Earnest Money depositDeposits are generally refundable unless there is a lawful liquidated damages clause.  The burden is on the party claiming the deposit to show it is a proper liquidated damages and not an improper “forfeiture” and the written agreement bars return of the deposit.  Buyers have several powerful arguments for the refund of their deposit even if the written agreement states the deposit is non-refundable.  Cases such as Kuish v. Smith (2010) 181 CA4th 1419 also support buyers getting their deposit back when there is no liquidated damages clause, but only a clear “the deposit is non-refundable” clause.  See also Civil Code §§1670, 1671 as to liquidated damages.The most important statute for a buyer is Civil Code §§1670, 1671 as to what is a proper (or improper) liquidated damages.  But as in a raising real estate market, look at the Kuish v. Smith case, and the deposit will be refunded.

Kuish v .Smith involved a $640,000 deposit on a 14 million home with an unambiguous and clear clause that the deposit was non-refundable.  The buyers cancelled and the house was then sold for $15 million.  The Kuish Court found in a rising real estate market (prices increasing) that the seller keeping the deposit was not reasonably related to any “actual damages” so constituted an invalid forfeiture. Kuish relied upon the Freedman v. The Rector (1951) 37 Cal. 2d 16 case that also held that it was improper to keep deposit money in excess of expenses associated with a contractual breach as that would unduly enrich the seller and the buyer “will suffer a penalty in excess of any damages he causes”.  (Freedman, 37 Cal2d at 19-20)  Freedman looked at the punitive damages law Civil Code 3294 and thought that a forfeiture was akin to a penalty and if arising from a contract was not allowed just as punitive damages  may not arise from a contract.  Note, Kuish also stated that in a falling market, if then there were seller’s damages the deposit will probably be kept by the seller.  (Kuish at p. 1429)

Civil Code §3307 (benefit of the bargain)