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Liquidated Damages Provisions Come in All Shapes and Sizes

Contracts aren’t always as they seem. A client entered into a lease purchase agreement to purchase a home. The contract stated that he would pay a monthly lease amount plus quarterly payments toward the purchase of the home. He paid nearly $50,000.00 in quarterly payments before eviction proceedings were brought against him. Pursuant to the terms of the contract, the quarterly payments were non-refundable under any circumstance.

Although it appeared the client might be out of luck because he entered into a bad bargain, something seemed inherently inequitable about the situation. I began researching lease purchase agreements to see if there were any consumer protection regulations that might apply to him. There was nothing really on point. Then, I decided to look at the contract from a different perspective.
I recalled the Florida Supreme Court case of Lefemine v. Baron, 573 So. 2d 326 (Fla. 1991). The Lefemine case dealt with the default provision in the standard residential Florida real estate contract in effect at that time and the circumstances under which the buyer under a contract could face both losing his deposit and being sued for actual damages. In Lefemine, the Florida Supreme Court held that a liquidated damages clause (the clause requiring buyer to forfeit his deposit) was unenforceable as a penalty where the contract gave the seller the option of exercising the liquidated damages provision or suing the defaulting buyer to recover actual damages. Analogizing to the Lefemine case, I began to think that the non-refundable purchase clause in my client’s contract might also constitute an unenforceable penalty provision. Our argument would be that forfeiture of the quarterly payments essentially constituted a penalty, unenforceable under the reasoning in Lefemine.

In Lefemine, the Supreme Court established a test to determine when a liquidated damages provision will be enforceable, and when it will be unenforceable as a penalty clause. First, in order to uphold the provision, “the damages consequent upon a breach must not be readily ascertainable.” Second, “the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties could have intended only to induce full performance, rather than to liquidate their damages.” Lefemine v. Baron, 573 So. 2d 326 (Fla. 1991). In other words, for a liquidated damages clause to be enforceable, first, the actual damages in event of a breach of contract cannot be reasonably ascertainable and second, the amount forfeited must not be so grossly different from anticipated actual damages to indicate that the seller could only have intended the forfeiture to induce full performance rather than to set a reasonable amount to compensate him for his anticipated losses.

In Pappas v. Deringer, 145 So. 2d 770 (Fla. 3d DCA 1962), the court found that a lease agreement, which gave the landlord the option of retaining the security deposit as liquidated damages upon default by the lessee or suing for a greater amount of damages was unenforceable. The court reasoned that this was actually a “penalty clause.” The same principle was applied to a real estate contract in Cortes v. Adair, 494 So. 2d 523 (Fla. 3d DCA 1986). The Florida Supreme Court in Lefemine agreed with the rationale of both Pappas and Cortes, noting that a contract, which gives the seller the option between, liquidated damages and suing for actual damages “indicates an intent to penalize the defaulting buyer and negates the intent to liquidate damages in the event of a breach.”

Here, my client’s contract with the landlord stated that the quarterly purchase payments were non-refundable under any circumstance and that the landlord could recover all damages proximately caused by any breach of the agreement. Although not labeled as a penalty, it seems clear that the intent here was to penalize my client for failing to fulfill the contract by requiring him to forfeit the money paid toward the purchase. The quarterly purchase payments our client made were not rent, but rather monies paid above and beyond the agreed rental amount. The amount of these payments was so grossly disproportional to any damages that the seller might be expected to suffer that the only intended purpose was to penalize our client for non-performance. So, our argument is that the landlord does not have the legal right to retain these quarterly payments because the provision allowing him to do so is tantamount to a penalty, which would render the provision unenforceable.

This case is still in active litigation, so at this point in time, we do not know whether the courts will agree with this analysis. However, given the existing case law, I believe that there is a strong argument that the provision requiring forfeiture of the quarterly payments is unenforceable since it constitutes a penalty.