November 2015 – The Connecticut Appellate Court recently issued a significant ruling in a case in which Martin LLP litigation partner Mark Gregory represented the seller of residential real estate to successfully enforce a liquidated damages clause upon the buyer’s breach. Peterson v. McAndrew et al, 160 Conn. App. 180 (2015).
It is common for parties buying and selling property to include in their contract a mandate that the buyer pay into an escrow account a deposit equal to ten percent of the purchase price as well as a provision providing that the seller may keep such deposit as liquidated damages in the event the buyer breaches the obligation to close on the purchase of the property. Notwithstanding the clear terms of both the standard real estate liquidated damages provision and Connecticut law regarding the circumstances that make such provisions valid, attorneys and brokers often found they were unable to advise clients with any certainty regarding their rights when a buyer decided to breach the agreement. For years, sellers were met with the argument that allowing them to keep the deposit constituted an unjust enrichment.
This case involved property along the Rowayton River in Norwalk. Over the years, the physical condition of the subject property changed as a result of natural accretion. The buyer refused to accept the warranty deed tendered to him even though it matched the property description in the contract on the grounds that it did not cover the accreted land. The trial court held that the refusal to close was a breach of the contract but it also held that, because the seller could only demonstrate actual damages that totaled about half of the escrowed money since he had been able to sell the property to a different purchaser shortly after the breach, it would represent an unjust enrichment for him to keep the entire deposit.
On appeal, the seller convinced the Appellate Court that it was a mistake to calculate actual damages in this circumstance. The Court determined that, as long as the seller is able to establish the existence of some actual damages in an amount not substantially less than the deposit and that such damages were of the type and nature the parties contemplated might occur in the event of a breach, he was entitled to keep the entire deposit rather than just the amount of the actual dollars lost: “Parties contract for liquidated damages clauses at least partly because of difficulty in assessing damages. So long as neither the contract nor its enforcement is patently inequitable, parties are to be accorded the benefits, or burdens, of their bargains; after-the-fact parsing of damages defeats that purpose.”
In addition to awarding to the seller the entire escrow deposit, pursuant to the contract, the seller was able to also recover the reasonable fees he incurred both in the trial court proceedings and in respect of the appeal.
