Tag Archives: loss of deposit

The Liquidated Damage Provision in the Sales Agreement–Often misunderstood, more often a trap for the unwary

One of my pet peeves as a Massachusetts real estate attorney is the printed language in most standard purchase and sale agreements regarding liquidated damages. To paraphrase the legalese contained in the printed form “if the Buyer defaults, the Seller may keep Buyer’s deposit as liquidated damages unless the Seller within thirty days of such default decides to avail himself,or herself, of other options”

These “other options” would definitely include suit for specific performance of the contract, which in a falling market, could mean a financial disaster for the Buyer. In effect, if the Seller sold the property to another Buyer, the defaulting Buyer would be responsible for damages measured by the price in his or her contract versus the actual sales price realized by the Seller.

The alarming thing about this provision is that in my forty plus years of practicing real estate law, I have never had an attorney for the Seller refuse my request to eliminate the second option.  So,if for some reason, you Buyer’s Agents are forced to “fly solo” because your client will not retain an attorney, I urge you to, at the very least, make sure that you request a change from the printed form.

The changed version reads, that “if the Buyer defaults, the Seller may retain Buyer’s deposit, and such retention shall constitute Seller’s sole remedy against the Buyer” That remedy is a horse of a different color and,of course, much more favorable to the Buyer.

Those of you who are starting to serve as Buyer’s Agents should also be aware that many Sellers are inserting provisions in the purchase and sale agreements to the effect that “since there is no way to truly measure the damages suffered by the Seller, if the Buyer defaults,both parties agree that the retention of the entire deposit constitutes an acceptable remedy for both side.”

I strenuously resist this provision when representing Buyers, unless their deposit is very small. The only Massachusetts Supreme Judicial Court decision which actually address this issue held that five (5%) was a reasonable sum for liquidated damages. Many deposits are in excess of five (5%) per cent. I would rather leave the provision quoted above out of my agreement, and argue that five (5%) per cent is, indeed, plenty of compensation for a Seller, especially if the default occurs in a relatively short period of time. I have a lot more wood to cut if I have agreed the retention of the deposit, no matter of what amount, is a “fair measure” of damages.

It is never pleasant when circumsatances dictate that a Buyer must “walk away”. In circumstances where we are representing Buyers, it is important not to turn this cruel turn of fate into a financial disaster for the Buyer, which usually cannot be easily remedied.

New Restrictive Financing Guidelines are Killing our Industry-A Call to Action

In a recent article in the New York TIMES, problems besetting our industry were the main focus. Examples of people who had committed to purchase as yet unbuilt homes, free standing and condominiums,  and were now “trapped” by new FNMA/FHLMC Guidelines, which have made many financing programs much more restrictive, in terms of down payment and sales of project units. While I did not generally recommend 95% and 90% financing to many of my clients, such programs were a fact a life as recently as 18 months ago, and that high leverage was often the only way a family could purchase the home of their dreams. New Condominiums were not limited to 70% pre-sale, either.

So, when FNMA and FHLMC developed more rigid standards for borrowing, at this difficult time in the housing industry, I have to ask myself “why”. These entities are no longer owned by public stockholders. For all intents and purposes, they are part of our government. Yet, the very same government that has given lip service to the real estate recovery as being essential to an overall recovery permits these agencies to act in a manner which prevents real estate activity.

Who, if anyone,  is really benefiting from the new restrictions on residential lending? Certainly, the potential Buyer who has put down a deposit without a financing contingency is not benefiting. That deposit money is probably gone, as liquidated damages for the Buyer’s failure to perform. So, not only is the contemplated sale up in smoke; so is any other real estate purchase for the Buyer losing his or her Deposit. “No sale” hurts the realtor, the mortgage originator, the closing agent and, ultimately, the Seller or Developer, because holding on to the Deposit is a poor alternative to making the sale of the property in question at the contract price.

It is time for each of us, whatever role we play in real estate, to inform our elected representatives in Washington, DC that these restrictions need to be eased. Dropping interest rates, alone, will not stimulate a  real estate recovery. Programs with some leverage need to be brought back. Pre-sale requirements need to be lowered. If we sit back and allow these new restrictions to continue, we have no one but ourselves to blame for what happens to our industry. Make the phone calls; send the emails, petition the people you put in office. The stakes are much too high to sit on our hands.