By Elliott Topkins, Esquire
5/19/11
One of my pet peeves as a Massachusetts real estate attorney is the printed language in most standard purchase and sale agreements regarding liquidated damages. To paraphrase the legalese contained in the printed form “if the buyer defaults, the seller may keep buyer’s deposit as liquidated damages unless the seller within 30 days of such default decides to avail himself, or herself, of other options.”

These “other options” may definitely include suit for specific performance of the contract, which in a falling market, could mean a financial disaster for the buyer. In effect, if the seller sold the property to another buyer, the defaulting buyer would be responsible for damages measured by the price in his or her contract versus the actual sales price realized by the seller.

The alarming thing about this provision is that in my 40-plus years of practicing real estate law, I have never had an attorney for the seller refuse my request to eliminate the second option.  So, if for some reason, you decide not to retain an attorney to represent you when you are purchasing residential real estate (not really the best idea, I might add), I urge you to, at the very least, to make sure that you request a change from the printed form.

The changed version should read “if the buyer defaults, the seller may retain buyer’s deposit, and such retention shall constitute seller’s sole remedy against the buyer, in law or in equity.” That remedy is a horse of a different color and, of course, much more favorable to the buyer.

You should be aware many sellers are inserting provisions in the purchase and sale agreements to the effect that “since there is no way to truly measure the damages suffered by the seller, if the buyer defaults, both parties agree that the retention of the entire deposit constitutes an acceptable remedy for both sides.” If you have put more than 5 percent as a deposit when you sign your purchase and sale agreement, you might want to counter this proposal by limiting the amount that can be retained to 5 percent. That is usually a significant amount of money and more than compensates the seller for the period of time that the seller has removed the property from the market, especially if the default occurs in a relatively short period of time.

The only Massachusetts Supreme Judicial Court decision which actually addresses this issue has held that 5 percent was a reasonable sum for liquidated damages.

One other point that you may want to consider about the importance of being specific about liquidated damages. Most purchase and sale agreements contain dates for obtaining mortgage financing. There are situations where a buyer obtains a mortgage commitment, then loses his or her job, and the lender will not fund the mortgage loan with that change of circumstances. The fact that this is happening in our unstable economic times makes even more critical the precision directed to insuring that your purchase and sale agreement contains a solid, and well-considered, liquidated damage provision.

(Mr. Topkins is an attorney with Topkins & Bevans, Braintree Executive Park, 150 Grossman Dr., Braintree, MA 02184. His blog can be found at http://realtorsresourceblog.com. His e-mail address is etopkins@topbev.com.)