SAN JOSE, Calif., Feb. 22
— An agreement for a "nonrefundable" escrow deposit is invalid and unenforceable, according to the ruling in the recent California case of Kuish v. Smith. This case serves as a good reminder for consumers and Realtors® that inserting a "nonrefundable deposit" provision into a real property purchase contract may be legally ineffective.
"This ruling is particularly relevant in our current market environment where lenders selling bank-owned homes may include 'nonrefundable deposit' language in their contracts," said Karl Lee, President of the Santa Clara County Association of Realtors. "Buyers should work with knowledgeable Realtors who can point out these terms and direct buyers to appropriate legal counsel."
The Kuish case involved a $620,000 escrow deposit for the purchase of a $14 million oceanfront home in Laguna Beach. Instead of using a liquidated damages provision, the buyer and sellers merely agreed in the purchase contract that the deposit would be "nonrefundable." The buyer eventually cancelled the agreement. The sellers refused to return the deposit to the buyer, even though they sold the property to someone else for $1 million more.
The court stated that "any provision by which money or property would be forfeited without regard to actual damage suffered would be an unenforceable penalty. To construe the term 'nonrefundable' to establish [the sellers'] entitlement to the full deposit without regard to actual damages would essentially create a liquidated damages provision." Yet, the parties in this case did not separately sign or initial a liquidated damages provision.
Under C.A.R.'s Residential Purchase Agreement, the sellers would have been entitled to the escrow deposit (not to exceed three percent of the purchase price), if the parties initialed the liquidated damages provision, and the buyer had no contingencies or had removed all his contingencies. For more information about liquidated damages, C.A.R. has a legal article entitled Liquidated Damages and Deposit Forfeitures, which is available in English, Chinese, Korean, Spanish, and Vietnamese.