Spring 2005 Newsletter

May 16, 2005

WASHINGTON COURT OF APPEALS CHANGES FORFEITURE OF EARNEST MONEY RULE
 
On January 3, 2005 the Washington Court of Appeals issued a decision in Chrisp v. Goll  about which all real estate agents should take note.

In Goll, Nancy Chrisp put her Auburn home up for sale for $450,000. The property included a small guest cottage. On July 2, 2001, Claud Goll made a full-price offer.  He planned to live in the cottage, and his daughter and grandchild would occupy the main house. This required installing a kitchen in the cottage, which Goll planned to do.

Goll offered $2,000 in earnest money, which was acceptable to Chrisp only because Goll was prequalified and preapproved for financing.

The agreement addressed the consequences of the buyer's default in two provisions. On the first page, Item 7 allowed the parties to indicate whether "forfeiture of earnest money" or "seller's election of remedies" would apply in the case of the buyer's default. Goll's realtor checked the box corresponding to the forfeiture option.

Paragraph P on the fourth page elaborated on Item 7:

Default. In the event Buyer fails, without legal excuse, to complete the purchase of the Property, then the following provision, as identified in Specific Term No. 7, shall apply:

i. Forfeiture of Earnest Money. That portion of the Earnest Money that does not exceed five percent (5%) of the Purchase Price shall be forfeited to the Seller as the sole and exclusive remedy available for such failure.

ii. Seller's Election of Remedies. Seller may, at Seller's option (a) keep the Earnest Money as liquidated damages as the sole and exclusive remedy available to Seller for such failure, (b) bring suit against the Buyer for Seller's actual damages, (c) bring suit to specifically enforce this Agreement and recover any incidental damages, or (d) pursue any other rights or remedies available at law or equity.

Chrisp and Goll signed the agreement, and each initialed the bottom of every page. Neither separately signed or initialed the remedy provisions on the first and fourth pages, as required by RCW 64.04.005. The parties did not utilize Form 22D, which outlines optional clauses including one making earnest money forfeiture the seller's sole remedy, and providing spaces for buyer and seller to initial.

To accommodate Goll's schedule, Chrisp testified she removed her furniture from the main house and put it in storage; allowed Goll's daughter to park a moving truck on the property and put the utilities and security system accounts into her name; moved, with her granddaughter, into the cottage; and rushed into the purchase of another home.

One day before he was to take possession, on July 14, 2001, Goll backed out. Ostensibly, this was because he failed to obtain financing, a condition of the contract. But Goll's daughter testified that Goll actually decided not to buy the property because he realized he could not legally install a kitchen in the cottage.

After Goll's default, the September 11 attacks and economic recession affected the housing market. Without furniture, the house did not show well. Chrisp was unable to sell for six months. Ultimately she sold for $375,000, $75,000 less than Goll's offer, and $75,000 less than Chrisp paid several years earlier.

Chrisp sued Goll for specific performance or damages. Goll defended on several grounds, and contended that Chrisp was limited to forfeiture in any event: "[P]laintiff's relief is limited to the liquidated damages set forth in the alleged contract."

At trial, Chrisp and the listing agent testified they knew Goll's realtor had checked the forfeiture remedy box on the purchase and sale agreement. The listing agent believed the forfeiture paragraph was ineffective without the initials of both seller and buyer. She advised Chrisp not to initial the paragraph because, given Goll's accelerated closing and occupancy requirements and small earnest money deposit, it was important to protect Chrisp's remedies. Chrisp testified she did believe she was not giving up any rights or remedies by signing the contract.

At the close of Chrisp's case, Goll moved for judgment as a matter of law on several grounds, including substantial compliance with the earnest money forfeiture statute. The court granted the motion. The court concluded the only purpose of RCW 64.04.005 was to give the parties notice of the forfeiture clause. Since both parties were aware of the provision, the court ruled they had substantially complied with the requirements of the statute. The court thus held Chrisp's damages were limited to the amount of the earnest money. Goll then stipulated to forfeiture of the earnest money, and the court dismissed the jury. Chrisp appealed.

The Court of Appeals held as follows:

RCW 64.04.005 is unambiguous. It states that certain requirements must be met before a contractual clause limiting a seller's remedies will be effective. . .

 ii) [The forfeiture clause m]ust be separately initialed or signed by the purchaser and seller.

 The statute itself clearly states the consequences of failure to comply: the seller retains all remedies.

Here, not only did the parties fail to comply with the statute, but Chrisp and her realtor testified she intentionally avoided compliance. She had no wish to be bound by the forfeiture clause, and ensured she would not be bound by declining to meet the statutory conditions for the clause to be effective. This is entirely different from situations in which parties attempt to comply with statutory requirements but do so imperfectly.

We hold that the plain language of RCW 64.04.005 does not allow substantial compliance, and that, in any event, the circumstances here do not establish substantial compliance with the objective of the statute.

Reversed and remanded for trial.

The Forfeiture of Earnest Money provision in the NWMLS form Purchase and Sale Agreements does not require the parties’ initials.  Agents should, at this point, make sure that all parties to the Purchase and Sale Agreement initial the Forfeiture provision, and that they use the NWMLS Optional Clause Addendum, Form 22D, with every transaction in which the forfeiture of earnest money is to be the selected option.

Cordially,
 
Jeffrey P. Helsdon
Oldfield & Helsdon, PLLC
(253) 564-9500 (office) or (253) 414-3525 (direct)
(253) 677-1031 (cell)
(253) 414-3500 (facsimile)
www.tacomalawfirm.com