Opinion
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
APPEAL from the Superior Court of San Bernardino County. Kurt J. Lewin, Judge. (Retired judge of the L.A. Super. Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.), Super.Ct.No. VCVVS037602
Caldwell, Kennedy & Porter and D. Kevin Porter for Defendants and Appellants.
Law Offices of Steven J. Hassing and Steven J. Hassing for Plaintiff and Respondent.
OPINION
HOLLENHORST, Acting P. J.
In this appeal, we are asked to determine whether the liquidated damages provision in an agreement to purchase nonresidential property was reasonable or amounted to an unenforceable penalty under Civil Code section 1671.
I. PROCEDURAL BACKGROUND AND FACTS
On or about July 7, 2004, Northern California Universal Enterprise Company, Inc., through its principal/president Joe Wu (Buyer), offered to purchase approximately 8.8 acres of vacant land in Rosamond, California. The terms of the offer included a purchase price of $500,000, the Buyer would obtain a new first loan, the transaction would close within 180 days of acceptance, and the sale would be conditioned upon verification that the property “has rights to Rosamond Community Service District utility services.” Darrell Souza (Souza) acted as broker for Buyer.
After August 3, 2004, RSMD 50 LLC, a California LLC, (Seller), in which Gerald Kokoszka was a principal, delivered a Non-Binding Term Sheet (TS 1) to Souza. It included a sales price of $1,000,000, nonrefundable deposits totaling $75,000 no later than October 4, 2004, the execution of a purchase and sale agreement no later than August 11, 2004, the opening of escrow with Escrow Junction, and a closing date of January 31, 2005. TS 1 also stated that the property was being sold “as is” and the subject deposits were nonrefundable and served as liquidated damages.
On or about August 30, 2004, Souza replied that Buyer was willing to accept the terms and conditions with the following changes: (1) sales price to be $750,000; (2) due diligence period runs through November 4, 2005; and (3) escrow closes on February 28, 2005. An additional deposit of $45,000 was due by November 4, 2004. The remaining terms were unchanged, and the reply further stated, “my client is under contract to purchase the property that adjoins your property on the south for the same price as this proposal.”
On September 7, 2004, Land R Us Realty (Realty) sent a counteroffer with revised dates. Realty included a revised Non-Binding Term Sheet (TS 2). TS 2 included a proposed purchase price of $850,000, total deposits of $75,000, a feasibility/contingency period up through November 4, 2004, execution of a purchase and sale agreement no later than September 10, 2004, and escrow to close on or before February 28, 2005. Again, the “as is” and the “liquidated damages” provisions were included. On or about September 14, 2004, Realty/Kokoszka faxed a Binding Term Sheet (TS 3) to Souza. On September 15, 2004, Buyer executed TS 3 and initialed the “as is” and “liquidated damages” clauses. TS 3 was the same as TS 2, except the purchase price was set at $750,000 and escrow was to close by February 28, 2005.
The liquidated damages clause provided: “IN THE EVENT ESCROW FAILS TO CLOSE SOLELY AS A RESULT OF BUYER’S MATERIAL DEFAULT, AT ANY TIME SUBSEQUENT TO THE ACCEPTANCE DATE, AND SAID FAILURE TO CLOSE IS NOT OTHERWISE PERMITTED BY THE TERMS OF THIS LETTER, BUYER AND SELLER AGREE THAT, BASED UPON THE CIRCUMSTANCES NOW EXISTING, KNOWN OR UNKNOWN, IT WOULD BE EXTREMELY DIFFICULT, COSTLY AND IMPRACTICAL TO ESTABLISH SELLER’S DAMAGES BY REASON OF BUYER’S DEFAULT. ACCORDINGLY, BOTH BUYER AND SELLER, BY THEIR RESPECTIVE INITIALS SET FORTH BELOW, DO HEREBY ACKNOWLEDGE AND AGREE THAT SO MUCH OF THE EARNEST MONEY DEPOSIT(S) OF SEVENTY FIVE THOUSAND DOLLARS ($75,000.00) AND ANY ADDITIONAL DEPOSIT(S)THAT HAS BEEN DEPOSITED BY BUYER INTO ESCROW AS OF THE DATE OF SUCH DEFAULT IS A NEGOTIATED REASONABLE SUM INTENDED TO BE LIQUIDATED DAMAGES WHICH SHALL BE DEEMED AS BEING SELLER’S SOLE AND EXCLUSIVE REMEDY AND RELIEF, IN LIEU OF ANY OTHER FORM OF REMEDY OR RELIEF (INCLUDING, BUT NOT LIMITED TO COMPENSATORY, PUNITIVE AND ANY OTHER FORM OF MONEY DAMAGES) WHICH SELLER MAY OTHERWISE BE ENTITLED TO, AT LAW OR IN EQUITY, BY REASON OF BUYER’S MATERIAL DEFAULT.”
Escrow opened on September 16, 2004. On September 28, 2004, Buyer deposited $5,000 into escrow as the first deposit. Prior to October 20, Buyer signed the escrow instructions, which included the following language: “OFFER TO PURCHASE: Escrow Junction, Inc. is hereby handed by the undersigned parties, that certain document entitled Land Purchase Agreement dated September 9, 2004, consisting of 5 pages and a Counter Offer - Binding Term Sheet, collectively referred to as the ‘Agreement.’”
Although the Counter Offer is entitled as a Binding Term Sheet, we note that on its last page, it states, “Additional terms and conditions shall be outlined and defined in the Purchase and Sale Agreement,” and “This non-binding term sheet and its terms stated herein require an acknowledgement by the party listed below by September 17, 2004.” Nonetheless, because escrow referred to these documents (the five-page Land Purchase Agreement dated September 9, 2004 and the Counter Offer - Binding Term Sheet) as the Agreement, we shall likewise refer to them as the “Agreement.”
On November 8, 2004, a second deposit of $70,000 was made into escrow. On November 22, 2004, Escrow released the $75,000 to an accommodator. Escrow did not close. On May 24, 2005, the $75,000 was released to Seller.
On April 18, 2005, Buyer initiated this action to recover the $75,000 on the grounds that, inter alia, the liquidated damages provision was an unenforceable penalty. Following a court trial, a tentative decision was entered on June 29, 2007, in favor of Buyer, and the following findings were made: (1) the $75,000 deposit was an unenforceable penalty; (2) Seller included it so that Buyer would not tie up the property in order to “flip” it for a quick profit; (3) no party considered, discussed, or contemplated what actual damages Seller would likely suffer in the event of a breach, the difficulty of calculating damages in the event of breach, or the difficulty in proving damages in the event of a breach; (4) there was no difficulty in making such calculation of damages; and (5) Seller might just as well have testified that he included the “‘liquidated damages’” provision as a penalty to discourage Buyer from seeking to tie up the property. Judgment was entered on September 5, 2007. This appeal followed.
According to the trial court, “[Kokoszka] testified that he included the liquidated damages provision as a disincentive to [Buyer] to tie up the property in order to ‘flip’ it for a quick profit only to breach if no buyer could be found for the ‘flip’ transaction. . . . He also admitted that neither he, [Buyer] or . . . Souza ever considered, discussed or contemplated what actual damages he would likely suffer, or the difficulty of their calculation and proof in the event of breach. Nor is there great difficulty calculating the usual damages such as holding costs, interest on capital, commissions, etc., the only possible damages that might still be incurred in light of [Kokoszka’s] testimony stating his belief that the property was worth at least a million dollars. In sum, [Kokoszka] might just as well have testified that he included the ‘liquidated damages’ provision as a penalty to discourage [Buyer] from seeking to tie up the property for a possible ‘flip’ transaction.” (Bold and italics in original.)
II. DISCUSSION
“To avoid uncertainty and litigation if a default occurs, the parties to a contract may use a liquidated damages clause to determine the measure of damages in advance. [Citation.] A liquidated damages clause is generally valid unless the party challenging it shows it was unreasonable under the circumstances existing at the time the parties entered into the contract. [Citations.] In the absence of a reasonable relationship between the liquidated damages and the actual damages the parties could have contemplated for breach, ‘a contractual clause purporting to predetermine damages “must be construed as a penalty.” [Citation.]’ [Citation.] ‘“A contractual provision imposing a ‘penalty’ is ineffective, and the wronged party can collect only the actual damages sustained.” [Citations.]’ [Citations.]” (Allen v. Smith (2002) 94 Cal.App.4th 1270, 1278; see also, Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 977 [prepayment provision in bridge loan was penalty for delinquency in meeting interest payments]; Hong v. Somerset Associates (1984) 161 Cal.App.3d 111, 115-116 [$25,000 liquidated damages clause in contract to purchase 36-unit building was reasonable] (Hong); Civ. Code, § 1671, subd. (b) [“a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made”].)
Here, the sole issue is whether the provision for liquidated damages in the Agreement was reasonable under the circumstances existing at the time it was made. Buyer bore the burden of proof. (Civ. Code, § 1671, subd. (b); Hong, supra, 161 Cal.App.3d at p. 116.) According to the evidence before this court, the liquidated damages clause was included to prevent Buyer from tying up the property with a goal of flipping it to make money. Although Kokoszka, on behalf of Seller, claimed the $75,000 was reasonable, he acknowledged that he had not talked to Buyer about it, he had done “[n]othing” to calculate his reasonable damages, and he believed that the property was worth $1,000,000 at the time he agreed to sell it and at the time of trial. Moreover, Seller admitted that he had a “million-dollar potential buyer” for the property at the time of this Agreement. Given this evidence, we conclude that Buyer met his burden of proving that the liquidated damages clause was unreasonable under the circumstances existing at the time it was made.
More importantly, we note that the clause itself does not limit the liquidated damages to $75,000. It provides that the amount of liquidated damages is the $75,000, plus, “ANY ADDITIONAL DEPOSIT(S) THAT HAS BEEN DEPOSITED BY BUYER INTO ESCROW AS OF THE DATE OF SUCH DEFAULT . . . .” Kokoszka acknowledged the fact that he was not limiting the liquidated damages amount. Does this mean that had Buyer deposited $150,000 or $450,000, Seller would have been entitled to keep all of such deposit? In Hong, the court found that for a sale of $1,325,000, the $25,000 liquidated damages was reasonable because it amounted to two percent of the purchase price. (Hong, supra, 161 Cal.App.3d at p. 116.) The court noted, “If the amount paid pursuant to a liquidated damages provision in a residential property sales agreement does not exceed 3 percent, there is a statutory presumption that the provision is valid. (§ 1675, subd. (c).) If the amount exceeds 3 percent, the provision is presumed invalid. (§ 1675, subd. (d).)” (Hong, supra, at p. 116, fn. 7.) Here, the amount of $75,000, plus any additional deposit(s), equals 10 percent, or more, of the purchase price of $750,000. Although this was not residential property, clearly such amount is not presumed valid.
Seller complains the trial court failed to consider the “extensive experience” of both parties. We disagree. Regarding the parties’ experience, the trial court noted it found “nothing objectionable in two intelligent, sophisticated and experienced businessmen of equal bargaining power agreeing to pay a penalty in the event one or the other breaches an agreement between them, . . . except that this could not be reconciled with the thoroughly and well established benefit of the bargain foundation of contract damages and the strong public policy against forfeitures.” Such agreement may have been named an option; however, instead of consulting an attorney, Seller chose to “cannibaliz[e] provisions from previously used contracts . . . .”
We reject Seller’s claim that the trial court erred in finding no difficulty in calculating potential damages. According to Seller, the trial court failed to consider the unique aspect of a real estate transaction, namely, “taking the subject property off the market for all practical purposes while a potential Buyer conducts its due diligence, whether the ‘Buyer’ intends to buy the property or not.” Here, the evidence showed that Seller had another potential buyer for $1,000,000; the sale fell through in February 2005; and at that time the real estate market was still a seller’s market with housing construction on the rise. To suggest that Seller was unable to calculate the damages he would suffer (if any, given the fact that the market was a seller’s market and housing development was on the rise) is ludicrous.
Finally, regarding Seller’s claim that the trial court erred in not granting some amount of liquidated damages, we note that Seller has failed to cite any legal authority in support of such contention. We therefore deem the challenge waived. (Nobel Farms, Inc. v. Pasero (2003) 106 Cal.App.4th 654, 660.) Even if this issue was not waived, we conclude Seller failed to meet its burden of proof.
III. DISPOSITION
The judgment is affirmed. Buyer to recover his costs on appeal.
We concur: GAUT, J., KING, J.