Metropolitan News-Enterprise


Thursday, January 3, 2002


Page 1


C.A. Clarifies Rule on Return of Deposit in Failed Sale of Residence


By KENNETH OFGANG, Staff Writer/Appellate Courts


An agreement to buy and sell real estate, using preprinted forms standard to the California real estate industry, is a purchase agreement, not an option contract, the Fourth District Court of Appeal ruled yesterday.

The decision by Div. One means that a prospective buyer who backs out of the purchase of the seller’s residence may recover his or her deposit, less liquidated or actual damages.

The panel overturned a ruling in favor of Frank Smith and his wife Jeri Schwartz Smith. San Diego Superior Court Judge Thomas P. Nugent ruled the Smiths were entitled to keep the entire $100,000 deposit they received from Barbara Allen in 1999 when she agreed to purchase the Smiths’ Rancho Santa Fe home for $1.775 million.

Allen presented her offer on a California Association of Realtors standard form, declaring she would pay a deposit equal to three percent of the purchase price—in this case $53,250—with $20,000 paid up front and the remainder after an inspection of the property.

The form provided that if the buyer defaulted, the seller could keep “the deposit actually paid” as liquidated damages, provided that “the amount retained shall be no more than 3% of the purchase price.”

The Smiths countered on another standard form, requesting that the additional sum to be deposited after inspection be increased to $80,000 and that the entire sum deposited be treated as “non refundable purchase option monies.” Allen agreed and paid the additional amount in late March, following which the escrow company paid the entire $100,000 to the Smiths.

No Sale

Two months later, Allen notified the Smiths she would not complete the purchase. She acknowledged their right to keep the original $20,000, but demanded the return of the remaining $80,000. The Smiths refused, and eventually sold to someone else for $1.74 million.

Allen sued, but Nugent granted summary judgment on the ground that under the language of the contract, Allen had purchased an option, not merely agreed to pay liquidated damages.

Justice Judith Haller, writing for the Court of Appeal, disagreed. The determination of whether a real estate contract provides for an option or for liquidated damages, she wrote, is determined by construing the language of the agreement as a whole, not by looking at whether those specific terms are used.

“The contract consists of a California Association of Realtors standard form deposit receipt and counteroffer,” the jurist wrote. “These forms ordinarily constitute a binding and enforceable contract for the purchase and sale of the described property.”

Option Agreement

In an option agreement, Haller went on to explain, the decision to complete or not complete the transaction lies entirely with the prospective buyer. The arrangement between Allen and the Smiths, the justice said, was a standard purchase transaction in which both sides retained obligations and the Smiths could have canceled the sale if certain contingencies were not met.

“Moreover, the Smiths concede that if inspection contingencies were unsatisfied, Allen was entitled to a return of her initial $20,000 deposit,” the justice wrote. “Accordingly, the deposit cannot be considered independent consideration for an option.”

Haller went on to reject the Smith’s alternative argument—that the entire deposit could be retained as liquidated damages under Civil Code Sec. 1675(d), which limits liquidated damages for failure to complete a purchase of real estate to three percent of the purchase price unless “the party seeking to uphold the [contract] provision establishes that the amount actually paid is reasonable as liquidated damages.”

The statute doesn’t apply, Haller said, because while the Smiths’ counteroffer increased the total deposit to $100,000, it didn’t alter the original provision limiting liquidated damages to three percent of the purchase price, or $53,250. And even if the statute did apply, Haller said, the Smiths would still lose because they didn’t show that it would be reasonable to allow them to keep the whole $100,000.

“We conclude that Allen is entitled to a refund of $46,750 from the Smiths,” the jurist wrote.

The case is Allen v. Smith, 02 S.O.S. 23.


Copyright 2002, Metropolitan News Company