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 dirt@umkc.edu
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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