Proceed With Caution: The Unrealized Cost of Pursuing Liquidated Damages Clause
August 13, 2014
By Christopher J. Charles, Esq.,
David Degnan & Joshua Black
Many real estate listings contain a “liquidated damages” clause that allows the agent to collect a commission if the seller breaches the listing. However, agents should be reminded that the best defense is sometimes a good offense and the pursuit of a claim for the commission is often met with a counterclaim for breach of duty.
I. Liquidated Damages Are Enforceable
First, as discussed in this column last month, liquidated damages clauses in listing agreements are enforceable. See Focus Point Properties, LLC v. Johnson, 1 CA-CV 12-0766, 2014 WL 2770535 (Ariz. Ct. App. June 19, 2014) (upholding liquidated damages clause and awarding the broker a $140,000.00 commission after the seller canceled a listing six months into a one-year listing agreement.)
II. Be Careful: Enforcing Liquidated Damages May Result in Counter-Claims
Many real estate agents have been faced with similar situations where a client has backed out of a listing or purchase contract, leaving the agent without an anticipated commission. While the result in Focus Point Properties may sound like good news to agents who have found themselves in similar predicaments, filing a lawsuit to enforce a liquidated damages clause should be carefully considered.
Preserving business relationships with clients is a worthwhile concern; agents may, however, have an even larger, self-preserving interest, in showing restraint when considering filing a lawsuit for liquidated damages. Potential civil and regulatory repercussions could be lurking in the shadows for an agent who pursues a client for liquidated damages. Bringing such a suit may expose the agent to heightened scrutiny and potential civil liability, including both counterclaims for money damages against the agent as well as problems with the Arizona Department of Real Estate.
For example, in Focus Point Properties, the seller brought counterclaims against the broker for the following: fraudulent misrepresentation; inducement into contract; negligent misrepresentation; breach of fiduciary duty; and damages under Arizona’s vulnerable adult statute. Although the broker prevailed on his liquidated damages claim, he was forced to defend against these other claims and had surrendered his real estate license by the time the proceeding was over.
In a similar case, Mason v. Bulleri, 25 Ariz. App. 357, 360, 543 P.2d 478, 481 (1975), the broker brought suit against the client to recover an unpaid commission. The Bulleri court ruled against the broker, finding that he had breached his fiduciary duty to the seller and therefore was not entitled to recover his commission. Even in instances where a breach is not found by the court, an agent may still find themselves economically battered by the litigation process, and in a worse position then they were prior to the litigation.
Fortunately, many listing agreements contain alternative dispute resolution clauses that require the parties to mediate their dispute prior to filing any lawsuit. Mediation is an excellent alternative to litigation and often leads to a prompt and relatively inexpensive solution to the dispute.
Liquidated damages clauses are great tools for encouraging sellers to honor their contractual agreements. And they provide agents with strong remedies if the seller breaks his or her commitment. But prudent agents should thoughtfully consider all options before suing a client for a commission.
If you or someone you know has questions regarding a commission dispute or any other real estate matter, call or email Mr. Charles or Mr. Degnan to schedule an appointment today.
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Christopher Charles is a State Bar certified real estate specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS® (the “AAR”). He is a Partner with the law firm Titus Brueckner & Levine PLC. Christopher is also an Arbitrator and Mediator for the AAR regarding real estate disputes; he serves on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions.
Christopher is a licensed real estate instructor and he teaches continuing education classes at the Arizona School of Real Estate and Business. For a list of upcoming speaking engagements, please visit www.tbl-law.com. Christopher can be reached at ccharles@tbl-law..com or at 480-483-9600.
David Degnan is a real estate attorney at Titus Brueckner & Levine, PLC. David’s practice focuses exclusively on real estate disputes. David can be reached at 480-483-9600 or firstname.lastname@example.org.
Joshua Black is a summer associate at Lorona Mead, PLC, and a third year law student at Arizona Summit Law School.