Anyone who has bought or sold property is aware of the overwhelming amount of paperwork exchanged between the buyer and the seller. Many people gloss over these important real estate contracts and other documents without fully reading them.
While many purchase and sales agreements provide for a fixed amount of damages (liquidated damages) in the event the buyers do not live up to their contractual obligations, not all “standard form” purchase and sales agreements are the same.
The typical liquidated damages deposit clause in the Massachusetts purchase and sale agreement looks like this:
If the BUYER shall fail to fulfill the BUYER’s agreements herein, all deposits made hereunder by the BUYER shall be retained by the SELLER as liquidated damages, which shall be the SELLER’S sole remedy at law or in equity.
Given the downturn of the real estate market, and in order to deter buyers from backing out of a transaction, sellers and attorneys often try to provide for sellers to be able to recover larger amounts of damages, above and beyond what might be otherwise recoverable pursuant to a liquidated damages provision.
In Avery v. Hughes, Docket No. 10-2379, (1st Cir. Nov. 18, 2011), the liquidated damages deposit clause provided for the seller to CHOOSE whether she wants to accept liquidated damages OR pursue actual damages. This provision read as follows:
If BUYER shall default in the performance of their obligation under this Agreement, the amount of the deposit may, at the option of SELLER, become the property of SELLER as reasonable liquidated damages.
Recently, the First Circuit Court of Appeals upheld the real estate contract and found that where (1) defendant failed to close on a real estate purchase and sale agreement, (2) the seller retained its deposit, sold the property to a third party for a lower price and then assigned its claim for the price differential to plaintiff and (3) when the plaintiff sued, plaintiff was entitled to recover the difference between the original real estate contract price and the ultimately received contract price.
This ultimately cost the defendant over $250,000; not just the $25,000 that the buyer thought was contemplated under the purchase and sales agreement.
As you can see, the changes in contract language between the standard form purchase and sales agreement and the one used in Avery are minimal; however, as is clear from the Avery decision, the effects of these minimal changes are huge. In fact, the Court of Appeals found that defendants’ deposit was not liquidated damages at all, and instead was merely consideration for the commitment to extend purchase money financing. Moreover, the Court found that in absence of the “sole remedy at law” language, defendant was on the hook for the entire difference between what he offered to buy the house for, and what the house ultimately sold for.
These effects of minor changes in contract language exhibit the importance of having binding contracts carefully reviewed for both form and substance. As the First Circuit Court of Appeals noted, contract interpretation is not as open ended as many think, and certainly is not based on what one party believes the agreement to mean. Instead, the agreement must be looked at rationally, and analyzed by an independent party who can offer a fair interpretation of contract terms and make suggestions for clarity. This is especially true in contracts where one party has altered the form of a pre-existing, “form” real estate contract.