Can I get a refund of a real estate deposit?

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The Pennsylvania Superior Court recently required the sellers to refund most of the potential buyers’ deposit in an aborted real estate transaction, even though the buyers breached the contract of sale and the contract itself provided for forfeiture of the down payment. What happened?

Pedro and Magdalia Matos entered into a written contract to sell their small commercial storefront in Philadelphia to Luis and Antonio Disla. The contract called for prompt settlement and provided that all deposit moneys and other sums advanced by the buyers could be kept by the sellers as liquidated damages if the buyers failed to comply with the contract. The Dislas made an initial down payment of $4,000, followed three weeks later by an advance of an additional $20,000. The total sale price was $40,000. The Dislas backed out of the contract and then sought the return of their $24,000 down payment.

The court ruled that the Matoses were entitled to keep only $4,000 and required that they return $20,000 to the Dislas. The court found that although the contract permitted the retention of all down payment moneys as liquidated damages, Pennsylvania law supports liquidated damages clauses only when such clauses do not “effect a penalty.”

The court reviewed the contract, the intentions of the parties, the property, and its price. Noting that it had previously upheld forfeitures of liquidated damages amounting to 10% of contract prices, the court declined to uphold the sellers’ retention of a 60% deposit in this case. While the Matoses’ contract contained a liquidated damages clause, the clause itself did not identify the amounts of the down payments, nor did it give any specific reason why a forfeiture of 60% of the purchase price was fair or agreed upon by the parties.

Liquidated damages awards are carefully reviewed by the courts. When liquidated damages effect a penalty, they are not enforceable. If you are a party to a real estate contract involving substantial down payments, you should pay particular attention to the clarity of the forfeiture clause.