The contract included a liquidated damages clause commonly used in real estate contracts which provided for a predetermined sum to be paid to the seller if the purchaser fails to perform as promised.
Liquidated damage clauses provide predictability and allow the parties to balance the cost of anticipated performance against the act of a breach. The clause serves as a source of limited insurance for both parties. For purchasers, a liquidated damage clause limits theirs loss if they default. For sellers, it provides a preset amount, usually the purchaser's down payment deposit.
There was also a due diligence provision in the contract which gave the purchaser thirty days from the signing of the contract to terminate the contract. Under the provision, the purchaser could terminate anytime for any reason within thirty days of the signing of the contract and have his down payment returned to him without penalty.
The problem for the purchaser was that the down payment came from two different sources. One of the sources tendered a $840,000 check which cleared the bank. The other $1,760,000 check bounced twice. The first time it bounced due to insufficient funds. The second time it bounced due to the purchaser's stop payment order.
Prior to the expiration of the thirty days, the purchaser terminated the contract, citing the due diligence provisions of the contract, and requested the return of the down payment. The purchaser claimed the right to terminate the contract for any reason without penalty because the thirty day due diligence period had not yet expired as of the date of the purchaser's termination notice.
The problem for the purchaser was that in order to invoke the provision of the contract permitting thirty days for due diligence and thus cancel the contract without penalty, the purchaser must first have tendered performance, i.e. successfully made the down payment. Unfortunately for the purchaser, the purchaser had not done so.
Before the purchaser submitted the notice to terminate, the purchaser offered to make good on the $1,760,000 that failed to clear my firm's escrow account. The firm strategically decided to refuse this overture which enabled the seller, after court intervention and motion practice, to obtain a judgment against the purchaser for $2.6 million, collect the $840,000 placed in the escrow account at the contract signing and still be able to sell its property.
Had the seller accepted the $1,760,000, the purchaser would simply have rescinded the contract within the thirty day due diligence period, and been entitled to the return of the entire 10% deposit, as seller's acceptance would have constituted a waiver of the purchaser's prior breaches. Needless to say our client was pretty happy as it retained the property plus the deposited money.
Sincerely,
Mario Biaggi Jr.