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34. Should the buyer get the earnest money back?
Just before the closing, the buyer lost her job. The buyer told the seller that she could no longer purchase the house and asked him to return the earnest money. The seller accurately told the buyer that the seller's actual losses exceeded the amount of the earnest money; that if the seller sued the buyer for damages, he would receive a minimum of $5,000; and that it would be difficult for him to sell the house in the current market.
When a buyer and a seller executed a valid contract for the sale of a house, the buyer gave the seller$1,000 as earnest money. The contract noted that the earnest money tendered would be applied to the purchase price at the time of sale but was silent as to remedies in the event of any default.
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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, then 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 predetermined 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.
B is correct. When a contract for the sale of land calls for a buyer to deposit earnest money, the seller may retain that earnest money as liquidated damages in the case of a breach. However, if the deposit is so large that it is not a reasonable estimate of the seller's actual damages, courts will generally refuse to enforce it on the grounds that it is a penalty. Here, the seller's losses exceeded the amount of the earnest money, which would allow the seller to keep the earnest money as liquidated damages.
A is incorrect. The principal remedy for breach of a real estate sales contract is either damages or specific performance. Here, although the contract was silent regarding remedies, courts routinely uphold the seller's retention of earnest money as liquidated damages.
C is incorrect. An agent or broker's commission may be made payable upon condition that he procures a purchaser who is «ready, willing, and able» to execute an unconditional contract on terms specified by the seller. In such an instance, as a rule, if the agent fulfills that condition, even if the seller refuses to conclude the sale or withdraws the property, he has earned his commission. «Ready, willing, and able» is not the applicable standard to use in this situation.
D is incorrect. The buyer's reasoning does not excuse the breach. There is not a state of mind requirement for the court to hold the buyer to be in breach. Courts routinely uphold the seller's retention of earnest money as liquidated damages. Even without a liquidated damages clause, courts uphold retention by the seller on the ground that giving retention to the buyer would unjustly reward the party in breach.