Most people (buyers, sellers, real estate agents) think that when a real estate contract stipulates a nonrefundable deposit, it means the person paying that deposit will not get their money back under any circumstance.

Earlier this month, a California court said: not so fast.

The Feb. 3, 2010 decision by the California 4th District Court of Appeal in Kuish v. Smith (Cal.Rptr.3d —-, 2010 WL 373225) said that under California law, nonrefundable deposits are not nonrefundable.

The basic facts of the case: In 2006, Buyer Kuish agreed to purchase Seller Smith’s Laguna Beach home for $14 million. Their agreement included $620,000 in nonrefundable deposits, which Buyer Kuish made by April 21. Escrow was set to close on Sept. 15. On Sept. 18, Buyer Kuish requested escrow cancellation. Seller Smith agreed to cancel escrow in October, and sold the LB home for $15 million in November. Seller Smith refused to return Buyer Kuish’s nonrefundable deposits.

Litigation ensued and the trial court found for Seller Smith.

However, the appellate court reversed the trial court, finding that Seller Smith’s retention of the deposit in the context of a rising market constituted an invalid forfeiture:

In the context of a rising market, which was the circumstance of the instant case, an interpretation of the nonrefundable term of the agreement as precluding the return of plaintiff’s deposit above and beyond any damages suffered by defendants as a result of plaintiff’s breach would render that provision unenforceable. As discussed ante, “ ‘any provision by which money or property would be forfeited without regard to the actual damage suffered would be an unenforceable penalty.’ “ (Freedman, supra, 37 Cal.2d at pp. 21-22, 230 P.2d 629.)

What a difference a couple of years makes. In the current market, Buyer Kuish would be S-O-L no matter the S-O-L-D price of Smith’s Laguna Beach property.

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