Brief Fact Summary. After a couple stopped making mortgage payments, the seller enforced a liquidated damages clause.
Synopsis of Rule of Law. A clause for damages is only a penalty when the amount is grossly disproportional in comparison to the damages actually incurred.
Parties may properly contract for liquidated damages (1) where such damages are uncertain and not readily capable of ascertainment in amount by any known or safe rule, whether such uncertainty lies in the nature of the subject, or in the particular circumstances of the case; or (2) where from the nature of the case and tenor of the agreement, it is apparent that the damages have already been the subject of actual fair estimate and adjustment between the parties.View Full Point of Law
Issue. Is a clause for damages a penalty when the amount is grossly disproportional in comparison to the damages actually incurred?
In determining whether the amount paid by a purchaser through liquidated damages under an installment land contract is so grossly disproportional to the damages actually incurred, courts will look at the loss of fair rental value to the seller, the costs involved in the sale of property, depreciation, attorney fees, and other directly related expenses arising by virtue of the purchaser’s abandonment of the property.
Here, the amount retained by the Defendants was not excessive. Defendants had to assume responsibility of the rental payments and expenses for selling the property a second time. The amount includes the down payment plus monthly rental payments for twelve months. Taking into account the expenses Defendants assumed when regaining the property, the amount retained is not excessive.
Discussion. A buyer only has a right to be reimbursed for his down payment when the amount so exceeds the seller’s damages as to constitute a forfeiture.