Fact Pattern: You are the listing agent in a multiple offer situation. To help make sure that the ultimate buyer does not cancel, you want to propose to your seller that you send out Seller Multiple Counter Offers (SMCOs) stating that, “Buyer’s deposit shall be nonrefundable 14 Days After Acceptance.”

Multiple Choice Question: Which of the following statements best describes the proposed nonrefundable language? Pick the best answer:

A. It’s binding and enforceable.
B. It’s enforceable only if the buyer is also required to remove all contingencies within 14 days.
C. It’s enforceable only if the buyer and seller initial the liquidated damages clause.
D. It’s unenforceable. 

Answer: The correct answer is D. Whether a “nonrefundable deposit” is enforceable is ultimately determined, as needed, by a judge or arbitrator, not by us. However, Answer A is unlikely to be correct. The proposed nonrefundable language is what the law calls a “forfeiture clause.” Yet, as courts often say, “the law abhors a forfeiture.” A judge or arbitrator is unlikely to rule that a buyer loses the deposit, unless the forfeiture language is very clear.

But here, the language is not at all clear. For example, the proposed nonrefundable language does not address what happens if the buyer does not remove all contingencies within 14 days, as pointed out in Answer B. However, Answer B is also wrong, because that’s not the only ambiguity. The proposed nonrefundable language also fails to address many other important points, such as, whether the buyer forfeits the deposit if the seller causes a delay or decides to cancel for no reason.

Answer C is also wrong. Under a valid liquidated damages clause, a seller is generally entitled to the buyer’s deposit if the buyer defaults (e.g., fails to perform after removing all contingencies). That entitlement is a big advantage for sellers. Hence, the law demands that sellers satisfy a long list of requirements before they can get that big advantage. You should know at least some of those requirements, e.g., the clause must be in writing; the clause must be in at least 10-point bold font; both parties must initial next to the clause; the liquidated damages cannot exceed 3% of the purchase price if the buyer will be owner-occupying the home; and so on.

If a seller tries to get around all those requirements by just saying that the buyer’s deposit shall be “nonrefundable,” a judge or arbitrator is not going to react kindly. Courts are generally reluctant to reward people who try to get around the law.

As the listing agent, you should not be proposing any nonrefundable language. Take a look at paragraph 21A of the RPA which states that any clause specifying a forfeiture or nonrefundable deposit “shall be deemed invalid unless the clause independently satisfies the statutory liquidated damages requirements.” If, despite that warning in paragraph 21A, your clients nevertheless want to go with a nonrefundable deposit, that’s up to them. Just make sure that you inform your clients in writing that it’s against your advice, and that you strongly recommend that they consult with their own attorney before proceeding (and get your clients’ written acknowledgment of receipt).

You can also give your clients a copy of C.A.R.’s Legal Q&A called Liquidated Damages and Deposit Disputes (password-protected for C.A.R. members only). Question 22 of C.A.R.’s Q&A addresses the problems with a nonrefundable deposit. If you give your clients the C.A.R. Q&A, get their written acknowledgment of receipt for the C.A.R. Q&A too.

-A big thank you for suggesting this week’s legal tip goes to Brent Jorgensen (Monarch Beach and San Clemente Manager).

Copyright© 2021 Berkshire Hathaway HomeServices California Properties (BHHSCP). All rights reserved. Any unauthorized reproduction or use of this material is strictly prohibited. This information is believed to be accurate as of January 25, 2021. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals.