The Third District Court of Appeal recently ruled that a sum provided as a deposit in a commercial real estate contract could be retained as a liquidated damages amount when the buyer did not close on the transaction, even though the amount was argued to be an excessive penalty and the property was later sold for more than the original contract price.  In San Francisco Distribution Center v. Stonemason Partners, LP, —So.3d—, 2014 WL 1491633 (Fla. 3d DCA April 16, 2014), 39 Fla. L. Weekly D790a, the court held that a deposit amount of $400,000 on a purchase price of $5,250,000 was an enforceable liquidated damages amount on three grounds: (1) the provision involved was enforceable even though it provided for an alternative remedy; (2) the amount was less than ten percent of the purchase price and therefore enforceable and (3) the fluctuating real estate market relegates a higher sales price for the property at issue irrelevant when considering the liquidated damages clause.

The appeal by the party that failed to close followed a summary judgment on the seller’s part.  The buyer alleged the summary judgment was improper because the liquidated damages clause in the contract between the parties providing for the $400,000 deposit was unenforceable because (1) it provided for alternative remedies of liquidated damages or specific performance, rendering it a penalty clause and (2) the provision was unconscionable in light of the fact that the property ultimately sold for $200,000 more than the contract agreed upon between the parties.

In analyzing the first argument, the court considered the Florida Supreme Court decision of  Lefemine v. Baron, 573 So. 2d 326 (Fla. 1991) in which the court held a liquidated damages clause was unenforceable because the contractual provision gave the seller the option of using the liquidated damages provision or suing the buyer to recover actual damages.  The court reasoned that providing the option to the seller made the provision more of a penalty to the defaulting buyer and therefore rendered it unenforceable.  Id at 329.  In the instant case, the court distinguished Lefemine and held that specific performance, being an equitable remedy, made the situation entirely different.  The court also held, in citing Lefemine, that a deposit amount forfeited of less than ten percent of the purchase price is not unconscionable.  The deposit here being 7.6% of the purchase price, the amount was deemed to be reasonable.

As for the second summary judgment argument, the buyer argued that the seller did not suffer any damages because the property ultimately sold for more than the original contract price.  The court held that this argument was unavailing because of the fluctuating real estate market and speculation as to a seller’s loss of potential buyers during the time when a property was taken off the market during the pendency of the transaction.

The implications of the decision are for buyers to think about liquidated damages provisions with alternative remedies and to avoid a default if possible.  Furthermore, arguments such as a higher subsequent purchase price and an unconscionable deposit amount in light of the original contractual amount will not save a buyer who defaults and expects to recover a deposit.