The Florida Supreme Court recently ruled that a liquidated damages provision similar to that found in the Florida Bar/Florida Association of Realtors Real Estate Contract (the “FAR/BAR Contract”) is unenforceable. The Court in Lefemine v. Baron, held that a liquidated damages clause will not be enforceable if the contract also gives the non-defaulting party the right to bring an action at law for accrual damages. The Court reasoned that providing for an option to seek accrual damages means that “the parties did not have the mutual intention to stimulate to a fixed amount as their liquidated damages in the event of a breach.”1 Accordingly, any default in any contract, option agreement, lease agreement, or any other agreement which provides for the retaining of a deposit as liquidated damages or the right to proceed to seek actual damages is not enforceable as a liquidated damages clause. Rather, such a clause constitutes a penalty as a matter of law because the existence of the option negates the intent to liquidate damages. Basically, Lefemine v. Baron requires parties to a contract, lease agreement, option agreement or any other agreement to elect their remedy upon execution of the contract.

The Supreme Court reviewed Lefemine v. Baron, 566 So.2d 1160 (Fla. 4th DCA 1990) based upon an express and direct conflict with Cortes V. Adair, 494 Sp/ 2d 523 (Fla. 3d DCA 1986). The court quashed the decision below in Lefemine and agreed with the principles applied in Cortes.2 The default found in Cortes is almost identical to the default provision in the FAR/BAR Contract.3

The analysis used by the Supreme Court in Lefemine, therefore, renders the liquidated damages provision in the newly revised FAR/BAR Contract unenforceable as a penalty clause.

The Lefemine case involved a real estate contract by Daniel and Catherine Lefemine to purchase a residence for $385,000.00 from Judith W. Baron. The Lefemines sued Baron for the return of their $38,500.00 deposit after they were unable to obtain financing. Baron filed a counterclaim to retain the deposit as liquidated damages under the default provision in the Contract. The broker cross-claimed against Baron for one-half of any recovery of the deposit. The trial court found that the buyers defaulted under the terms of the Contract, that the default provision in the Contract was a bona fide liquidated damages clause, and that the $38,500.00 deposit was not an unconscionable amount of damages. The trial court also found in favor of the broker on its cross-claim, awarding Baron and the broker each half of the $38,500.00. The Fourth District of Court of Appeals affirmed the trial court judgment.

In analyzing the enforceability of the default provision as a liquidated damage amount, the Florida Supreme Court restated the test established in Hyman v. Cohen, 73 So. 2d 393 (Fla. 1954) for determining the circumstance under which a liquidated damages provision will be upheld. Under Hyman, a two-pronged test is employed.

First, the damages resulting from the breach must not be readily ascertainable.4 Second, the amount the parties agree will be forfeited must not be grossly disproportionate to the amount of damages that would reasonably be expected to flow from a breach so as to indicate that the parties only could have intended to induce full performance, rather than to liquidate their damages.

Applying the test set forth in Hyman, the Florida Supreme Court agreed with the Fourth District Court of Appeals that the $38,500.00 was not unconscionable. It nonetheless declared the liquidated damages clause was non-enforceable because of the existence of the option to elect remedies.5 The Lefemine Court cited Kanter v. Safran 68 So. 2d 553 (Fla. 1953), Stenor, Inc. v. Lester, 58 So. 2d 673 (Fla. 1951), and Pappas v. Deringer, 145 So. 770 (Fla. 3d DCA 1962) in support of its holding. The Court adopted the reasoning employed in Pappas, since the seller would only elect to retain the liquidated damages in the event that they were greater than the accrual damages; then such, the liquidated damages clause constituted a penalty to the buyer. The buyer would then be in the position of either losing the security deposit or paying the accrual damages, whichever were greater.

Giving the buyer, as well as the seller, the right to choose remedies, does not mitigate against the punitive nature of a liquidated damages clause which contains alternative remedies. As the Court said in Lefemine, “we do not read Cortes, or any of the prior cases in which the term 'mutuality' appears as meaning that an option by one party either to retain the deposit or to seek actual damages is enforceable whenever the other party has a right to choose remedies.”6 Whether or not damage in the case was readily ascertainable at the time of the drawing of the Contract does not appear to be an issue in Lefemine. Under Lefemine, in order for the liquidating damage clause to be construed as a penalty, the damages must be readily ascertainable at the time of the drawing of the contract. Arguably, then, under Hutebinson and Hyman supra, a liquidating damage clause containing an opinion would be a penalty only if the actual damages were ascertainable at the time of the drafting of the contract. In actuality, the opinion only considers the liquidated damages provision a penalty to the buyer if the actual damages at the time of the brief turn out to be greater than the deposit. The provision, then, might not have been intended to be a penalty at the time it was agreed to. Again, the Court in Lefemine implicitly rejects this analysis.

Under the reasons of Lefemine, the existence of an opinion to proceed at law for actual damages at the time of the contract renders the liquidating damages clause unenforceable as a penalty. Given the holding in Lefemine, it is important for attorneys to consider alternative default provisions. These alternatives must address both the analysis employed in Lefemine and the mutuality of remedy required.

Here are some alternatives which are available to the seller:
1. True Liquidating Damages: The holding of the case could be easily avoided by the Seller merely giving up the contract language which permits the option to sue for actual damages. Nothing in the case or in the other cases cited by the Court as authority suggests that a liquidated damages provision in a real estate contract would not be enforceable so long as it meets the traditional tests for liquidated damages. However, the Seller's decision to forego the right to pursue additional damages could fundamentally affect the nature of deposits in residential real estate contracts. It is not unusual for a residential real estate contract to carry a deposit of $500.00 or $1,000.00. Sellers in the future may be unwilling to accept this sum as a liquidating damages amount if they know they must forego the option to seek damages in addition to this sum.
It must also be remembered that the use of this type of clause would still be subject to the concept found applicable in the Cortes case. The contract would still have to provide a mutuality of remedy for the Buyer other than the mere return of the deposit. One question, which could be subject of the next case along these lines, is whether there would be a lack of mutuality of remedy if the contract permits a stipulated sum payable to the Seller as liquidated damages but would declare that the Buyer could only recover actual damages.

2. Liquidated Damages or Specific Performances: Although there are no obvious difficulties with a Seller achieving specific performance upon a defaulting Buyer, nothing in the holding of the Supreme Court seems to suggest that a liquidated damages clause could not be accompanied by the option to speed specific performance. However, if the specific performance action were accompanied in any way by an action to recover the damages incurred by the Seller through the delay in performance, it would probably fail under Lefemine. Nothing in the ruling suggests that this would prohibit an action for specific performance accompanied by an award of attorney's fees.

3. Actual Damages Only. An obvious way of voiding the holding in this case would be to eliminate the use of a liquidated damages provision altogether and simply call for the remedies of the party to be specific performance or the collection of actual damages.
This would have some obvious drawbacks. First, it may render the deposit virtually meaningless and leave a Seller without effective leverage to compel performance of the real estate contract. Second, there are in fact a number of situations where a liquidated damages type of provision is useful because the damages may not easily be capable of determination at the time of default. For instance, if a Buyer defaults, the most common measures of damage would be the carrying costs to Seller before the property can be sold to another purchaser, along with any loss of value or increase in the expenses of closing in a second transaction. In a slow market, the Seller would have to wait a significant amount of time until the other closing occurred before being able to determine these damages. It may well be in the Seller's best interest to stipulate the liquidated damages so the matter could be concluded prior to a new closing.

4. A suggestion- the deposit as security: In real life, the primary use of a deposit in real estate contracts is for the Buyer to make a commitment and to generate a fund from which damages could be paid in the event of an award in favor of Seller. Lefemine does not stand for the proposition that this is an improper objective in a real estate contract. It simply objects to the designation of this fund as liquidated damages, if an option is retained to recover actual damages. However, the Pappas case, 45 So. 2D 770, could be construed to support the proposition that a deposit may be retained as security for the payment of damages which would eventually be awarded. Thus the real estate contract could be reworded to provide that the deposit is being held as security for damages incurred in the event of Buyer's default, but reserve to the Seller the opportunity to allege and prove his damages in excess of the amount of the deposit. Of course, what the Seller gives up under the scenario is the opportunity to collect the minimum amount of liquidated damages if the actual damages are less than the amount of the deposit. In that case, that portion of the deposit which exceeded the amount of actual damages would be paid back over to the Buyer, either by the Seller, or by the Escrow Agent, if the deposit is held in the escrow. To that extent, the Buyer would have available an action for damages for the recovery of the excess deposit. This type of concept would also be combined with the type of procedure contained in Florida Stat 679.505 (2) under which the contract could provide the right of the Seller to propose to retain all of the deposit in full satisfaction of its damages, with a time period available for the Buyer to object to this procedure. By giving the Buyer the opportunity to object, the matter is taken outside the sole discretion of the Seller, and the holding in Lefemine v. Baron might be avoided. This also might give the parties an opportunity to resolve the matter quickly without waiting for an actual court adjudication to occur.

In summary, the Court's holding will bring practice under real estate contracts in line with long recognized contract principles, and will also force Buyers and Sellers to consider more carefully at contract execution which remedies they wish to pursue in the event of default. There are a number of alternatives possible which should meet the needs of most Buyers in the damages clause.

1 Lefemine v Baron 16FLW S27, 28 (January 4, 1991)

2 The default clauses in Lefemine and Cortes were almost identical.

3 The Cortes provision reads as follows: 1. If the buyer: If buyer fails to perform the contract within the time specified, the deposit(s) made by buyer may be retained or recovered by or for the account of seller as liquidated damages, consideration for the execution of the contract and in full settlement of all claims; whereupon all parties shall be relieved of all obligations under the contract; or seller; at his option, may proceed at lay or in equity to enforce his rights under the contract.

The new FAR/BAR Contract revised as of January 1991 contains a default provision which reads as follows:
Failure of performance: If buyer fails to perform this Contract within the time specified, including payment o all deposit (s), the deposit(s) paid by buyer and deposit(s) paid y buyer and deposit(s) agreed to be paid, may be retained by or for the account of seller as agreed upon liquidated damages, consideration for the execution of the Contract and in full settlement of any claims; whereupon, buyer and seller shall be relieved of all obligations under Contract; or seller at seller's expense, may proceed in equity to enforce seller's rights under this Contract....

4 For a liquidating damage clause to be enforceable it is necessary that the damages not be readily ascertainable the time of the drawing of the Contract as opposed to, at the time of the breach. See Hutchinson v. Tomplins, 259 So. 2d 129 (Fla. 1972) and Hyman supra.

5 The liquidated damages clause at issue in Hyman also gave the seller the option of retaining the deposit as liquidated damages or proceeding with a suit at law or equity. Nonetheless, the court in Hyman found the liquidated damages provision to be enforceable. As the court noted in Lefemine, however, the legal consequences of the existence of the option was not in issue in Hutchinson. Lefemine at 528.

6 Lefemine at 528.