Kuish v. Smith Non-refundable deposit in California no such thing

If you where over the age of 62 it is also elder abuse entitling the elder treble damages!

Sometimes buyers and sellers agree in real estate purchase and sale contracts that the buyer’s deposit will be “nonrefundable.”  Or a point may be reached in a transaction where the seller’s interest in consummating the deal seems to exceed the buyer’s interest in completing their “due diligence”.  In order to persuade the seller that the buyer is committed to the deal, the parties may then agree that some or all of the buyer’s deposit will be “passed through” to the seller or retained in escrow on a nonrefundable basis.

Certainly the greater the buyer’s “investment” in the deal, as represented by their releasing their deposit to the seller before close of escrow, the greater the likelihood the buyer will actually close the deal?

Perhaps.

But the recent decision by the California 4th District Court of Appeal in Kuish v. Smith (PDF) (February 3, 2010) —- Cal.Rptr.3d —-, 2010 WL 373225 serves as a reminder of the fact that under California law nonrefundable deposits are not nonrefundable.

The Kuish and Smith Agreement:

In January of 2006, Bradford Kuish agreed to purchase William W. Smith, Jr. and Rhonda Lynn Smith’s Laguna Beach residence for the sum of $14 million.  Their agreement consisted of an offer, nine counteroffers, and escrow instructions that required Mr. Kuish to make a total of $620,000 in nonrefundable deposits to escrow.  (The agreement was not an option contract and contained no liquidated damages provisions.)  Escrow was to close on September 15.  Mr. Kuish completed his deposits by April 21, and requested escrow cancellation on September 18.

The Smiths agreed to cancel escrow in October, sold their Laguna Beach property for $15 million to a backup buyer in November, refused to return Mr. Kuish’s $620,000 nonrefundable deposit ($400,000 of which had already been “passed through” escrow to them in accordance with the parties’ agreement), and litigation commenced.

The Kuish v. Smith Decision:

The court of appeal reversed the trial court and held that allowing the Smiths to keep the buyer’s $620,000 “nonrefundable” deposit in the context of a rising market would constitute an invalid forfeiture:

In the context of a rising market, which was the circumstance of the instant case, an interpretation of the nonrefundable term of the agreement as precluding the return of plaintiff’s deposit above and beyond any damages suffered by defendants as a result of plaintiff’s breach would render that provision unenforceable. As discussed ante, “ ‘any provision by which money or property would be forfeited without regard to the actual damage suffered would be an unenforceable penalty.’ “ ( Freedman, supra, 37 Cal.2d at pp. 21-22, 230 P.2d 629.)

(Kuish v. Smith (PDF), emphasis added.)

The court further held that that no part of the $620,000 deposit constituted “separate and additional consideration” for the Smiths’ agreement to extend the escrow period, and that the buyer’s “deposit would have been nonrefundable in a falling market to the extent [the Smiths] were able to show damages under Civil Code section 3307.” (PDF)

Without the benefit of a valid liquidated damages clause, the seller may retain the deposit only to the extent that actual damages were incurred according to [Civil Code section] 3307. A deposit, however, can serve as a fund from which the seller obtains whole or partial reimbursement for actual losses. [Citation.] [¶] The seller must refund the excess over actual damages to the buyer, regardless of whether the breach was innocent or willful. [Citation.] This is true whether the buyer paid the deposit directly to the seller or into an escrow account. [Citation.] The deposit gives the seller the practical advantage of shifting the burden to the buyer to show that the seller’s retention of the deposit constitutes unjust enrichment.” (1 Cal. Real Property Remedies and Damages, supra, § 4.69, p. 350.)

(Kuish v. Smith (PDF), emphasis added.)

My thoughts:

Deposits in California real estate contracts are not made nonrefundable by calling them nonrefundable. They are made nonrefundable only to the extent that they are available to compensate for a seller’s actual damages after a buyer’s breach, or to the extent that they are covered by a valid and enforceable liquidated damages provision.  Sellers and their agents rely at their peril upon their own labeling of deposits as “nonrefundable” to determine refundability.

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One thought on “Kuish v. Smith Non-refundable deposit in California no such thing

  1. Pingback: Beware of the Second trust deed Ponzi scheme « Timothymccandless's Weblog

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