Daily Development for Tuesday, March 2, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri email@example.com
VENDOR/PURCHASER; SELLER’S REMEDIES; SPECIFIC PERFORMANCE: Seller may have specific performance as an alternative remedy notwithstanding earnest money provision that gives the seller the right to cancel the agreement and retain the earnest money in the event of buyer’s default, which provision states that “neither party shall have any further rights or obligations . .. .”
Conner v. Auburn Partners, L.L.L. 852 So. 2d 755 (Ala. Civ. App. 2002) (cert. den. 12/12/02)
Buyer put a relatively small earnest money deposit down on a land sale contract. The contract provided for a much larger “approval deposit” to be paid upon the expiration of an inspection period. Although Buyer failed to withdraw during the inspection period, it did not post the approval deposit and later failed to close.
The contract had language that the buyer argued established forfeiture of the earnest money as the exclusive remedy. The trial court agreed, but the appeals court here reversed, and held that specific performance was available to the seller.
The language in question read as follows:
“If Purchaser fails to consummate the purchase of the Property . .. For any reason other than [exercise of the right to withdraw during the inspection period] then Seller shall have the right to terminate this Agreement by notifying purchaser thereof, in which event Escrow Agent shall deliver the Earnest Money to Seller and Neither party hereto shall have any further rights or obligations hereunder.”
The court distinguished Alabama authority to the effect that when a contract contains a liquidated damages clause, stating that liquidated damages are the “sole remedy,” specific performance would be denied. Here, however, the contract does not expressly state that the earnest money forfeiture is the sole remedy, only that if that remedy is exercised, other remedies are precluded. In this case, of course, the seller chose not to avail itself of the forfeiture of the earnest money, perhaps because it was a pittance, and instead elected to sue for the price (specific performance.)
The court noted that Alabama statutes provide that specific performance is the preferred remedy for breach of real estate sale contracts. As this contract did not preclude use of that remedy, it is available.
Comment 1: Courts differ dramatically on the question of the impact of a provision for forfeiture of earnest money. Many are of the view that such forfeiture must satisfy liquidated damages standards. In some of these states, a liquidated damages clause indeed is the solve remedy as a matter of law when the parties elect to insert it. In others, however, such as Kansas, specific performance remains available as an optional remedy.
In still others, such as in Missouri, the parties can provide for forfeiture of the earnest money and the seller may keep the earnest money and simply credit it in an action for damages.
Comment 2: An action for damages often is a preferred remedy to specific performance, since in the latter case the seller must keep the property available for sale until the action is completed, passing up opportunities possibly to sell in mitigation of damages. If the specific performance award then proves uncollectible, the seller is left without relief. If the buyer clearly has assets and has clearly defaulted, however, specific performance is often a very satisfactory approach.
Further, as this case indicates, even if you give up your right to an action for damages as the cost of getting an earnest money forfeiture clause, you still have that equitable specific performance remedy in your back pocket in many states.
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