A Liquidated Damage Cause in a Breach of Contract Cases Isn’t Always Enforced

HNWContract Law, Real Estate, Landlord/Tenant, and Zoning

  • A recent case I read involved a dispute over a $852,100 deposit made by a buyer in connection with a commercial real estate sale that failed to close.breach of contract
  • The buyer was unable to obtain financing to make the purchase, and the seller claimed a breach of contract and sought to retain the deposit as liquidated damages for the buyer’s breach.

Background to This Contract Dispute Case

After an evidentiary hearing, the Chancery judge determined that the buyer had not acted in good faith, causing the seller to continue to believe that a mortgage commitment was still in place when, in fact, the commitment had already lapsed or been withdrawn. Upon considering the testimony of competing expert appraisers, the judge found the subject property was worth significantly less than the contractual sale price. Accordingly, the judge allocated $736,900 of the deposit to the seller to compensate it for its financial loss and ordered the $115,200 remainder to be returned to the buyer.

The buyer appealed, arguing the judge’s findings were erroneous and that it was entitled to keep the full value of the deposit.

In this case, the judge discussed the enforcement of the liquidated damages claims found in the contract.  A liquidated damage clause gives courts in NJ a difficult time.  The judge recognized that even though the parties had agreed in their contract that a forfeiture of the full amount of the deposit as liquidated damages would be reasonable, New Jersey case law requires such damages to be objectively reasonable.

Accordingly, the judge evaluated the equities of both sides, and concluded that the property owner should retain only a portion of the deposit representing the loss of the benefit of its bargain.

Specifically, the judge adopted a capitalization rate of 6.0 percent — a figure between the experts’ competing percentages of 5.50 and 6.75 percent. That 6.0% rate yielded a computation of $7,784,100 as the fair market value for the real estate, a figure $736,900 less than the contract price. Based on this computation, the judge awarded $736,900 of the deposit to the owner as damages for the buyer’s breach, allowing the buyer to retain the $115,200 remainder.

If you are looking for additional details on this topic or if you require advice about your situation, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Contract Law Attorney

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