DD 10/21/05 Liquidated Damages clause re Earnest Money does not preclude separate recovery for pre closing rent.

Daily Development for Friday, October 21, 2005
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; EARNEST MONEY; LIQUIDATED DAMAGE PROVISION:  A liquidated damages provision of a purchase agreement limiting damages to earnest money does not preclude Seller’s recovery of monthly rent when Buyer retains possession of the property under a rental arrangement as a tenant pending completion of the sale and not as buyer. 

Khatib v. Bolton, 618 S.E.2d 9  (Ga. App., May 5, 2005). 

Seller agreed to let Buyer take possession of subject property prior to closing date in exchange for monthly rental fee.  After the closing fell through, Seller  brought action against Buyer to recover rent for over six months.  The trial court entered judgment in favor of Seller and Buyer appealed.

Buyer had signed a purchase and sale agreement containing  a liquidated damages provision.  Buyer argued that the liquidated damages provision in the purchase agreement precludes the Seller's recovery of the monthly rent and limits damages to the earnest money.

The Court of Appeals found that although the purchase agreement provided that Seller was entitled to retain the earnest money as liquidated damages in the event of Buyer's breach, the Court also found that since Buyer was allowed possession of the premises, Buyer was obligated to pay rent to Seller until the time of closing.  Even though the closing did not occur, Buyer was responsible for paying rent as long as he remained in possession of the premises as his possession was under the rental arrangement as a tenant pending completion of the sale, and not as a Buyer.

Comment: This seems pretty straightforward.  Why did the buyer bother to appeal?  Perhaps the sums were too large not to do so. The amount of the forfeiture was $50,000 and the judgment for rent and late fees was likely another $50,000.  That smarts!! 

The Seller’s counsel got very lucky here.  Logically, it certainly makes sense to view the rental agreement as a separate item.  Nevertheless,  the rental agreement here was in “special stipulations added to the agreement..”  In other words, it was part of the agreement, and the agreement provided that the deposit was forfeited as liquidated damages (presumably) for breach of the agreement.  Whoops!!    Logic prevailed and saved the seller from failure to make this all more clear, but don’t try this at home, kids. 

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