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As printed in the OC Register / Saddleback Valley NewsWritten by Jim E. Flynn, Century 21 Beachside Realtors, Lake Mission Viejo
March 12, 2010
Are Non-Refundable Deposits Valid?
And What about Liquidation Damages?
Q. Jim, one of our friends told us that an Escrow deposit cannot be refunded if we see it written in on the purchase contract and noted "Nonrefundable" is that true.
- Jack from Mission ViejoA. Actually Jack, page 5 of the 8 page Purchase contract specifically details the effects of the buyers removal of contingencies, the effect of cancellation of deposit and requires the buyer, seller and agent to initial their Understanding of liquidated damages and dispute resolution including Arbitration of Disputes. in 3 different places.
There was a recent case in California that was deemed invalid, Kuish v.Smith (2010.WL.373225) that was resolved and established good reason for Realtors® to cautiously understand that inserting a "non-refundable deposit provision into a real property purchase contract may be legally ineffective. The Kuish case involved a $620,000 escrow deposit for the purchase of a $14 million oceanfront home in Laguna Beach. Instead of using a liquidated damages provision, the buyer and sellers merely agreed in the Purchase contract that the deposit would be "nonrefundable." According to the trial court, both parties were "big boys," meaning that they were "sophisticated business people who understood all the ramifications of their actions in freely negotiating to make the deposit non-refundable.
"The buyer eventually cancelled the agreement. The sellers refused to return the deposit to the buyer, even though they sold the property to someone else for $1 million more. The buyer sued to recover the $620,000 deposit, and won on appeal.
The court stated that "any provision by which money or property would be forfeited without regard to actual damage suffered would be an unenforceable penalty. To construe the term 'nonrefundable' to establish [the sellers'] entitlement to the full deposit without regard to actual damages would essentially create a liquidated damages provision." Yet, the parties in this case did not separately sign or initial a liquidated damages provision. Under C.A.R.'s Residential Purchase Agreement, the sellers would have been entitled to the escrow deposit (not to exceed three percent of the purchase price), if the parties initialed the liquidated damages provision, and the buyer had no contingencies or had removed all his contingencies.
One of the key Questions covered is:
Does a liquidated damages clause automatically entitle the seller to the buyer's deposit if a transaction does not close?
No. As stated, a liquidated damages clause only determines the amount of money a seller can recover from a buyer, and then only if the seller can prove that the buyer breached the contract.
A buyer may fail to close a transaction for a variety of acceptable reasons (e.g., where the buyer's obligation to purchase was contingent on the buyer obtaining financing, and the buyer could not reasonably obtain financing).
To recover liquidated damages the seller generally must prove in court or arbitration that the buyer's failure to close the transaction was wrongful.
For more information about liquidated damages, Jack, C.A.R. has a legal article entitled Liquidated Damages and Deposit Forfeitures, which is available in English, Chinese, Korean, Spanish, and Vietnamese.
Jim Flynn is an Award winning Realtor with Century 21 Beachside in Mission Viejo.
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Jim E. Flynn
CalBRE license #: 01215480
Phone: (949) 463-0739