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Q: I had a contract for sale of my condominium at a good price. The buyer backed out and tells me all I get to keep is the deposit. His deposit was only $100. That does not seem fair, as I turned down a higher after we entered the contract, and I have had to pay the mortgage for months. Is he correct?

A: Under Florida Law, parties to a contract can agree upon the amount of damages that will be paid upon breach of the contract. Such an agreement is known as liquidated damages provision. In real estate purchase contracts, it’s common to find a liquidated damages provision under which the buyer forfeits deposits in event of default by the buyer. Assuming your contract had a liquidated damages clause limiting the damages to forfeiture of deposit, you are most likely limited to $100 in damages.

For a liquidated damages clause to be enforceable, the damages must be uncertain at time of contract and the amount must be reasonable.

The exact amount of damages in most contracts is usually difficult to determine at time of contract. Absent a liquidated damages clause, the non-breaching party to a contract is entitled to benefit of the bargain. In a real estate sale, that would usually mean the difference between price under the broken contract and price of later sale. In some cases, you might also be entitled to additional expenses that would be considered to normally result from breach of contract, such as carrying cost (mortgage, taxes, and maintenance), costs of sale (advertising and commissions).

Speculative or unique damages that would not generally be considered to arise from breech of a sales contract are not generally recoverable, unless the parties are aware that they will naturally accompany the breech. Damages of this type might include termination of a rental to accommodate the closing that does not take place. The liquidated damages clause replaces claims for damages with an amount agreed upon by the parties.

You might argue that $100 is not reasonable. Unfortunately for you, the reasonable standard applies to invalidate liquidated damages set so high as to be a penalty but not so low as to be almost illusory. In the real estate sales area, courts have generally upheld liquidated damages of up to 20 percent of the purchase price. This makes it important that sellers not get to greedy if they want to have enforceable liquidated damages provision.

The reasonable test also requires that the limitation on damages be mutual and not illusory. Mutual does not mean identical.

In one case, a developer included in its form contract a clause providing that if the buyer defaulted, the deposit would be forfeited to the seller, and if the developer defaulted, the buyer would get back the deposit. The court held that clause void for lack of mutuality of remedy. The developer could retain the deposit as damages, which was something the developer did not have prior to contract. The buyer limited to return of their own money upon a sellers default would be left without a meaningful remedy.

Courts apply the same reasoning where no deposit is made. In those cases, a clause providing that deposits made under the contract are forfeited to the seller in event of default by the buyer provide an illusory remedy. Since they provide no damages where a deposit is not made, the buyer can not rely upon the clause to insulate the buyer from liabilities.

When a liquidated damages clause is unenforceable, it’s treated as if the contract did not contain the clause. That allows the non-defaulting party to pursue normal damages for breach of contract, as expressed earlier, benefit of the bargain, or under Florida Law, real estate sales contracts can be enforced by suit to mandate the defaulting party perform. The buyer can force the seller to sell and a seller can force a buyer to buy.

Liquidated damages need not be limited to deposits actually made. Some real estate contracts provide that if the buyer defaults, the buyer not only forfeits all deposits actually made, but deposits that were supposed to be made under terms of the contract. These clauses are subject to the same rules of reasonableness and mutuality of remedy, but generally provide better recovery for a seller.

In any event, it seems you have learned two valuable lessons. First, read and understand a contract before you sign it. You would be well advised to consult with an experienced attorney, especially when the contract can involve the investment of your life.

Second, you have learned the importance of a large deposit. Small deposits are usually “tire kicking money.” Bigger deposits confirm the buyer is truly interested and also evidence that the buyer has sufficient where withal to complete the purchase.

Because a bad contract keeps your property off of the market, a bad contract is worse then no contract. In future transactions, I encourage you to retain an experienced attorney to review the contract and explain it to you before you sign.

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William G. Morris is a lawyer with offices at 247 N. Collier Blvd., Marco Island. The column is not intended to be legal advice for specific circumstances. General questions can be sent by e-mail to wgmorrislaw@earthlink.net or by fax to (239) 642-0722. Read other columns at http://www.wgmorris.com.