After months on the market, you finally have a binding offer for your home. While the offered price of $1.5 Million seems low, even in this market, your ace real estate broker from Pay, Less & Commish convinces you to take the offer because the buyers appear solvent. They are purchasing with no financing contingency and with a 30-day escrow close. And, your broker has an all-cash back-up offer at $1.48 Million. The buyers deposit $10,000 in escrow. You and the buyers initial the Liquidated Damages Provision in your Purchase Contract. Liquidated Damages are to be increased by $35,000 (to $45,000), when the buyers remove inspection contingencies.
Initialing the Liquidated Damages clause makes sense for both parties and is customary. A Liquidated Damages provision allows for the payment of specified damages should the buyer breach the contract – a way to stipulate damages on the front-end of the transaction to save the parties from spending time and money fighting over damages at the back-end of the transaction. However, California’s statutory requirements must be followed in order for the seller to recover its Liquidated Damages. Now, back to our story.
Twenty days later your buyers release inspection contingencies and deposit the remaining $35,000 Liquidated Damages Deposit in escrow. Escrow is scheduled to close in ten short days. On day 27 your broker at Pay, Less & Commish phones you – bad news – your buyers have defaulted and cancelled the contract because they could not obtain their loan. Pay, Less & Commish advises you to put a written demand into escrow for the entire $45,000 Liquidated Damages Deposit and move forward with the $1.48 Million back-up offer, which you do. Your back-up offer closes in 30 days without a hitch. However, your attempt to obtain the $45,000 Liquidated Damages Deposit is mired in difficulty. The original defaulting buyers are refusing to release the $45,000 from escrow to you. Your broker repeatedly says you are entitled to the full $45,000 in Liquidated Damages without proving actual damages.
You call your attorney at Carr McClellan for her advice. Her first question is “Did you sign or initial a second Liquidated Damages clause separate from the Liquidated Damages Clause in your original Purchase Contract for the second $35,000 Deposit?” You don’t remember, but you did sign all the paperwork provided to you by your broker. Your attorney tells you this separate Liquidated Damages Clause was most likely the California Association of Realtors Form RID, and that under California’s Civil Code, any liquidated damages deposit made after the original deposit requires an agreement separately signed or initialed by both the seller and buyer in order for the Liquidated Damages clause to be valid.
You call your broker. Unfortunately, he was unaware of these requirements. (Both authors have encountered this very issue in their real estate practices – it is not as rare as one might think.) You call your attorney again. She confirms that you are entitled to only the original $10,000 of the $45,000 Liquidated Damages Deposit because the buyers and sellers initialed only the original Liquidated Damages clause in the Purchase Contract. Overall, you are out $10,000 based on the original $1.5 Million offer (the difference between the original $1.5 Million offered price, less the $1.48 Million from your second buyer, plus the $10,000 in liquidated damages you can legally claim from the first, defaulting buyers). You have no other legal recourse against your original buyers. Three weeks later, your attorney negotiates a $15,000 settlement payment for you from your broker, out of the commission you paid him on the second, $1.48 Million sale. Your ace broker has lived up to his firm’s name: Pay, Less & Commish.
The provisions of the Civil Code are intended to protect the buyer of residential property, not the seller. This has been confirmed by the California courts. The bottom line: If you are the seller of residential property and desire to liquidate your damages, make sure that both parties initial a Liquidated Damages clause each and every time a buyer makes a deposit into escrow. This will ensure that your Liquidated Damages are not unexpectedly cut-off and that you, as the seller, are not caught in this trap for the unwary!
If you have questions about the foregoing, please feel free to contact Jennifer Johnson, Kendall Patton or other members of Carr McClellan’s Real Estate Group.