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14. In such lawsuit, judgment should be for
The administratrix brought an appropriate action against the banker to recover $50,000. In answer, the banker made no affirmative claim but asserted that she was entitled to retain the $50,000 as liquidated damages as provided in the contract.
Before the date set for the closing in the contract, the buyer died. On the day that the administratrix of the buyer's estate was duly qualified, which was after the closing date, the administratrix made demand for return of the $50,000 deposit. The banker responded by stating that she took such demand to be a declaration that the administratrix did not intend to complete the contract and that the banker considered the contract at an end. The banker further asserted that she was entitled to retain, as liquidated damages, the $50,000. The reasonable market value of Goldacre had increased to $110,000 at that time.
A banker owned Goldacre, a tract of land, in fee simple. The banker and a buyer entered into a written agreement under which the buyer agreed to buy Goldacre for $100,000, its fair market value. The agreement contained all the essential terms of a real estate contract to sell and buy, including a date for closing. The required $50,000 down payment was made. The contract provided that in the event of the buyer's breach, the banker could retain the $50,000 deposit as liquidated damages.
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To be enforceable in a real estate sales contract, the liquidated damages clause must be a good-faith attempt by both parties to reasonably approximate a fair amount for compensation to the non-breaching party. If there is a valid and enforceable liquidated damages clause contained within a real estate sales contract, it is controlling in the litigation.
Conversely, a liquidated damages clause will not be enforced if it is deemed to be a penalty or unconscionable. A liquidated damages clause is also invalid if it gives one party a choice of possible remedies while not providing any pre-determined remedy for the other party.
A liquidated damages clause that provides the buyer with the sole remedy of a return of his or her deposit if the seller breaches while at the same time providing the seller with a choice of remedies if the buyer breaches is also unenforceable.
A is correct. A seller is entitled to keep a buyer's deposit as liquidated damages following the buyer's breach of the contract, as long as that amount appears to be reasonable in light of the seller's anticipated and actual damages. Many courts will uphold the retention of a deposit of 10% of the sale price or less without inquiry to its reasonableness. The facts indicate that the sale price of Goldacre was set at the «reasonable market value,» which was $100,000 at the time of contracting and had increased to $110,000 by the time set for closing. Therefore, the banker did not have actual damages because she can sell it for $10,000 more, and the most the banker can legally retain is $11,000. Thus, she will not be able to enforce a liquidated damages clause in any higher amount. The administratrix has not sought specific performance of the contract, so the only issue being considered by the court is liquidated damages.
B is incorrect. Under the doctrine of equitable conversion, once a contract is signed and each party is entitled to specific performance, equity regards the purchaser as the owner of the real property. The seller's interest, which consists of the right to the proceeds of the sale, is considered to be personal property. This doctrine also affects the passage of title when a party to a contract dies before the contract has been completed. In general, it holds that a deceased seller's interest passes as personal property and a deceased buyer's interest as real property. In this question, the doctrine of equitable conversion would keep the contract alive after the buyer's death, and the banker would close with the buyer's estate.
C is incorrect. As explained above, courts will not enforce a liquidated damages clause, even if both parties contracted to it, if the clause, as enforced, would be a penalty or unconscionable to the opposing party. Here, the court will not enforce an agreement that violates the law, even if both parties have assented to it.
D is incorrect. This answer choice is contrary to the facts of the question. The banker is not seeking specific performance. The only question left for the court to decide is the issue of monetary damages.