Schrenko v. Regnante
27 Mass. App. Ct. 282, 537 N.E.2d 1261 (1989)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A contract clause that allows a seller to retain a buyer's deposit as liquidated damages while also reserving the right to seek additional actual damages is an unenforceable penalty, not a true liquidated damages provision. When such a clause is invoked and the seller suffers no actual loss from the breach, the seller is not entitled to retain the deposit.
Facts:
- On July 24, 1985, the buyers agreed to purchase the sellers' single-family residence for $360,000 and paid a $16,000 deposit.
- The purchase agreement stated that if the buyers defaulted, the sellers would retain the deposit as liquidated damages 'unless within thirty days...the seller otherwise notifies the buyer in writing.'
- The buyers were unable to close on the specified date of November 12, 1985, and therefore defaulted on the agreement.
- On November 18, 1985, six days after the default, the sellers entered into a new agreement to sell the property to a different party for $385,000.
- On the same day, the sellers' attorneys released the $16,000 deposit to the sellers.
- On December 2, 1985, the sellers' attorneys sent a letter to the buyers stating the sellers' intent to retain the deposit and to hold the buyers liable for any additional damages incurred.
Procedural Posture:
- The plaintiff buyers filed an action in Superior Court against the defendant sellers for the return of their $16,000 deposit.
- The buyers also sued the sellers' attorneys for improperly releasing the deposit.
- The Superior Court judge granted summary judgment in favor of the defendants (the sellers and their attorneys) on both claims.
- The plaintiff buyers appealed the summary judgment ruling to the Massachusetts Appeals Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a clause in a real estate contract, which allows a seller to retain a buyer's deposit as 'liquidated damages' but also gives the seller the option to seek additional damages, constitute an unenforceable penalty rather than a valid liquidated damages provision?
Opinions:
Majority - Fine, J.
Yes, a clause that allows a seller to retain a deposit as liquidated damages while also preserving the right to seek additional damages constitutes an unenforceable penalty. The court reasoned that the essence of a liquidated damages clause is to provide a pre-agreed settlement of potential losses for both parties. This particular clause, however, gave the sellers a one-sided option to either accept the deposit as full payment or to treat it as a minimum recovery while pursuing further damages. By sending a letter exercising their right to seek additional damages, the sellers transformed the provision into a penalty clause. Because the clause functioned as a penalty and the sellers ultimately suffered no financial loss—in fact, they profited from the buyers' breach by reselling the property at a higher price—it would be inequitable for them to also retain the deposit.
Analysis:
This decision clarifies the line between enforceable liquidated damages and unenforceable penalties in Massachusetts, particularly for hybrid clauses. It serves as a caution to contract drafters that clauses attempting to secure a minimum recovery (the deposit) while keeping the option to sue for more will likely be voided as penalties. The ruling reinforces the principle that liquidated damages must be a genuine, mutually binding pre-estimate of damages, not a one-sided tool to penalize a breaching party. While the court explicitly avoids deciding the broader issue of whether a profitable resale alone invalidates a standard liquidated damages clause, it signals strong judicial skepticism toward clauses that deviate from the classic, bilateral nature of such provisions.
Unlock the full brief for Schrenko v. Regnante