Are non-refundable deposits enforceable? Ask an Expert Witness

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Education & Training with Real Estate Expert Witness Support

As as a person who serves as an expert witness in real estate litigaiton cases,  I am always excited when a real case finding agrees with what I believe myself.  In this case,  are non-refundable deposits on residential property in California.  CAR has published the informatin on the case.  The buyer did not close but the court found that the Seller couldn't keep the deposit.  My guess is that the agent,  or whomever wrote the contract,  will probably get sued.  For more information,  check out my website.  See below

 

NONREFUNDABLE DEPOSIT DEEMED INVALID

An agreement for a "nonrefundable" escrow deposit is invalid and unenforceable, according to the recent California case of Kuish v. Smith (2010 WL 373225).  This case serves as a good reminder for REALTORS® that inserting a "nonrefundable 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.  For more information about liquidated damages, C.A.R. has a legal article entitled Liquidated Damages and Deposit Forfeitures, which is available in English, Chinese, Korean, Spanish, and Vietnamese.

 


 

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Guy Berry

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Rainer
38,015
Guy Berry
Real Estate Expert Witness Support - San Jose, CA
Real Estate Broker and Legal Expert

Merrill,  good comments. But the seller wasn't damaged but his greed cause him to refuse to return the deposit. Don't know if any compromises offers were made and if so,  then the buyer was being greedy. In California,  the seller has to actually be damaged to retain the deposit.  Not sure what you mean that I suggested the agents walk away from the commission.  Most listing agreements agree that if there are retained deposit,  the agents get their share of it.  Also,  there is at least one case where the Buyer's agent sued the buyer for the breach.  I think in this case,  they would have a great case.  Conversely,  if the listing agent lost the listing, he would have good grounds for going after the buyer also, The problem is,  at least in California, that our association makes sure that we are not in the Attorney fee clause paragraph,  thus even if you sue for your commission,  there is little chance for reimbursement of attorney fees. But, at $14 Million, I would take the risk.  I know when i was managing for Coldwell,  they would NEVER go after a commission because the client typically cross files against the agent claiming breach of duty.

I had an attorney friend who once told me that yes, agents practice law when they write, counter and interpret contracts. And,  since we do,  we have to get it right. 

Thanks for your comments.  It is always nice communicating with a person that can think. 

Feb 12, 2010 11:22 AM #12
Rainmaker
564,419
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

Hi Guy -- Why any agent/REALTOR would not send their client to competent real estate counsel is perplexing and this example highlights what can happen when a lot of dollars are on the table.

Feb 12, 2010 12:20 PM #13
Rainer
93,887
Merrill Moss
HomeSmart Elite, Scottsdale AZ - Scottsdale, AZ
Scottsdale AZ Homes For Sale

Guy -- Excellent reply. I'm a little shocked that the seller may not refuse to return non-refundable earnest money upon a buyer's breach, regardless of the circumstances including whether or not he (the seller) is damaged. But since that is so (California's reputation for overreaching remains intact) this case makes much more sense, and I now agree with you that the buyer is entitled to the return of the deposit. Thank you for your astute clarifications. No wonder you are an expert witness.

Feb 12, 2010 12:30 PM #14
Rainmaker
1,831,977
Lise Howe
Keller Williams Capital Properties - Washington, DC
Assoc. Broker in DC, MD, VA and attorney in DC

I don't think it is a technicality that got the buyer his money back - definately a lesson not to go practicing law where you don't know what you are doing!

Feb 12, 2010 12:56 PM #15
Rainmaker
493,376
Tom Bailey
Margaret Rudd & Associates Inc. - Oak Island, NC

I agree with Lise # 15. I am not a lawyer and glad of it. I would not change or add anything to our NC contract forms without asking a lawyer to look at it.

Feb 12, 2010 01:06 PM #16
Ambassador
1,556,086
Karen Fiddler, Broker/Owner
Karen Parsons-Fiddler, Broker 949-510-2395 - Mission Viejo, CA
Orange County & Lake Arrowhead, CA (949)510-2395

I need to know this.....I have buyers who have a deal with Fannie Mae. Through some financing snafus (not the buyers' fault..the lender's fault) we are now out of time. The contract Fannie Mae makes us sign states that the deposit is non-refundable and they are now losing their deposit. The actual damages are $450 for HOA documents and Fannie Mae is selling to a cash buyer for a higher price. Can they do this?

Feb 12, 2010 01:26 PM #17
Rainer
38,015
Guy Berry
Real Estate Expert Witness Support - San Jose, CA
Real Estate Broker and Legal Expert

Karen,  Fannie really doesn't want the buyers deposit.  What I would do would be to ask for an extension.  Have you lender write a letter showing the seller that you are not the cause of the problem. There may be a penalty clause that the buyer has to pay for being late.  They don't automatically lose their deposit

Feb 12, 2010 03:02 PM #18
Rainer
38,015
Guy Berry
Real Estate Expert Witness Support - San Jose, CA
Real Estate Broker and Legal Expert

Merrill,

My experience is that people in the multi-million price range are used to getting their own way, right or wrong.  I am currently on a case for a house that is 17,000+ sf, mentioned above. The buyer buys is 1/2 finished, and leaves it that way for 2 years.  Now he is suing the seller and agents because there are leaks.  Just stupid. 

 

Feb 12, 2010 03:06 PM #19
Rainer
38,015
Guy Berry
Real Estate Expert Witness Support - San Jose, CA
Real Estate Broker and Legal Expert

Bill, the case didn't mention it but I would think that would have been a factor.  But, remember, the issue was only about the enforceability of the Non-refundable deposit.  I was in one case there the judge got angry at the seller since he had sold the house a 2nd time for more money.   

Feb 12, 2010 03:11 PM #20
Rainer
204,614
Keith & Shannon French
www.KeithandShannonFrench.com - Catonsville, MD
Baltimore's Best for Rent To Own Homes

What happened to the days when a binding contract was in fact that, a binding contract?  Today, contracts are only binding to the point you have the money to hire an attorney to defend/uphold it.  

I can appreciate how easy it is to come to a conclusion on who's being greedy.  But first of all, we don't know everything that went down.  There are ALWAYS a MILLION sides to every dispute and you DEFINITELY can't count on any media to present anything accurate.  

But should "who's being greedy" even be a factor in this?  What did the parties agree to in writing?  Was their contract illegal?  I don't think so, just unenforceable and it got taken to court and challenged. 

Man, I'm torn on this issue!  Very interesting!  It could be, too, that just today I spent an hour and 10 minutes with my Prepaid Legal attorney today after he reviewed some changes we were making to our lease option agreement where the option fee is always non-refundable in the event they don't exercise their option to purchase.  I have a 2 paragraphs in the Option agreement (titled "Non-exercise of option, return of option payment" and "Default, cross default" that both had "liquidated damages" in the paragraph.  My attorney advised that I replace the term with "Both parties agree that optionor's damages would be difficult to estimate, but that consideration paid is a reasonable estimate of what damages could be."  So I'm definitely intrigued to make sure I wrap my brain around this whole liquidated damages issue.

Thanks for the post!  Contracts are fascinating and you are good to be in the know of how judges are ruling on particular issues.  Look forward to reading more on your blogs as I am now a subscriber! ;)  Have a fabulous evening!

Feb 12, 2010 03:13 PM #21
Rainmaker
1,317,757
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

Intersting... I don't know if other states will agree with this decision.  Time will tell.

Feb 12, 2010 03:36 PM #22
Rainer
333,602
Frank Castaldini
Compass - San Francisco, CA
Realtor - Homes for Sale in San Francisco

Very interesting.  I heard about this today in my office.  It certainly will be interesting to see where  this goes.  It makes sense as I ready it even though the assumption is that the deposit is non refundable.  If there are no damages then I guess no go...I'm interested in who else gets dragged into this and what we all can learn.

Feb 12, 2010 03:37 PM #23
Rainer
34,791
Niema Thomas
Century 21 Beachside - Alta Loma, CA
CDPE, SFR, MBA

Thanks for the information. I recently came across a situation with a major home builder who refused to return a deposit. Long story we are going to mediation and a attorney was retained.

Feb 12, 2010 05:14 PM #24
Rainmaker
683,630
Debra Leisek
Bay Realty,Inc Homer Alaska - Homer, AK

My broker when I started told us over and over there was no such thing as non-refundable earnest money... he was right all those years ago... and is still right... I tell my folks this now and get the look but I hold to my guns... I really did have a good broker back then just didnt always know it... just like my folks might say years from now... I hope!

Feb 12, 2010 06:19 PM #25
Rainmaker
206,516
Margaret Mitchell
Coldwell Banker Yorke Realty - York, ME
Seacoast Maine & NH Real Estate

Wow, what a great post.  I was fascinated because I recently had a Seller client who wanted a non-refundable deposit on a commrecial listing.  I am really glad now that I talked him out of it.  (I found alternatives that would protect his interests.) 

Feb 13, 2010 05:35 AM #26
Ambassador
1,556,086
Karen Fiddler, Broker/Owner
Karen Parsons-Fiddler, Broker 949-510-2395 - Mission Viejo, CA
Orange County & Lake Arrowhead, CA (949)510-2395

I didn't think they would either.....we've had too many extensions and the cancellation notice does give the deposit to Fannie Mae. I've tried for another extension but the lender has just taken too long.

Feb 13, 2010 09:56 AM #27
Rainmaker
273,670
Wayne B. Pruner
Oregon First - Tigard, OR
Tigard Oregon Homes for Sale, Realtor, GRI

That's pretty much always been the case. Try enforcing an Exclusive Buyers Agreement. You'll get the same results.

Feb 13, 2010 12:52 PM #28
Rainer
38,015
Guy Berry
Real Estate Expert Witness Support - San Jose, CA
Real Estate Broker and Legal Expert

Margaret,  non-refundable is not only legal in commercial, it is also very common.  

Feb 13, 2010 05:01 PM #29
Rainmaker
3,066,356
Tony and Suzanne Marriott, Associate Brokers
Serving the Greater Phoenix and Scottsdale Metropolitan Area - Scottsdale, AZ
Haven Express @ Keller Williams Arizona Realty

Earnest Money is defined as the $1,000 that the Buyer loses when in contract on one of our listings and they try to pull some "funny stuff"!

Aug 11, 2010 02:40 AM #30
Rainmaker
1,116,153
Gary Frimann, CRS, GRI
Eagle Ridge Realty / Signature Homes & Estates - Gilroy, CA
REALTOR and Broker

Guy, good post.  What I find very interesting is how many Realtors I talk to who just do not get this.  It is amazing how few are versed in the process.  Also, I think the court's reasoning on the matter was spot on.

No matter what language one couches it in, if it looks like a "non-refundable deposit" it really is tantamount to liquidfated damages, and on 1-4 units in CA, there really is no such thing as a non-refundable deposit.

Oct 24, 2011 04:22 AM #31
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Rainer
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Guy Berry

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