Legal Question in Real Estate Law in California

Liquidated Damages Clause

Had a really bad situation with a buyer who backed out 20 days after org. close of escrow date. We moved out at their request to complete unreasonable repair requests that we felt obligated to do to keep the sale. Buyer had the loan docs and decided not to purchase. We now face rent on top of a huge mortgage and incured numerous during this process and find ourselves in a dire situation.

The deposit has not been released as they want 1/2 of it back. Escrow is also wanting to charge me $1700 in fees (including HOA transfer, doc, etc). The purchase contract was the standard C.A.R. form and unfortunately we initialed the liguidated damages and mediation/arbitration clauses. The deposit is only $4500. I know I am entitled to the whole deposit if they agree too but can I get them to pay the escrow cancellation? Would arbitration include that and side with me? I did not intitate the cancellation and all contingencies were met weeks ago. Also can I sue for further damages? Does that liquidated clause limit me to the deposit no matter what? Can I get around it under extreme circumstances? Are there any precedents? I do not want to default on my mortage or rent. Does the law protect me? I am distressed and extremely concerned.

Asked on 5/31/06, 11:03 pm

3 Answers from Attorneys

Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Liquidated Damages Clause

Your ability to sue is limited both by the liquidated damages clause and the mediation-and-arbitration checkoffs.

I do however have a suggestion for you. Make a demand for mediation and arbitration, accompanied by an offer to settle for what you think is a fair amount of damages. Most of the check-the-box contracts also call for attorney fees to be awarded to a prevailing party. Point this out to the defaulting buyers. They may be more willing to settle before mediation and arbitration run their course (with high expenses) if they see your offer as a cheaper way to avoid a big arbitration award including fifteen or twenty hours of attorney fees, mediator's billings, arbitration fees, etc.

If they won't settle promptly and fairly, be prepared to assert your claim for every penny of your losses, especially if you have the attorney fee clause. Be prepared to see this process through to its conclusion, even if the up-front costs are high and it seems to drag on forever.

Coming out on top in the long run depends upon having at attorney fee clause, a meritorious case, and lots of patience.

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Answered on 6/01/06, 12:01 am

Re: Liquidated Damages Clause

Unless you are going to argue that the contract was procured under fraud or duress, you are stuck with its terms. Given that you performed under the contract, it's most unlikely that you can argue that it was procured by fraud, etc.

The liquidted damage provision is entirely enforceable, and they are quite standard in the CAR contracts. You are limited to 3% of the purchase price. If the deposit is not 3%, then sue them for the rest.

Yes, you will need to go to mediation, and binding arbitration (if the parties initialed this part of the agreement - typically found at paragraphs 17A and 17B).

Good luck.

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Answered on 6/01/06, 9:08 am
Cynthia Beckwith Law Offices of Cynthia Beckwith

Re: Liquidated Damages Clause

I agree with both of the prior responses, and I write separately only to emphasize a couple of points.

First, unless this settles early, you must do the mediation/arbitration. Failure to do so will likely preclude your being able to recover attorneys' fees.

Second, assuming the facts are as you state and assuming all contingencies have been waived and you have performed everything on your side of the bargain, you are likely to prevail.

Third, depending on the version of the California Association of Realtors (CAR) residential purchase agreement you are using, the liquidated damages clause probably does not limit your damages to the amount of the deposit. The clause only provides that you are entitled to the deposit, not that you are limited only to the deposit. Thus, the buyers may be liable not only for the return of the deposit, but also for what are called consequential damages -- damages that would be expected in this kind of situation, including escrow cancellation fees, costs of remarketing, costs of carrying the mortgage and paying rent at the same time.

Fourth, as a practical matter, your realtor may be helpful in talking to the realtor on the other side and persuading the buyers that the failure to go through with the deal will be costly for them. Neither realtor wants to lose his/her commission and get dragged into something as a witness.

That having been said, I agree with the other attorneys' suggestion, to make an offer to resolve now. It is still early enough in the summer to put your property back on the market, and it avoids the litigation. Keep good notes in the meantime in case this does not settle and you need to recall what happened.

I routinely represent both buyers and sellers in this situation and would be happy to speak with you further.

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Answered on 6/01/06, 10:46 am

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