The Enforceability of Liquidated Damages Clauses in Real Estate Sales Contracts
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Real estate sales transactions, and the underlying contracts precipitating those transactions, are constantly the source of litigation. Usually, the real estate sales contract will attempt to either limit the remedies available to the parties involved or specifically provide a predetermined amount for any monetary damages awarded through litigation. When a contract contains a provision for a predetermined monetary award for damages, that provision is called a “liquidated damages clause.” This Blog post will discuss the enforceability of liquidated damages clauses as they pertain to real estate sales contracts.
To begin with, if there is a valid and enforceable liquidated damages clause contained within a real estate sales contract then it is controlling in the litigation. See Jay Vee Realty Corp. v. Jaymar Acres, Inc., 436 So.2d 1053 (Fla. 4th DCA 1983). That means the court will enforce the parties’ meeting of the minds on liquidated damages and award the amount specified in the clause, minus any setoffs. However, the court must first determine whether the clause is valid and enforceable. This begs the question as to what makes a liquidated damages clause enforceable and under what circumstances will such a clause be struck by the court?
Generally, if damages are “readily ascertainable” then a liquidated damages clause that differs substantially from that readily ascertainable amount is invalid. See Hutchinson v. Tompkins, 259 So.2d 129, 130 (Fla. 1972). The problem with contracts involving real estate is oftentimes the damages resulting from a breach are not readily ascertainable. Thus, 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 nonbreaching party. Valenti v. Coral Reef Shopping Center, Inc., 316 So.2d 589, 592 (Fla. 3d DCA 1975). In essence, the liquidated damages amount “must be reasonable under the circumstances.” Id. It has been held that if estimated damages are not readily ascertainable at the time the contract is drafted, “a liquidated damages clause in the form of a forfeiture of a deposit does not constitute a penalty” and will be enforced. Id.
Conversely, a liquidated damages clause will not be enforced if it is deemed to be a penalty or unconscionable. Hutchinson, 259 So. at 130. 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. See Ropiza v. Reyes, 583 So.2d 400 (Fla. 3d DCA 1991); Lefemine v. Baron, 573 So.2d 326 (Fla. 1991). In Ropiza, the liquidated damages clause gave the seller the option of three separate remedies, including retention of the buyer’s deposit or bringing action at law or equity, while failing to provide the buyer with any predetermined remedy. Ropiza, 583 So.2d at 400. The court explained that such a clause destroys the mutuality of remedies under the contract and is therefore invalid. Id. The Lefemine court held that because the seller had options, the clause “indicates an intent to penalize the defaulting buyer and negates the intent to liquidate damages in the event of a breach.” Lefemine, 573 So.2d at 329.
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. See Hackett v. J.R.L. Dev., Inc., 566 So.2d 601 (Fla. 2d DCA 1990). Florida courts have explained there exists no mutuality of obligation in that situation. If the seller breaches, he or she merely needs to return the deposit back to the buyer, whereas if the buyer breaches he or she will have real legal issues to deal with. Id. at 603. “A return of one’s own money hardly constitutes damages in any meaningful sense . . . and [the seller] can breach the contract with impunity.” Id. In summary, a liquidated damages clause in a real estate sales contract will be enforceable if it is a fair approximation of damages and provides for the mutuality of remedies between the parties.