Paragraph 3B of the Purchase Agreement is a relatively simple clause, relating solely to an Increased Deposit. This clause is used most often when, for example, the buyer agrees to make part of their deposit at the time of contract but hold off on some portion until after their due diligence. As a result, it is common to see an Increased Deposit due upon removal of the buyer’s investigation contingency. If there is a problem with Increased Deposits it almost always relates to liquidated damages. Of course, as you know, the liquidated damages clause is only part of the contract if it is initialed by both the buyer and seller. That clause specifically says that at the time of any increased deposit, both buyer and seller also need to execute a separate clause covering that money, specifically CAR Form RID. This form is required so that the parties are undoubtedly clear that each part of their deposit, both the original and the increased amount, are subject to liquidated damages. The RID gives notice of that fact.

Of course, in many years of reviewing transaction files, I am not sure if I have ever seen an executed RID. So, in such a case, how would liquidated damages work on the buyer’s breach? Let’s assume for discussion purposes that they buyer is paying $500,000 for the subject property, meaning the maximum 3% deposit equals $15,000. Let’s also assume that the buyer is concerned about the seller and the property condition, so he agrees to deposit $5,000 at the time of contract and $10,000 upon removal of his inspection contingency. The seller agrees and escrow is opened. After performing his inspections and due diligence, the buyer is satisfied with the property’s condition and removes all of his contingencies. He also makes his Increased Deposit of $10,000, but does not sign and RID. Then, 30 days later, the buyer changes his mind and cancels the transaction. The seller wants his liquidated damages and expects $15,000. In our scenario, how much does he get? Unfortunately for the seller and the listing agent, in this case he only gets the original $5,000. At the time that deposit was made, the buyer initialed paragraph 25 of the RPA so he was on notice of the risk to that money. He did not, however, get that same notice when he deposited the Increased Deposit of $10,000 and therefore has not forfeited that amount.

Remember that when this happens, the seller looks to the listing agent for compensation. She claims that the listing agent had an obligation to make sure the RID was signed at the time of the Increased Deposit and therefore is liable to pay her the $10,000. In truth, she is probably right. It is our obligation as the seller’s fiduciary to make sure the RID was signed. That Increased Deposit is for her protection, and we need to make sure she can take advantage of it. So, the lesson from this simple clause is also very simple: if you represent the seller, and there is an Increased Deposit, make sure there is a signed RID at the time that Increased Deposit is actually paid. If you don’t, you will probably be paying the seller the amount of that Increased Deposit. And, of course, that is never something we want to do.

As always, please let us know if you have any questions.