The Property Management Shop

Settling Liquidated Damages Disputes

by Marc Wilson

Q. Our 7-unit apartment building is in escrow. The buyer deposited $45,000 in escrow during the course of the deal. He has systematically removed all of the contingencies from the contract. Last week, the buyer’s agent informed us that the buyer had decided not to proceed with the transaction and wants to cancel the deal. My agent tells me that we can keep the $45,000, but we have to split the money with her. Can we keep the $45,000 deposit? Do we have to give half to our agent?

A. How can you keep money that you don’t have? You are not in possession of the money; your escrow officer is in possession of the money. And escrow officers will not do anything unless they receive concurrent and identical instructions from both the buyer and the seller. Your escrow officer will release the money to you when, and only when, one of two things happens: she receives concurrent and identical instructions from you and the buyer, or she receives a court order or judgment mandating a payment to you. What does this mean? It means that either the buyer will voluntarily forfeit his deposit or you will have to hire an attorney to try to take the deposit. Your question is timely and poignant; market conditions in the short-to mid-term will undoubtedly contribute to increased levels of cancelled contracts and the inevitable arguments over good faith deposits. A friend of mine is a real-estate transaction attorney and his office is awash with liquidated damages disputes.

Most buyers who breach purchase contracts are not excited about losing their deposits—that’s just human nature. It is very rare for a buyer to willingly sign over his deposit (in this case, a substantial one) after failing to proceed with a purchase. Your agent should instruct the escrow officer to draft cancellation instructions that dictate the payment of all deposits in escrow to the seller. Your agent should also start collecting evidence that you are owed these monies; it is possible that the buyer will be persuaded. Hopefully, your agent will show the buyer the following materials.

A signed liquidated damages clause within the purchase contract. This is a standard clause, which stipulates that, among other things, “if the buyer fails to complete this purchase because of buyer’s default, seller shall retain, as liquidated damages, the deposit actually paid.” All purchase contracts should have a signed liquidated damages clause. It is always a bad sign when a buyer tenders a purchase offer without signing this clause.
The systematic, timely and detailed removal of purchase contingencies signed by the buyer during the course of the transaction, including, but not limited to, “buyer removes financing contingency, buyer removes inspection contingency,
buyer removes income/expense contingency.”
An organized, detailed and professional general disclosure package with each and every page received, read and approved by the buyer. This package of documents should be at least two-inches thick and include: a pest report, 3R report, general contractor’s report, roof report, seller transfer disclosure documents, leases, estoppels, income/expense documents, marketing statements and more.
A final receipt for increased deposit/liquidated damages document for the buyer’s final deposit in escrow. All deposits in escrow following the initial deposit need to be accompanied by this form.
A final addendum to the contract, which stipulates something like: “buyer hereby removes any and all buyer contingencies.” Once all contingencies are removed, whether or not the buyer has satisfied himself regarding all contingencies or received information relating to those contingencies, the buyer’s deposit will not be returned if the buyer does not close escrow. This could happen even if, for example, the buyer does not approve of some aspect of the property or the lender does not approve the buyer’s loan.

Most agents make their mistakes relative to item number five. It is important that the buyer understand and agree in writing that he will never see his deposit again—whether or not he buys the property. It is not enough to simply have the buyer remove all of his contingencies during the course of the transaction; there should be a final document that clearly states the nonrefundable nature of the buyer’s deposit once all contingencies are removed. Keeping a buyer’s deposit is very, very serious business. You and your agent will need to have done everything possible to document your right to keep the money. Deliver all of the aforementioned documentation and escrow instructions to the buyer’s agent and see what they do. In my 25 years as a real-estate agent, I have had exactly one buyer willingly walk away from a deposit. Most buyers will hire an attorney to find some reasonable argument to refute your right to the deposit. Remember, the average purchase contract is nine or ten pages long. It wouldn’t take Perry Mason to find some reasonable argument supporting the return of the buyer’s deposit.

If the buyer won’t budge, see if you can find an attorney who will take the case on contingency. If you prevail, the attorney will share in the glorious bounty of the buyer’s forfeited deposit. If you lose, it costs you nothing. If no one will take your case on contingency, then forget about the deposit. Most attorneys will wash your car for $400 an hour, but very few will take a loser liquidated damages beef on contingency. Your inability to find an attorney who will work on contingency should be your litmus test relative to the validity of your claim.

It isn’t wise to spend good money and lots of emotional energy chasing some poor buyer’s deposit. What was your original goal? Was it to take a buyer’s deposit? Of course not. Your goal was to sell your property. Don’t fixate on torturing the buyer. Just put the property back on the market, find a real buyer and get on with your life.

So, does your real-estate agent get half the money? It depends on your written listing agreement, your exclusive authorization and right to sell. Most standard listing agreements, like the California Association of Realtors’ form, contain standard language in this regard. This agreement dictates that the agent gets either the full commission due or half the total bounty, whichever is less. Some real-estate offices in town use listing agreements that do not have such a provision. But, I can guarantee you that most offices will be using some sort of sharing language relative to forfeited deposits by the end of next year. My crystal ball sees a much higher incidence of cancelled transactions in the future.

Remember, all aspects of exclusive listing agreements are negotiable. Most sellers sign their agent’s written agreement without thinking twice. They unwittingly believe that the only negotiable aspects of a listing agreement are price, commission and term. Nothing could be further from the truth. Just like most prospective tenants will sign any rental agreement, most prospective listing agents will agree to just about any deviation from their preprinted form.

San Francisco real-estate agents, myself included, ply their trade in a very competitive environment when it comes to the representation of motivated sellers. If I were a seller, I would strike any language relative to sharing a forfeited deposit. What are the chances that your listing agent will balk? Slim to none. Similarly, give your agent a six-month listing, but reserve the right to cancel the agreement with or without cause with a 14-day written notice. You might consider a clause stating that you do not owe a commission until such time as you have actually signed a purchase contract and the deal closes escrow. What if the original asking price was set too low and you immediately get a full-price offer from your agent’s college roommate? Why should you potentially owe your agent a commission if you understandably don’t wish to sign the purchase contract? What about a reduced commission if your agent represents both the buyer and the seller? How about a graduated commission scale based on the ultimate purchase price? Listing agreements are written for and promulgated by real-estate companies, so it’s not surprising that they might be slanted in the agents’ favor. Don’t be afraid to be creative with your listing agreements or ask for alterations or deletions. Believe me when I say that your real-estate agent will be quite accommodating.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the SF Apartment Magazine. Marc Wilson has specialized in the brokerage of San Francisco apartment buildings for 20 years. He can be reached at 415-229-1275. Copyright � 2007 by the SF Apartment Magazine. All rights reserved.