachic authorities penalize such an employer for reneging after labor was completed, subjecting him to a formal chastisement by a Bet Din.

The above information applies to an employee who labors in return for a transportable item, and may include labor in return for an acquisition of real estate. Since by Torah law an employee’s labor is viewed as a form of payment for the agreed property, if, after his labor, it goes up in value, the additional value is to the gain of the employee. Hence, while the employer maintains the legal right to renege on the sale in light of the fact that no contract was signed, nevertheless, the employee is entitled to wages according to the increased value of the property. As aforementioned, although the employer may renege on the deal, numerous halachic authorities subject him to a formal chastisement by a Bet Din for his immoral conduct.

According to the Shulhan Aruch, a transaction is not binding if a seller merely provides a letter of intent in return for a buyer’s payment. Since at the time of payment no goods or property were actually transferred, the transaction is rendered invalid. The future intent of the seller is subject to change, and is generally dependent on later circumstances and consideration, rendering the transaction null and void. Hence, whether payment or labor is provided by a potential buyer, the mere intent of a seller to perform does not finalize the transaction, and his money is refunded.  In short, if money is transferred in order to hold a seller to his word rather than to serve as partial payment for the property, the transaction is invalid. Subsequently, by whim of the seller, the money or monetary value of labor is refunded.

By Torah law, a person who labors without having set a prescribed amount of compensation for his services is nevertheless entitled to payment according to the going market rate.

As a general rule, it is considered untrustworthy and improper conduct to renege on a verbal agreement, even if no money was transferred.

Endnotes: Shulhan Aruch Hoshen Mishpat190:7, 332:4;Kesot332:4-6; Netivot 203:7; Bet Yosef 195:12 citing Rabbenu Yerucham (netiv 15);Teshuvat HaRashba 1033;Shulhan Aruch Hoshen Mishpat 245, 264:4, 204:7.

 Verdict: Riding the Wave

The Bet Din informed Robert that reneging on his agreement is unethical and is viewed as dishonest conduct. Nevertheless, since a proper transaction was never performed for the purchase of the home, and no contract was signed, he maintained the legal right to sell it on the market for an extra $100,000. The Bet Din further ruled that Danny was entitled to payment for his labor in the sum amounting to $70,000. The going rate for his work – serving as an insurance adjuster as well as a contractor supervising the project – was determined to be 35 percent of the amount spent on the renovation, which was $200,000.  As discussed, Danny was not entitled to wages for his services in the amount of $100,000, the present additional value of the home, since his mode of agreement to purchase the home was an invalid transaction.

Amusingly, when Robert learned that he needed to pay Danny $70,000, he suddenly realized that it was not worth his while to risk losing him as a customer. The potential outside buyer had still not yet closed the deal, and even after paying Danny his wages, he would be left with only an extra $30,000. Robert opted to sell the property to Danny for the 2 million they had originally agreed upon, thereby keeping to his word.

Winners: April 2013 - Albert Sutton and Raymond Kairey

Multi Million Mess

Eddie, an accomplished real estate investor, was approached by David who wished to be included in an upcoming promising real estate investment. Eddie agreed, and David transferred $22 million to Eddie’s corporate account. Shortly afterwards, Eddie had a change of heart, and without informing David, proceeded with the group’s investment without including David.  Approximately two weeks later, Eddie stumbled on a unique opportunity for a short-term investment with a profitable return. Eddie exhausted all his personal financial resources, including the $22 million David had sent to him, and made the investment. Within weeks, the short-term investment came to fruition, and Eddie successfully doubled his personal fortune. Thereafter, Eddie approached David and explained to him that he had not included him in his corporate group investment and is refunding him his money. He was further willing to compensate David for the delay in returning his money while it was privately invested. David berated Eddie for his dishonesty, and demanded that the money earned from his $22 million be forwarded to him. Eddie rejected David’s request, explaining that it was his personal business venture and he had merely borrowed David’s money for the deal.

In the meantime, the original real estate investment, in which Eddie had originally agreed to include David as a partner, matured, and reaped a modest gain of 10 percent.

How should the Bet Din rule? Should David be refunded his $22 million without any earnings? Perhaps he is he entitled to a 10 percent return on his money? Is he entitled to his claim to double his money?