Daily Development for
Friday, September 22, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

This case continues the same theme that we have been talking about for the last week. I'm curious what DIRT readers think about the notion of earnest money forfeiture as an "independent remedy," not dependent upon liquidated damages justifications, and permitted as an alternative to other damage claims or specific performance. That's the law in my state, and in many others. Here, we can keep the earnest money and apply it against damage claimse when they arise.

The general question is: Is it proper to treat seller's rights under real estate contracts differently than the law treats other contract rights in other settings?

The more specific question is: Should the seller be required to forfeit the "bird in the hand" in order to seek a general damages remedy?

VENDOR/PURCHASER; ELECTION OF REMEDIES: By failing to release earnest money deposit to purchasers, vendor's elected remedy of liquidated damages.

Palmer v. Hayes, 892 P.2d 1059 (Utah App. 1995).

Vendors and purchaser signed a standardized Utah Real Estate Commission approved contract which provides that "[in] the event of default by buyer, seller may elect to either retain the earnest money as liquidated damages, or to institute suit to enforce any rights of seller." The court held that Utah law requires that before the seller may pursue a remedy other than liquidated damages, the seller must release any claim to the deposit money. Further, the court held that the vendors' arguments regarding the fact that the money was held by an escrow agent as opposed to by the vendors themselves were not persuasive.

The court found that regardless of any duties the escrow agent may have had to the parties, the vendors had an affirmative duty to release their interest in the deposit money to the purchasers before they filed their suit for damages. There was no evidence presented that the vendors ever released the deposit or advised the escrow agent that they were releasing their interest in the deposit money.

Comment: Probably more than half of the American jurisdictions permit sellers to declare the earnest money forfeit and also sue for damages, so long as they apply the forfeited funds against their damage claim. Of course, if the contract itself provides that the forfeiture of earnest money is an exclusive remedy, then that language would control.

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