Southeastern Land Fund, Inc. v. Real Estate World, Inc.

• Decision Date: 09 July 1976
• Docket Number: No. 31136,31136
• Parties: SOUTHEASTERN LAND FUND, INC. v. REAL ESTATE WORLD, INC.
• Court: Georgia Supreme Court

Page 340

227 S.E.2d 340

237 Ga. 227

SOUTHEASTERN LAND FUND, INC. v. REAL ESTATE WORLD, INC.

No. 31136.

Supreme Court of Georgia.

July 9, 1976.

Troutman, Sanders, Lockerman & Ashmore, John J. Dalton, J. Stanley Hawkins, Atlanta, for appellant.

Robinson, Harben, Armstrong & Millikan, Troy R. Millikan, Gainesville, for appellee.

INGRAM, Justice.

Certiorari was granted in this case ¹ for this court to consider whether a provision in a real estate sales contract, providing for the payment of earnest money, should be considered as a provision for liquidated damages. The Court of Appeals concluded this provision was a penalty and could not be enforced.

The litigation began when the seller filed suit against the buyer who defaulted under the contract. The buyer had paid $5,000 in cash as earnest money when the contract was signed. Thereafter, a promissory note for $45,000, representing additional earnest money, was executed and delivered by the buyer to the seller pursuant to the contract. The buyer defaulted at closing and the seller sued the buyer to collect the $45,000 note. The seller obtained a summary judgment in the trial court and the buyer's motion for summary judgment and counterclaim for return of the $5,000 earnest money were denied.

On appeal to the Court of Appeals, that court reversed in a 6-3 decision and held the earnest money provision of the contract amounted to a penalty. The Court of Appeals also ruled that the buyer's motion for summary judgment should have been granted by the trial court.

The contract provides: 'In the event purchaser defaults hereunder after having paid the additional earnest money (45,000) . . . seller shall be entitled to retain all original earnest money ($5,000) paid hereunder as partial liquidated damages occasioned by such default, to collect the proceeds of the indebtedness owed by purchaser as additional earnest money as further partial liquidated damages occasioned by such default, and to pursue any and all remedies available to him at law or equity including, but not limited to, an action for specific performance of this contract.'

If, as the Court of Appeals found, this provision in the contract was a penalty, or is unenforceable as a liquidated damages provision, then the buyer can prevail in asserting a defense to the enforcement of the $45,000 note. If, on the other hand, this is a proper provision for liquidated damages, the the seller can prevail in enforcing the note. Of course, whether a provision represents liquidated damages or a penalty does not depend upon the label the parties place on the payment but rather dependens on the effect it was intended to have and whether it was reasonable. See Lytle v. Scottish American Mortgage Co., 122 Ga. 458, 50 S.E. 402 (1905). Where the parties do not undertake to estimate damages in advance of the breach and instead provide for both a forfeiture (penalty) plus, actual damages, the amount, even though called liquidated damages, is instead an unenforceable penalty. See Foote & Davies Co. v. Malony, 115 Ga. 985, 42 S.E. 413 (1902).

The seller argues that a seller who is not in default may always retain the earnest money paid by the buyer and sue for actual damages above the amount of earnest money received under the contract. We do not agree with this argument and the seller cites no authority that supports it. While it is true that the earnest money feature of a real estate contract distinguishes it to some extent from a wholly executory contract, the same basic contract rules are used to determine available remedies for the breach of a real estate sales contract as for the breach of other contracts. The general contract law of remedies for a breach, as well as the intent of the parties in providing specific remedies in the contract, must be used in analyzing and deciding each particular case.

Depending on the language used in the contract and the discernible intent of the parties, the existence of an earnest money provision in a real estate sales contract can have one of three effects in the case of a breach by the buyer. First, the money could be considered as partial payment of any actual damages which can be proven as the result of the buyer's breach. ² Second, the money could be applied as part payment of the purchase price in the enforcement of the contract in a suit for specific performance by the seller. Third, the money could be liquidated damages for breach of the contract by the buyer. A provision for earnest money cannot, however, under Georgia law, be used for all three results as we shall see.

Of course, if the real estate sales contract is silent on the remedy to be provided, the non-breaching seller is entitled to his proven actual damages. The ordinary measure of damages is the difference between the contract price and the market value of the property at the time of the buyer's breach. Shives v. Young, 81 Ga.App. 30, 57 S.E.2d 874 (1950). If the non-breaching seller sues for actual damages, the earnest money then becomes a fund out of which those damages are partially paid if the proven damages exceed the amount of the earnest money. ³

Even if the real estate contract is silent as to the remedy of specific performance, it is still available as a remedy unless it is specifically excluded as a remedy. In the cases in which rescission has been used as a remedy the parties are put as nearly as is possible back to the status quo ante. See Lightfoot v. Brower, 133 Ga. 766, 66 S.E. 1094 (1909); Walter Tally, Inc. v. Council, 109 Ga.App. 100, 135 S.E.2d 515 (1964); Woodruff v. Camp, 101 Ga.App. 124, 112 S.E.2d 831 (1960). Cf. Higgins v. Kenney, 159 Ga. 736, 126 S.E. 827 (1924).

Of course, Georgia law also recognizes that the parties may agree in their contract to a sum to liquidate their damages. Code Ann. § 20-1402 provides: 'Damages are given as compensation for the injury sustained. If the parties agree in their contract what the damages for a breach shall be, they are said to be liquidated, and unless the agreement violates some principle of law, the parties are bound thereby.' (Emphasis supplied.) See also Code Ann. § 20-1403.

In deciding whether a contract provision is enforceable as liquidated damages, the court makes a tripartite inquiry to determine if the following factors are present:

'First, the injury caused by the breach must be difficult or impossible of accurate estimation; second, the parties must intend to provide for damages rather than for a penalty; and third, the sum stipulated must be a reasonable pre-estimate of the...