In
the Spring of 2008 Todd Phillips listed property for sale with a real estate
agency. Richard Gomez submitted an offer to purchase the property, which was
accepted in October 2008.
The
purchase price was $660,000, and required a 10% earnest money deposit. If Gomez
did not close, Phillips had the option of accepting the earnest money as
liquidated damages, or pursuing a
claim for damages or specific performance.
Later
the Purchase and Sale Agreement was amended. One of the amendments provided
that the $66,000 earnest money deposit became non-refundable following a due
diligence inspection period and Gomez’s attorney’s approval of the deal.
Although
not stated in the Court’s opinion, presumably all inspections were satisfactory
and Gomez’s attorney approved, since the full $66,000 earnest money deposit was
released to Phillips without restriction before closing.
In
early December 2009 Gomez advised Phillips that Gomez would not be able to
close on time. In February 2010 Phillips sent Gomez a letter demanding that
Gomez perform under the Agreement (as amended), or Phillips would pursue Gomez
for a deficiency after the property was re-sold.
Gomez
did not respond.
In
June 2010 Phillips sold the property for $527,500, creating a deficiency of
$132,500. Phillips had already received the earnest money deposit of $66,000, and
consequently Phillips applied the amounts already received from Gomez to the
deficiency balance.
In
November 2013 Phillips filed a lawsuit against Gomez for breach of contract and
money damages. Gomez defended by claiming that Phillips had the right to
receive the earnest money deposit or
litigate for consequential damages, but
not both. And, since Phillips had already received the earnest money
deposit, Phillips had no right to claim anything more.
The
district court agreed and entered judgment for Gomez.
Phillips
appealed, claiming that he had the right to both receive the $66,000 earnest
money deposit as liquidated damages, and
then recover a judgment against Gomez for additional sums. Gomez’ defense, as
accepted by the district court, was unchanged.
The
Appellate Court reviewed the Purchase and Sale Agreement, as well as the
Addenda, and determined that sellers and buyers are allowed to use liquidated
damages provisions as a singular and exclusive remedy. And that contracting
parties may pre-select a remedy in their contract.
By
accepting the $66,000 earnest money deposit, Phillips waived his ability to
pursue actual damages. The choice was his to make, but it had a lasting (and
legally binding) effect. The earnest money payment Phillips received was not a
‘down-payment’ toward actual damages, but rather it was an exclusive remedy.
It
may not have been what Phillips intended, but the Agreement and Addenda were
clearly drafted on this point.
Judgment
was affirmed for Gomez. See Todd J.
Phillips v. Richard D. Gomez; Docket No. 44594; Idaho Supreme Court; November
8, 2017: http://caselaw.findlaw.com/id-supreme-court/1879295.html.
Lessons
learned:
1. Typically
our Courts will uphold a properly drafted liquidated damages clause. Most of my
contracts contain them, as they can be beneficial to both sellers and buyers.
Do yours?
2. This
case is helpful to illustrate that liquidated damages provisions should be
clearly written, and leave no doubt that it is an exclusive remedy if selected
by the party entitled to it.
3. We
use liquidated damages provisions in commercial leasing too, particularly with
regard to delayed occupancy and early termination options to be exercised by
either Landlord or Tenant.
Stuart A. Lautin, Esq.*
* Board Certified,
Commercial (1989) and Residential (1988) Real Estate Law,
Texas Board of Legal Specialization
Licensed in the States of Texas and New
York
Reprinted
with the permission of the North Texas Commercial Association of REALTORS®, Inc.
