In January of 2016, Division One of the Arizona Court of Appeals rendered its opinion in Dobson Bay Club II DD v. La Sonrisa de Siena. In Dobson Bay, the Court reviewed the imposition of a late fee on a commercial loan transaction. The Court likened its analysis of the late fee at issue to that of a liquidated damages clause in holding the fee to be unenforceable as a penalty.
There is a liquidated damages earnest money provision in almost every real estate purchase and sale agreement in Arizona including the Residential Resale Agreement form from the Arizona Association of Realtors. Liquidated damages clauses are common in commercial contracts of all kinds because they provide certainty in the event one party backs out of its agreement.
The Dobson Bay Court created uncertainty when it wrote “[w]hether a liquidated damages provision is enforceable depends upon the particular circumstances of each case.” The Court went on to say that “the touchstone of a liquidated damages clause is reasonableness.” It further wrote that the determination of whether a liquidated damages clause is enforceable or unenforceable as a penalty depends upon two factors: (i) the anticipated or actual loss caused by the breach and (ii) the difficulties of proof of loss.
Not surprisingly, confusion has ensued in the aftermath of the Dobson Bay decision. My colleagues, Larry Crown, Jeff Harris and I represented a party seeking to enforce a liquidated damages clause in an extensive evidentiary hearing in Maricopa County Superior Court this summer. While our client prevailed, what once was routine enforcement of garden variety earnest money provisions has become uncertain, requiring a trial court to examine the “particular circumstances of each case.”
On September 20, 2016, the Arizona Supreme Court granted review of the lower Court of Appeals decision in Dobson Bay. We expect additional guidance on this issue to come from our State’s highest court. In the meantime, real estate buyers, sellers, and their attorneys will be wrestling with the effects of the Dobson Bay opinion.
Jon Titus may be reached at 480-483-9600 or firstname.lastname@example.org for questions concerning real estate law or other commercial law issues.