Real estate in California has seen a consistent theme: a dearth of closings for awaiting transactions. Parties unremarkably utilize a Residential Buy Agreement (C.A.R. Course RPA-CA) ("C.A.R. Grade"), provided by the California Clan of Realtors ("C.A.R."), to make offers, counteroffers, and take the negotiated purchase and sale of real estate. Immediately after the impacts of coronavirus became publicized and stay-calm and related executive orders were issued, the C.A.R. adult and circulated amendments to its existent manor forms. Existent manor attorneys' telephones rang, with clients asking if they should sign the new forms and, if they were the heir-apparent, whether they could cancel the transaction and receive their earnest money deposit dorsum. Such an research first concerns the concept of force majeure: can buyer cancel a real estate transaction solely because of the coronavirus pandemic? A force majeure provision assumes that at that place is an event exterior the control of both parties to the contract that either makes contract performance impracticable or frustrates the purpose of such performance. Is the coronavirus pandemic a foreseeable upshot that should qualify every bit an event under a "forcefulness majeure" provision? While reasonable minds may disagree, the answer is immaterial considering the C.A.R. Form includes no "strength majeure" provision. The answer to the buyer's question depends on specific circumstances related to each transaction and governing legal standards under California law.

The Auto Annex

To accost the touch of the coronavirus, the C.A.R. developed new forms ostensibly to address Covid-19 as a "force majeure" event. The primary forms relevant to this article are the Coronavirus Addendum or Amendment (C.A.R. Course CVA) and Notice of Unforeseen Coronavirus Circumstances (C.A.R. Form NUCC).[one] The forms are meant to be used equally an addendum to an offer or counteroffer, or an amendment to an accustomed agreement, and provide boosted time for buyers to conduct contingencies or close escrow. If an annex or amendment form was executed, it arguably provides the buyer with an additional opportunity to abolish the transaction without losing their deposit. Indeed, parties executing the NUCC clarified (or created a new definition of) unforeseen circumstances that could provide a contractual basis for not closing escrow and cancelling the transaction based on the coronavirus—a footing and legal right not provided nether the original C.A.R. Form. The annex and amendment are optional and, like to what has really occurred in many of the pending transactions, this commodity assumes that the parties declined to sign the annex for fearfulness it could unfavorably alter their legal rights.

Ceremonious Code Section 1511

Despite the lack of a force majeure provision in the C.A.R. Form, operation of an obligation may be excuses by certain causes, including performance that is "prevented or delayed by an irresistible, superhuman cause, or by the human activity of public enemies of this country or of the United states, unless the parties take expressly agreed to the opposite." See Cal. Civ. Code § 1511(ii). Whether the coronavirus qualifies as an "irresistible or superhuman cause" is hopefully something courts will never have to decide. And whether a buyer can truly not perform the agreement – every bit opposed to performance being simply more difficult or burdensome – is a difficult brunt and 1 required to utilize Section 1511[2] as a basis for non-performance under the agreement. Here once more, it is fair to assume that Ceremonious Code § 1511 will not excuse a party from performing due to the coronavirus pandemic.

The Liquidated Damages Clause

Parties unremarkably initial the liquidated damages provision found in Paragraph 21.B of the C.A.R. Form. This paragraph allows the seller to retain the earnest money eolith if the heir-apparent waives all contingencies or exercises a contingency in bad religion, and thereafter fails to close escrow. Under paragraph 21.B, "[i]f the [p]roperty is a dwelling with no more than iv units, one of which Buyer intends to occupy, then the corporeality retained shall exist no more than than 3% of the purchase price." Nether paragraph 9.A of the C.A.R. Form, the buyer must indicate whether it intends to occupy the property as a master residence. As such, when a dispute regarding the deposit occurs after a transaction does non close, the threshold research is whether the heir-apparent volition occupy the property as primary residence. The answer to this inquiry will touch whether a court volition easily award the eolith to the seller or require bear witness of the seller's bodily damages caused by the heir-apparent'south breach.

Enforcement of Liquidated Damages: What is the Standard?

Parties in California may agree to a presumed amount of impairment (i.e., liquidated damages) sustained from a breach if information technology would be impracticable or extremely hard to calculate the bodily amercement from a future alienation. See Cal. Ceremonious Code § 1671. Department 1671(b) provides that "a provision in a contract liquidating the amercement for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was fabricated."  In general, a liquidated amercement clause is considered unreasonable if information technology has no reasonable relationship to the range of actual damages that the parties could take predictable would flow from a breach. Come across Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 977. There are several key exceptions to this standard; the almost relevant precluding application of the standard if "another statute expressly applicable to the contract prescribes the rules or standard for determining the validity of a provision in the contract liquidating the damages for the alienation of the contract." Cal. Civ. Lawmaking § 1671(a). In a real estate transaction where a buyer fails to complete the purchase of real property, Section 1675 is the other "statute expressly applicable" as referenced past Section 1671(a).

Civil Lawmaking Department 1675, when applicative, governs the presumed validity (and invalidity) of a liquidated damages clause. The threshold question to identify the appropriate standard depends on whether the property subject to the dispute is "residential property." For purposes of liquidated damages rules, a holding is considered "residential" simply if, "at the fourth dimension the contract to purchase and sell the holding is made, the buyer intends to occupy the dwelling or one of its units as his or her residence." See Cal. Civ. Code § 1675(a)(ii).

The parties in Allen five. Smith, (2002) 94 Cal. App. quaternary 1270, executed a standard C.A.R. Form to purchase and sell a residential property for $1,775,000. The heir-apparent start deposited $20,000. Later that month the buyer deposited an boosted $eighty,000 into escrow and released all contingencies. Roughly two months afterward the buyer refused to buy the residence; in turn, the seller refused to refund the $100,000 deposit. The court applied Civil Code § 1675(d), which states:

If the corporeality actually paid pursuant to the liquidated damages provision exceeds 3 percentage of the purchase price, the provision is invalid unless the party seeking to uphold the provision establishes that the amount actually paid is reasonable as liquidated damages.

The court first rebuffed the sellers' assertion that the agreement was really an option contract—i.due east., the buyer received an option to purchase when she made the second deposit of $80,000. Afterward this argument failed, the sellers maintained that they should proceed the $100,000 deposit as reasonable liquidated damages. Id. at 1282. The court likewise rejected this argument, and held that the seller provided no testify establishing their actual damages or a reasonable relationship of the $100,000 deposit to the range of harm the sellers may have suffered because of the buyer's breach. For her part, the buyer did non argue that the liquidated damage provision violated Ceremonious Lawmaking Sections 1677 or 1678, or that $52,520 (or three percent of the purchase price) was an unreasonable amount of liquidated damages.[iii] The court ultimately held that the sellers did non meet their burden under Section 1675(d) and ordered that they retain only three percent of the purchase price ($52,520). See id. at 1283.

Only what about the pending purchase of a second abode that never closed due to coronavirus? This factual circumstance is common in and around the Lake Tahoe region and a unlike legal standard applies.  In this state of affairs, the buyer would not take contracted to purchase "residential" property because information technology was their second home, and Section 1675 should not apply. See Cal. Civ. Code § 1675(a)(ii). Instead, equally stated by the California Court of Appeal:

If the liquidated damages clause in a nonresidential property understanding meets the formal requirements in section 1677, it is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.

Come across Herrera v. Chambers (2004) Cal. App. Unpub. LEXIS 8033 *eight (unpublished) (citing Cal. Civ. Code § 1671(b); meet Cal. Law Revision Com. com., § 1676; Hong v. Somerset Assoc. (1984) 161 Cal. App. 3d 111, 115).

Neither political party in Herrera presented evidence as to whether the property was "residential property." On entreatment, the court, sua sponte, highlighted that the heir-apparent did non intend to occupy the property as his residence by checking the box in paragraph 9.A of the C.A.R. Course. Accordingly, the court held that the industry-standard "three percent of the purchase cost" dominion was not applicable. Come across id. at *8 fn. iii. Whether the buyer should receive a refund of his eolith was governed past Ceremonious Lawmaking Section 1671 and 1677. The court beginning found that Department 1677 was satisfied because the liquidated damages provision was typed on a blank form in an addendum, was separately signed past the both parties. Because the addendum was not a printed contract, the 10-point assuming blazon or contrasting red print requirements under Section 1677 did not use. Turning to the assay under Section 1671, the buyer made no effort in the trial courtroom to establish that the nonrefundable deposit provision was unreasonable when it was signed. See id. at *nine. The heir-apparent instead attempted to argue that actual amercement incurred by the sellers should exist the standard—and that the seller suffered no impairment as a result of the heir-apparent's failure to purchase the property. The court rejected this argument because, when analyzing liquidated damages for a nonresidential belongings under Section 1671, "the amount of damages actually suffered has no bearing on the validity of the liquidated amercement provision." Id. at *ix-10. Herrera demonstrates that a 2d homebuyer cancelling a real estate closing because of the coronavirus must show that the liquidated damages clause was unreasonable when the agreement was signed. If the seller can quickly resell the property or cannot otherwise bear witness bodily damages from the buyer'southward breach, it still does not help the buyer recover his eolith.

Conversely, if the holding is residential and therefore field of study to Section 1675, the buyer may show that the liquidated damage provision was amounts to an invalid and illegal forfeiture provision. California Ceremonious Lawmaking § 1675(eastward) states that the reasonableness of an amount actually paid equally liquidated damages shall be determined by because:

(1) The circumstances existing at the time the contract was made; and
(2) The toll and other terms and circumstances of any subsequent sale or contract to sell and purchase the same property if the sale or contract is made inside six months of the buyer's default.

Courts faced with this analysis normally agree that a deposit in an amount consistent with the industry standard for the blazon of transaction will support a finding of reasonableness. Run into, e.g., Hong v. Somerset Assocs., 161 Cal. App. 3d 111, 116, 207 Cal. Rptr. 597 (1984) (noting that the liquidated damages effigy of 2% of the buy price of an flat circuitous was standard in commercial real estate transactions); Cal Civ. Code § 1675(c) & (d) (discussing the presumed validity of a deposit amount of three percentage of the purchase price); Edwards v. Symbolic Int'50, Inc., 2009 U.South. Dist. LEXIS 37523, *21, 2009 WL 1178662 (finding that a not-refundable deposit of ten% for a vintage car contracted to be sold for $3.1 million is a standard amount in the industry). Despite the potential to show the unreasonableness of a deposit, if the liquidated damages amount for a residential real estate transaction is at or below three percent of the purchase cost, a buyer trying to recover their deposit likely faces an insurmountable hurdle.

There is, even so, a stiff legislative purpose to protect buyers in existent estate transactions. Equally stated by the California appellate court in Guthman 5. Moss (1984) 150 Cal.App.3d 501, in that location is "piddling dubiety that the purpose of enacting sections 1675, et. seq. was to protect buyers who fail to complete the purchase of real belongings and not sellers." Id. at 510. The court further held that the California Law Revision Committee recommended carefully drafted statutory limitations regarding liquidated amercement "to protect a defaulting heir-apparent 'from forfeiting an unreasonably big corporeality [on money] as liquidated amercement.'" Id. at 511. Nether the appropriate factual circumstances, creative counsel may succeed in arguing that despite a buyer's agreement to lose its deposit every bit liquidated amercement, the court must invalidate the provision and require evidence of the seller's actual damages.

The buyers in Timney v. Lin, (2003) 106 Cal.App.quaternary 1121, succeeded in arguing that their deposit was an illegal forfeiture. The case is unique because it revolved around a settlement agreement that required buyers to deposit funds into escrow deposit a quitclaim human action within five days of the closing date. The buyers deposited $31,250 into escrow but had failed to timely deposit a quitclaim deed, which resulted in forfeiture of their deposit under the understanding. The trial court enforced the settlement agreement and permitted the sellers to retain the deposit.[iv] On appeal, the appellate court reversed and rejected the sellers' endeavor to retain the deposit because the sellers had "no cognizable amercement." Id. at 1128. The sellers produced no evidence in the trial courtroom demonstrating amercement from the buyers' delay and cancellation. The court refused to presume that amercement existed merely considering the house may take been kept off the market for three weeks. As a issue, allowing the sellers to keep the deposit was an impermissible forfeiture of the buyers' property.

While the Timney case highlights an opportunity to debate that unreasonableness of a liquidated damages clause, the appellate court mentioned the $31,250 eolith exceeded three percent of the purchase cost. Even though this discussion was merely a footnote, if the dispute concerned an executed C.A.R. Form for the purchase of residential holding, the excessive corporeality of the deposit would have been presumed invalid under Section 1675(d). The court held that the legal principles related to illegal forfeitures as use to real estate contracts and settlement agreements, and heavily weighed the sellers' lack of evidence of whatever actual damage due to the buyers' breach. The court farther diminished use of its stance when acknowledging that "[i]f the provision in question, authorizing the forfeiture of a substantial deposit by reason of a minor delay in delivery of the quitclaim deed, were included in a real belongings sales contract, this provision would be void as an illegal forfeiture." Tinmey, 106 Cal. App. 4th at 1126. Thus, a heir-apparent seeking to recover a deposit is unlikely to use Timney every bit persuasive authorization to require court to consider the lack of actual amercement incurred past the seller.

Final Thoughts

The chance of a buyer retaining an earnest money eolith diminishes substantially once contingencies are removed. In these uncertain times and economic difficulties, a buyer could lose its deposit solely due to its lender reversing its position to fund the transaction. Real estate brokers and lenders must be careful when commenting on a buyer's decision to remove contingencies. If contingencies are removed and the deposit is lost to a seller, a buyer is probable to explore claims confronting the broker or the lender if they were not advised of consequences or were inappropriately told remove contingencies. No matter the reason, if your customer is a buyer debating on endmost escrow due to coronavirus-related concerns, you should promptly suggest of the legal standards applicative to a liquidated damages clause under California constabulary and the likelihood that a heir-apparent will lose its deposit.

Ethan Birnberg is licensed in California, Nevada, Colorado, and Wyoming. He regularly help clients with all types of nugget sales, acquisitions, and real estate issues, including landlord/tenant matters, lease formation and construction issues, and HOA disputes. He holds dual certifications as a business organization bankruptcy and consumer bankruptcy specialist from the American Lath of Certification, and has extensive insolvency experience assisting entities seeking to restructure nether chapter 11 of the U.Due south. Bankruptcy Code, borrowers and lenders seeking out-of-court workouts, representing chapter 7 trustees, and advising directors, officers, and executive management regarding fiduciary duties and corporate governance issues. He can be reached atbirnberg@portersimon.com.

[1] C.A.R. likewise adult a Coronavirus Belongings Entry Advisory and Annunciation (PEAD) and Listing Agreement Coronavirus Annex or Amendment (RLA-CAA). These forms relate to the real manor broker's duties and for parties to concur that providing admission to their property was unsafe or unsafe, and could expose the owner or visitor (i.e., potential buyer) to Covid-19. In short, these forms seek to convalesce liability for real estate brokers. All four forms were again amended on April xvi, 2020, subsequently the originally amended forms adult in late March resulted in several concerns voiced from buyers, sellers, broker, and other C.A.R. association members.

[2] All references to a "Department" refer to statutory section of the California Ceremonious Code.

[3] Department 1677 requires the parties to initial or sign the liquidated amercement provision and be typed in at to the lowest degree x-point assuming or at least 8-signal assuming if in contrasting red print.

[4] Even more unique to this case (and mayhap inferring the sellers' knowledge of the provision's unenforceability), the parties declined to explicitly use the term "liquidated damages" in the settlement agreement. The sellers reasoned that deleting referring to liquidated damages demonstrated the parties' intent to non agree to these types of damages. The appellate court plant this immaterial because any provision providing for an illegal forfeiture without regard to the damage acquired was forbidden under California law, regardless of its formal label. See Timney, 106 Cal. App. 4th at 1128 ("This forfeiture provision is invalid, whether analyzed every bit a forbidden forfeiture, or equally a void provision assuasive the recovery of liquidated damages.")