Existent manor in California has seen a consistent theme: a dearth of closings for pending transactions. Parties commonly apply a Residential Purchase Agreement (C.A.R. Form RPA-CA) ("C.A.R. Form"), provided by the California Clan of Realtors ("C.A.R."), to make offers, counteroffers, and take the negotiated purchase and sale of existent estate. Immediately afterwards the impacts of coronavirus became publicized and stay-at-home and related executive orders were issued, the C.A.R. developed and circulated amendments to its existent estate forms. Real estate attorneys' telephones rang, with clients asking if they should sign the new forms and, if they were the buyer, whether they could cancel the transaction and receive their earnest money deposit dorsum. Such an inquiry first concerns the concept of force majeure: can buyer abolish a existent estate transaction solely because of the coronavirus pandemic? A force majeure provision assumes that there is an outcome outside the control of both parties to the contract that either makes contract performance impracticable or frustrates the purpose of such performance. Is the coronavirus pandemic a foreseeable event that should qualify equally an event under a "force majeure" provision? While reasonable minds may disagree, the answer is immaterial because the C.A.R. Form includes no "force majeure" provision. The answer to the buyer's question depends on specific circumstances related to each transaction and governing legal standards under California law.

The CAR Addendum

To accost the impact of the coronavirus, the C.A.R. adult new forms ostensibly to accost Covid-19 as a "force majeure" effect. The primary forms relevant to this article are the Coronavirus Addendum or Amendment (C.A.R. Form CVA) and Detect of Unforeseen Coronavirus Circumstances (C.A.R. Form NUCC).[1] The forms are meant to exist used as an addendum to an offer or counteroffer, or an subpoena to an accepted agreement, and provide additional time for buyers to comport contingencies or shut escrow. If an addendum or subpoena class was executed, information technology arguably provides the buyer with an boosted opportunity to cancel the transaction without losing their eolith. Indeed, parties executing the NUCC clarified (or created a new definition of) unforeseen circumstances that could provide a contractual footing for not endmost escrow and cancelling the transaction based on the coronavirus—a basis and legal correct not provided under the original C.A.R. Course. The addendum and subpoena are optional and, similar to what has actually occurred in many of the awaiting transactions, this article assumes that the parties declined to sign the addendum for fear information technology could unfavorably alter their legal rights.

Ceremonious Code Section 1511

Despite the lack of a force majeure provision in the C.A.R. Grade, performance of an obligation may exist excuses by certain causes, including functioning that is "prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties take expressly agreed to the contrary." See Cal. Civ. Code § 1511(2). Whether the coronavirus qualifies equally an "irresistible or superhuman cause" is hopefully something courts will never have to decide. And whether a buyer can truly non perform the understanding – equally opposed to performance existence merely more difficult or burdensome – is a hard burden and ane required to utilize Department 1511[2] as a footing for non-performance nether the agreement. Here again, it is fair to assume that Civil Code § 1511 will not excuse a political party from performing due to the coronavirus pandemic.

The Liquidated Damages Clause

Parties ordinarily initial the liquidated amercement provision constitute in Paragraph 21.B of the C.A.R. Form. This paragraph allows the seller to retain the earnest money deposit if the buyer waives all contingencies or exercises a contingency in bad faith, and thereafter fails to close escrow. Under paragraph 21.B, "[i]f the [p]roperty is a dwelling with no more four units, one of which Heir-apparent intends to occupy, so the amount retained shall be no more 3% of the purchase price." Under paragraph 9.A of the C.A.R. Form, the heir-apparent must indicate whether it intends to occupy the property equally a chief residence. Every bit such, when a dispute regarding the deposit occurs later on a transaction does not close, the threshold enquiry is whether the buyer will occupy the belongings every bit primary residence. The answer to this inquiry will touch on whether a court volition easily award the eolith to the seller or crave evidence of the seller's actual damages caused past the heir-apparent's alienation.

Enforcement of Liquidated Damages: What is the Standard?

Parties in California may concord to a presumed amount of harm (i.e., liquidated amercement) sustained from a breach if it would exist impracticable or extremely difficult to calculate the actual damages from a future breach. See Cal. Civil Code § 1671. Section 1671(b) provides that "a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable nether the circumstances existing at the time the contract was made."  In general, a liquidated amercement clause is considered unreasonable if it has no reasonable relationship to the range of bodily damages that the parties could have anticipated would flow from a breach. See Ridgley five. Topa Thrift & Loan Assn. (1998) 17 Cal.quaternary 970, 977. In that location are several key exceptions to this standard; the most relevant precluding application of the standard if "some other statute expressly applicable to the contract prescribes the rules or standard for determining the validity of a provision in the contract liquidating the amercement for the breach of the contract." Cal. Civ. Lawmaking § 1671(a). In a real estate transaction where a heir-apparent fails to consummate the buy of real property, Section 1675 is the other "statute expressly applicable" as referenced by Section 1671(a).

Ceremonious Code Section 1675, when applicable, governs the presumed validity (and invalidity) of a liquidated amercement clause. The threshold question to identify the advisable standard depends on whether the belongings discipline to the dispute is "residential belongings." For purposes of liquidated damages rules, a property is considered "residential" just if, "at the time the contract to purchase and sell the holding is made, the buyer intends to occupy the dwelling or i of its units as his or her residence." See Cal. Civ. Code § 1675(a)(2).

The parties in Allen v. Smith, (2002) 94 Cal. App. quaternary 1270, executed a standard C.A.R. Form to buy and sell a residential property for $one,775,000. The heir-apparent first deposited $20,000. Later that month the buyer deposited an additional $80,000 into escrow and released all contingencies. Roughly two months later the heir-apparent refused to purchase the residence; in plough, the seller refused to refund the $100,000 deposit. The court practical Ceremonious Lawmaking § 1675(d), which states:

If the corporeality really paid pursuant to the liquidated damages provision exceeds 3 per centum of the purchase price, the provision is invalid unless the party seeking to uphold the provision establishes that the amount actually paid is reasonable as liquidated amercement.

The court offset rebuffed the sellers' assertion that the understanding was really an option contract—i.e., the heir-apparent received an option to purchase when she made the second deposit of $80,000. After this argument failed, the sellers maintained that they should proceed the $100,000 deposit every bit reasonable liquidated damages. Id. at 1282. The courtroom also rejected this argument, and held that the seller provided no show establishing their bodily damages or a reasonable relationship of the $100,000 deposit to the range of harm the sellers may have suffered considering of the buyer's breach. For her function, the buyer did not argue that the liquidated damage provision violated Civil Code Sections 1677 or 1678, or that $52,520 (or three percent of the purchase price) was an unreasonable corporeality of liquidated damages.[3] The court ultimately held that the sellers did not meet their burden under Department 1675(d) and ordered that they retain only 3 percentage of the purchase price ($52,520). See id. at 1283.

Simply what about the awaiting purchase of a second home that never airtight due to coronavirus? This factual circumstance is common in and around the Lake Tahoe region and a dissimilar legal standard applies.  In this situation, the heir-apparent would non accept contracted to purchase "residential" property because it was their second abode, and Section 1675 should non apply. Come across Cal. Civ. Lawmaking § 1675(a)(two). Instead, equally stated by the California Court of Appeal:

If the liquidated damages clause in a nonresidential property understanding meets the formal requirements in section 1677, it is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the fourth dimension the contract was made.

Encounter Herrera 5. Chambers (2004) Cal. App. Unpub. LEXIS 8033 *8 (unpublished) (citing Cal. Civ. Code § 1671(b); see Cal. Law Revision Com. com., § 1676; Hong v. Somerset Assoc. (1984) 161 Cal. App. 3d 111, 115).

Neither party in Herrera presented prove as to whether the property was "residential holding." On appeal, the court, sua sponte, highlighted that the buyer did not intend to occupy the property as his residence by checking the box in paragraph 9.A of the C.A.R. Form. Accordingly, the courtroom held that the industry-standard "three percent of the purchase toll" rule was not applicable. Run across id. at *viii fn. three. Whether the heir-apparent should receive a refund of his deposit was governed by Ceremonious Lawmaking Section 1671 and 1677. The court first found that Department 1677 was satisfied considering the liquidated damages provision was typed on a bare form in an addendum, was separately signed past the both parties. Considering the addendum was non a printed contract, the x-signal assuming type or contrasting red print requirements nether Section 1677 did non apply. Turning to the analysis under Section 1671, the buyer fabricated no effort in the trial court to establish that the nonrefundable deposit provision was unreasonable when it was signed. Meet id. at *9. The buyer instead attempted to argue that actual damages incurred by the sellers should be the standard—and that the seller suffered no damage equally a upshot of the buyer'south failure to purchase the property. The court rejected this statement considering, when analyzing liquidated damages for a nonresidential property nether Department 1671, "the amount of damages actually suffered has no bearing on the validity of the liquidated amercement provision." Id. at *9-10. Herrera demonstrates that a second homebuyer cancelling a real manor closing because of the coronavirus must show that the liquidated damages clause was unreasonable when the agreement was signed. If the seller can rapidly resell the belongings or cannot otherwise show actual amercement from the buyer'due south breach, it still does not aid the buyer recover his deposit.

Conversely, if the property is residential and therefore subject to Section 1675, the buyer may show that the liquidated harm provision was amounts to an invalid and illegal forfeiture provision. California Civil Lawmaking § 1675(e) states that the reasonableness of an corporeality really paid as liquidated amercement shall be determined by considering:

(one) The circumstances existing at the time the contract was made; and
(ii) The price and other terms and circumstances of any subsequent sale or contract to sell and purchase the same holding if the sale or contract is fabricated within six months of the buyer's default.

Courts faced with this analysis commonly agree that a deposit in an amount consistent with the industry standard for the type of transaction volition support a finding of reasonableness. Run across, due east.yard., Hong v. Somerset Assocs., 161 Cal. App. 3d 111, 116, 207 Cal. Rptr. 597 (1984) (noting that the liquidated amercement figure of 2% of the purchase price of an apartment complex was standard in commercial real estate transactions); Cal Civ. Code § 1675(c) & (d) (discussing the presumed validity of a eolith corporeality of three percent of the purchase price); Edwards v. Symbolic Int'l, Inc., 2009 U.S. Dist. LEXIS 37523, *21, 2009 WL 1178662 (finding that a non-refundable deposit of 10% for a vintage car contracted to be sold for $iii.1 million is a standard amount in the manufacture). Despite the potential to testify the unreasonableness of a deposit, if the liquidated damages corporeality for a residential real manor transaction is at or below three percent of the purchase price, a buyer trying to recover their deposit probable faces an insurmountable hurdle.

There is, however, a strong legislative purpose to protect buyers in existent estate transactions. As stated past the California appellate court in Guthman v. Moss (1984) 150 Cal.App.3d 501, there is "footling doubtfulness that the purpose of enacting sections 1675, et. seq. was to protect buyers who fail to complete the buy of real property and not sellers." Id. at 510. The court further held that the California Constabulary Revision Committee recommended advisedly drafted statutory limitations regarding liquidated amercement "to protect a defaulting buyer 'from forfeiting an unreasonably large corporeality [on money] equally liquidated damages.'" Id. at 511. Under the appropriate factual circumstances, creative counsel may succeed in arguing that despite a buyer'south understanding to lose its deposit as liquidated damages, the court must invalidate the provision and require evidence of the seller'south actual damages.

The buyers in Timney v. Lin, (2003) 106 Cal.App.4th 1121, succeeded in arguing that their deposit was an illegal forfeiture. The example is unique because it revolved around a settlement understanding that required buyers to deposit funds into escrow deposit a quitclaim act inside five days of the endmost date. The buyers deposited $31,250 into escrow but had failed to timely deposit a quitclaim human action, which resulted in forfeiture of their deposit under the understanding. The trial court enforced the settlement understanding and permitted the sellers to retain the deposit.[4] On appeal, the appellate court reversed and rejected the sellers' attempt to retain the eolith because the sellers had "no cognizable damages." Id. at 1128. The sellers produced no testify in the trial court demonstrating damages from the buyers' filibuster and cancellation. The court refused to assume that damages existed only because the firm may take been kept off the market for three weeks. Equally a result, allowing the sellers to keep the deposit was an impermissible forfeiture of the buyers' property.

While the Timney case highlights an opportunity to argue that unreasonableness of a liquidated damages clause, the appellate court mentioned the $31,250 deposit exceeded 3 percent of the buy price. Fifty-fifty though this word was simply a footnote, if the dispute concerned an executed C.A.R. Form for the buy of residential belongings, the excessive amount of the deposit would have been presumed invalid under Section 1675(d). The court held that the legal principles related to illegal forfeitures every bit apply to existent manor contracts and settlement agreements, and heavily weighed the sellers' lack of evidence of whatsoever actual damage due to the buyers' alienation. The court further diminished apply of its opinion when acknowledging that "[i]f the provision in question, authorizing the forfeiture of a substantial eolith by reason of a small delay in commitment of the quitclaim human action, were included in a real belongings sales contract, this provision would be void as an illegal forfeiture." Tinmey, 106 Cal. App. 4th at 1126. Thus, a heir-apparent seeking to recover a deposit is unlikely to use Timney as persuasive authority to require court to consider the lack of actual damages incurred by the seller.

Final Thoughts

The chance of a buyer retaining an earnest money deposit diminishes substantially once contingencies are removed. In these uncertain times and economical difficulties, a heir-apparent could lose its deposit solely due to its lender reversing its position to fund the transaction. Real estate brokers and lenders must exist careful when commenting on a buyer's decision to remove contingencies. If contingencies are removed and the deposit is lost to a seller, a buyer is probable to explore claims against the broker or the lender if they were not advised of consequences or were inappropriately told remove contingencies. No affair the reason, if your client is a buyer debating on endmost escrow due to coronavirus-related concerns, yous should promptly advise of the legal standards applicative to a liquidated damages clause under California law and the likelihood that a heir-apparent will lose its deposit.

Ethan Birnberg is licensed in California, Nevada, Colorado, and Wyoming. He regularly help clients with all types of asset sales, acquisitions, and real estate issues, including landlord/tenant matters, charter formation and construction issues, and HOA disputes. He holds dual certifications equally a business concern bankruptcy and consumer bankruptcy specialist from the American Board of Certification, and has extensive insolvency feel assisting entities seeking to restructure under chapter 11 of the U.Southward. Bankruptcy Code, borrowers and lenders seeking out-of-courtroom workouts, representing chapter 7 trustees, and advising directors, officers, and executive management regarding fiduciary duties and corporate governance issues. He can be reached atbirnberg@portersimon.com.

[1] C.A.R. besides developed a Coronavirus Property Entry Advisory and Announcement (PEAD) and Listing Understanding Coronavirus Addendum or Subpoena (RLA-CAA). These forms chronicle to the real estate broker's duties and for parties to concord that providing admission to their belongings was dangerous or unsafe, and could expose the owner or visitor (i.east., potential buyer) to Covid-19. In short, these forms seek to alleviate liability for real estate brokers. All four forms were over again amended on April sixteen, 2020, after the originally amended forms developed in late March resulted in several concerns voiced from buyers, sellers, banker, and other C.A.R. association members.

[2] All references to a "Section" refer to statutory section of the California Civil Code.

[3] Section 1677 requires the parties to initial or sign the liquidated amercement provision and be typed in at least ten-point bold or at least eight-bespeak bold if in contrasting red impress.

[4] Fifty-fifty more unique to this case (and mayhap inferring the sellers' knowledge of the provision's unenforceability), the parties declined to explicitly use the term "liquidated amercement" in the settlement agreement. The sellers reasoned that deleting referring to liquidated damages demonstrated the parties' intent to not hold to these types of amercement. The appellate courtroom institute this immaterial considering any provision providing for an illegal forfeiture without regard to the damage caused was forbidden nether California law, regardless of its formal characterization. See Timney, 106 Cal. App. 4th at 1128 ("This forfeiture provision is invalid, whether analyzed as a forbidden forfeiture, or equally a void provision allowing the recovery of liquidated amercement.")