Are liquidated damages clauses enforceable in Florida?

It is well settled that in Florida the parties to a contract may stipulate in advance to an amount to be paid or retained as liquidated damages in the event of a breach. Poinsettia Dairy Prods. v. Wessel Co., 123 Fla. 120, 166 So. 306 (1936); Southern Menhaden Co. v. How, 71 Fla. 128, 70 So. 1000 (1916). In Hyman v. Cohen, 73 So.2d 393 (Fla.1954), this Court established the test as to when a liquidated damages provision will be upheld and not stricken as a penalty clause. First, the damages consequent upon a breach must not be readily ascertainable. Second, the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties could have intended only to induce full performance, rather than to liquidate their damages.

We agree with the court below that the forfeiture of the $38,500 deposit was not unconscionable. The deposit represented only ten percent of the purchase price and half of this had to be paid to the broker. The $38,500 was not so grossly disproportionate to any damages that might reasonably be expected to follow from a breach of the contract so as to show that the parties intended only to induce full performance. See Hooper v. Breneman, 417 So.2d 315 (Fla. 5th DCA 1982). The controversy in this case arises from the existence of the option granted to the seller either to retain the security deposit as liquidated damages or to bring an action at law for actual damages.

In Stenor, Inc. v. Lester, 58 So.2d 673 (Fla.1951), this Court held that a lease provision which gave the lessor an option either to retain the deposit as liquidated damages or to apply it pro tanto against his actual damages constituted a penalty clause rather than an enforceable liquidated damages clause. Accord Glynn v. Roberson, 58 So.2d 676 (Fla.1952).

The following year in Kanter v. Safran, 68 So.2d 553, 562 (Fla.1953), this Court invalidated a lease provision which permitted the lessor to retain the security deposit upon the lessee's breach and further provided that the lessor " 'may call upon the lessee to respond for any existing damages, should the actual damages exceed the amount of the security fund.' " We stated:

It is apparent that the parties to the lease agreement in the instant case did not intend to liquidate their damages by stipulating for the forfeiture of the deposit upon cancellation of the lease by the lessor for the default of the lessee.

Paragraph (b), supra, expressly states that the lessors "may call upon the lessee to respond for any existing damages, should the actual damages exceed the amount of the security fund * * *." Under such circumstances, the provision for forfeiture cannot be sustained as a provision for liquidated damages. See Stenor, Inc., v. Lester, Fla., 58 So.2d 673.

Kanter, 68 So.2d at 562.

In Pappas v. Deringer, 145 So.2d 770 (Fla. 3d DCA 1962), the Third District Court of Appeal considered a provision which gave the lessor the option of retaining the security deposit as liquidated damages if the lessee defaulted. The court first reasoned that except for the option which was granted to the lessor, this provision met the two-prong test of Hyman for a valid liquidated damages clause. The court then observed:

[W]hat is the effect of the option of the lessor? If the lessor failed to exercise his option, the lessee would be entitled to receive all of the unrefunded deposit; but he would at the same time be liable for the actual damages. It stands to reason that the option would be exercised unless the actual damages were greater than the security deposit. Thus the lessee is in the position of being liable to lose the security deposit or pay the actual damages, whichever is greater.

Pappas, 145 So.2d at 772. The court held:

[A]n option granted to the lessor to either take the stipulated amount (security deposit) as damages or to refuse to be limited by that amount and thus become entitled to a greater amount of damages,

Page 329

destroys the character of the forfeiture as agreed damages and the forfeiture becomes a penalty.

Id. at 773.

This principle was first applied to a real estate sales contract in Cortes. ¹ The default clause, which was almost identical to that involved in the instant case, read as follows:

Q. DEFAULT: If buyer fails to perform this contract within the time specified, the deposit paid by buyer may be retained by or for the account of seller as consideration for the execution of this agreement and in full settlement of any claims for damages, and all obligations under this contract or seller at his option may proceed at law or in equity to enforce his legal rights under this contract.

Cortes, 494 So.2d at 524. The court reversed the award of the deposit as liquidated damages upon the authority of its earlier decision in Pappas.

Baron contends that Cortes is distinguishable because it was decided upon the unreasonable disparity in remedy alternatives available to sellers and buyers, while in this case no disparity exists between the seller and buyers. This argument is grounded upon a reference to the lack of mutuality contained in the Cortes opinion as well as in some of the other cases discussed in this opinion. However, we do not read Cortes or any of the prior cases in which the term "mutuality" appears as meaning that an option by one party either to retain the deposit or to seek actual damages is enforceable whenever the other party also has a right to choose remedies. ² The phrase "mutuality of the agreement" used in the Pappas opinion and cited in Cortes was not meant to impose a requirement that the parties to a contract have identical remedies. ³ Rather, we interpret these opinions to mean that the existence of the option reflects that the parties did not have the mutual intention to stipulate to a fixed amount as their liquidated damages in the event of a breach. ⁴

We also disagree with Baron's argument that this Court's decision in Hutchison v. Tompkins, 259 So.2d 129 (Fla.1972), is controlling. We reviewed the decision in Hutchison v. Tompkins, 240 So.2d 180 (Fla. 4th DCA 1970), to resolve a conflict with this Court's prior opinion in Hyman. Under the rationale of the Fourth District Court of Appeal, a liquidated damages clause would constitute a penalty if the damages were readily ascertainable at the time of breach, regardless of whether the damages were not ascertainable at the time the contract was executed. By contrast, in Hyman this Court had decided that in order for a liquidated damages clause to be construed as a penalty it was necessary for the damages to be readily ascertainable at the time of the drawing of the contract. In Hutchison we reaffirmed the validity of the Hyman rationale and held the liquidated damages clause could stand if the damages were not readily ascertainable at the time of the drawing of the contract. While it appears that the forfeiture clause in Hutchison gave the seller the option to retain the deposit as liquidated damages, the effect of the existence of the option was not an issue in the case.

The reason why the forfeiture clause must fail in this case is that the option granted to Baron either to choose liquidated damages or to sue for actual damages indicates an intent to penalize the defaulting buyer and negates the intent to liquidate damages in the event of a breach. The buyer under a liquidated damages provision

Page 330

with such an option is always at risk for damages greater than the liquidated sum. On the other hand, if the actual damages are less than the liquidated sum, the buyer is nevertheless obligated by the liquidated damages clause because the seller will take the deposit under that clause. Because neither party intends the stipulated sum to be the agreed-upon measure of damages, the provision cannot be a valid liquidated damages clause.

The decision we reach today is in harmony with authorities from other jurisdictions. Real Estate World, Inc. v. Southeastern Land Fund, Inc., 137 Ga.App. 771, 224 S.E.2d 747 (Ct.App.1976), overruled on other grounds, Mock v. Canterbury Realty Co., 152 Ga.App. 872, 264 S.E.2d 489 (Ct.App.1980); Jarro Bldg. Indus. Corp. v. Schwartz, 54 Misc.2d 13, 281 N.Y.S.2d 420 (App. Term 1967); Dalston Constr. Corp. v. Wallace, 26 Misc.2d 698, 214 N.Y.S.2d 191 (Dist.Ct.1960). In J. Calamari & J. Perillo, The Law of Contracts § 14-32, at 645 (3d ed. 1987), the authors state:

§ 14-32. Two Pitfalls of Draftsmanship:

The Shotgun Clause and the Have Cake and Eat It Clause

....

Another pitfall into which contract draftsmen have plunged involves an attempt to fix damages in the event of a breach with an option on the part of the aggrieved party to sue for such additional actual damages as he may establish. These have been struck down as they do not involve a reasonable attempt definitively to estimate the loss.

See also Comment, Liquidated Damages: A Comparison of the Common Law and the Uniform Commercial Code, 45 Fordham L.Rev. 1349, 1367-68 (1977).

We hold that the default provision in the subject contract was not enforceable as a liquidated damages clause. The provision constituted a penalty as a matter of law because the existence of the option negated the intent to liquidate damages. ⁵ We quash the decision below with directions to remand the case for a trial on the actual damages incurred by Baron as a result of the breach of contract.

San Francisco Distribution's first argument—that the liquidated damages clause is unenforceable because it gave Stonemason the option between liquidated damages and specific performance—appears to be based on the Florida Supreme Court case of Lefemine v. Baron, 573 So.2d 326 (Fla.1991). In Lefemine, the Florida Supreme Court held that a liquidated damages clause was unenforceable where the contract gave the seller the option of exercising the liquidated damages provision or suing the defaulting buyer to recover actual damages. To place Lefemine in proper context, we review some of the pre-Lefemine case law in this area.

In Hyman v. Cohen, 73 So.2d 393, 398 (Fla.1954), the Florida Supreme Court discussed the difference between a forfeiture provision (e.g., liquidated damages) and an unenforceable penalty provision. The Court held that where the contracting parties actually intend to liquidate their damages, the provision is valid, but where it is clear the parties' real intention is to induce performance under the contract, the provision is unenforceable. Id.

The Supreme Court established a test to determine when a liquidated damages provision will be found enforceable, and when it should be found unenforceable as a penalty clause. First, in order to uphold the provision, "the damages consequent upon a breach must not be readily

[183 So.3d 394]

ascertainable."⁵ Lefemine, 573 So.2d at 328. "Second, the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties could have intended only to induce full performance, rather than to liquidate their damages." Id.

In Pappas v. Deringer, 145 So.2d 770 (Fla. 3d DCA 1962), this court held unenforceable a liquidated damages clause in a lease agreement which gave the landlord the option of retaining the security deposit as liquidated damages upon default by the lessee or suing for a greater amount of damages. We reasoned that this was actually a "penalty clause." The same principle was applied to a real estate contract in Cortes v. Adair, 494 So.2d 523 (Fla. 3d DCA 1986). The Florida Supreme Court in Lefemine agreed with the rationale of both Pappas and Cortes, noting that a contract which gives the seller the option between liquidated damages and suing for actual damages "indicates an intent to penalize the defaulting buyer and negates the intent to liquidate damages in the event of a breach." Lefemine, 573 So.2d at 329. Thus, the Supreme Court held, "[b]ecause neither party intends the stipulated sum to be the agreed-upon measure of damages, the provision cannot be a valid liquidated damages clause." Id. at 330. Significantly for our purposes, the Lefemine court expressly noted that it was not "imply[ing] that a liquidated damages clause which merely provided the option of pursuing equitable remedies would be unenforceable." Id. at n. 5.

San Francisco Distribution argues by analogy that Lefemine should apply to the clause at issue because claims for specific performance ultimately result in a suit for damages. We do not agree with this contention. A suit for specific performance seeks equitable relief that requires the breaching party to perform its obligations under the agreement, and is not, as San Francisco Distribution suggests, to be considered the simple equivalent of a claim for damages and therefore governed by Lefemine and Cortes. The argument advanced by San Francisco Distribution has been rejected by our sister court. See Mineo v. Lakeside Village of Davie, LLC, 983 So.2d 20 (Fla. 4th DCA 2008) (distinguishing Lefemine and holding a forfeiture clause enforceable when it gave seller the option of retaining the deposit or enforcing the contract by specific performance and obtaining damages for delay). We agree with the analysis of Mineo and find that the specific performance option in the contract at bar did not render the liquidated damages provision unenforceable.

Lefemine also requires that "the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach ...." Lefemine, 573 So.2d at 328. Generally speaking, "liquidated damages are appropriate damages in a contract for sale of real estate in Florida, and they are not be considered a penalty." Bradley v. Sanchez, 943 So.2d 218, 222 (Fla. 3d DCA 2006). In this case, the amount of the deposit (i.e., the sum stipulated to be forfeited) was $400,000, which amounts to 7.6 percent of the purchase price of $5,250,000. Florida courts addressing this issue have held that a forfeiture amount of ten percent or less of the total purchase price is not unconscionable.

[183 So.3d 395]

See Lefemine, 573 So.2d at 328 (ten percent); McGuinness v. Prospect Aragon, LLC, 981 So.2d 496, 499 (Fla. 3d DCA 2008) (eight percent); Bradley, 943 So.2d at 222 (4.85 percent); Hot Developers, Inc. v. Willow Lake Estates, Inc., 950 So.2d 537, 541 (Fla. 4th DCA 2007) (9.65 percent).

The enforceability of this provision depends in part on whether it is truly one for liquidated damages or is a penalty. That depends on whether or not the damages flowing from the breach in the present case were readily ascertainable at the time the contract was executed. The rule enunciated by the Florida Supreme Court in Hutchison v. Tompkins, 259 So.2d 129 (Fla.1972), is that if damages are ascertainable on the date of the contract, the clause is a penalty and unenforceable; but if they are not so ascertainable, the clause is for liquidated damages and enforceable. It is clear that in this instance, as is the case in real estate contracts generally, damages were not readily ascertainable at the time the contract was entered into.

Notwithstanding the facial validity of the liquidated damage clause, if circumstances demonstrate that it would be unconscionable to allow the seller to retain the sum in question as liquidated damages, equity may relieve against the forfeiture. Hutchison; Bruce Builders, Inc. v. Goodwin, 317 So.2d 868 (Fla. 4th DCA 1975). Thus, the crucial question in this case is whether it was unconscionable to allow Bieberstein to retain all the deposits made by Berndt, which amounted to approximately 55% of the purchase price of the property.

One significant factor in determining unconscionability is the amount of money being retained vis-a-vis the total contract price. Hooper v. Breneman, 417 So.2d 315 (Fla. 5th DCA 1982). In Bruce Builders, the Fourth District looked at precedent to see what traditionally has shocked "the court's conscience." The court noted:

[I]n Beatty v. Flannery, [49 So.2d 81 (Fla.1950)], retention of a $3,000 deposit on a $30,000 contract created no pangs. And in O'Neill v. Broadview, Inc., [112

Page 1266

So.2d 280 (Fla. 2d DCA 1959) ], forfeiture of a $1,500 deposit on a $10,440 contract could be tolerated. However, in Hook v. Bomar, 320 F.2d 536 [(5th Cir.1963)], loss of a $30,000 deposit on a $95,000 contract was found unconscionable. In the case at bar the contract was for $173,800, and the deposit [$7,200] was only slightly more than 4% of that sum. Thus, based upon precedent the amount is not shocking to "the court's conscience."

317 So.2d at 870. See also McNorton v. Pan American Bank of Orlando, 387 So.2d 393 (Fla. 5th DCA 1980), petition for review denied, 392 So.2d 1377 (Fla.1981) (retention of fifty percent of the purchase price paid as a deposit was sufficiently shocking to state a cause of action for its recovery).

In the present case the Berndts deposited an initial amount of $10,000. While this would appear to have been a reasonable amount subject to forfeiture under paragraph 19, the seller's reservation to retain this amount plus all subsequent deposits by the Berndts made the forfeiture provision unreasonable. Bieberstein ended up retaining over fifty-five percent of the purchase price which had been deposited by the buyer. We hold that under these circumstances the forfeiture was unconscionable.

Accordingly, we reverse the award of damages and remand with directions for the trial court to entertain further pleadings and proof as to the actual damages sustained by Bieberstein and enter judgment in that amount. See Secrist v. National Service Industries, Inc., 395 So.2d 1280 (Fla. 2d DCA 1981); South Florida Regional Planning Council v. Board of County Commissioners of Palm Beach County, 372 So.2d 1142 (Fla. 4th DCA 1979), cert. denied, 385 So.2d 761 (Fla.1980).

Ben Shimon contends the liquidated damages provision of the subscription agreement should be stricken because it constitutes an impermissible penalty clause. The Florida Supreme Court has adopted this "test as to when a liquidated damages provision will be upheld and not stricken as a penalty clause. First, the damages consequent upon a breach must not be readily ascertainable. Second, the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties could have intended only to induce full performance, rather than to liquidate their damages." Lefemine v. Baron, 573 So.2d 326, 328 (Fla. 1991) Again, when properly considered as an agreement to subscribe to a business venture to acquire and convert a building into condominiums, rather than the mere purchase of condominium units, the liquidated damages meets both prongs of this test.

As to the not-readily-ascertainable prong, the Florida Supreme Court has explained that because of fluctuations in the real estate market, damages for the loss of a real estate opportunity cannot be readily ascertained at the time the contract is signed such that it would defeat a liquidated damages clause. See Hutchison v. Tompkins, 259 So.2d 129, 132 (Fla. 1972) ("The land sale market in Florida fluctuates from year to year and season to season, and it is generally impossible to say at the time a contract for sale is drawn what vendor's loss (if any) will be should the contract be breached by purchaser's failure to close. Accordingly ... we conclude that the damages which the parties could expect as a result of a breach were not readily ascertainable as of the time the contract was drawn up ...."); Bradley v. Sanchez, 943 So.2d 218, 222 (Fla. 3d DCA 2006) ("The Florida Supreme Court has ruled that liquidated damages are appropriate damages in a contract for sale of real estate in Florida, and they are not to be considered a penalty. Such damages are not readily ascertainable as of the time the contract is drawn." (quotation omitted) ). So it was for the subscription agreement in this case, which contemplated an investment in an office building that BH 150 was buying.

As to the grossly-disproportionate prong, Ben Shimon's failure to pay her share of money due for closing jeopardized the entire investment opportunity, not just the purchase of the four units earmarked for Ben Shimon. Her $3,295,000 damages amount is measured against the potential loss of the investment—the office building—which was in excess of $22 million. The approximate 14.97 percent of liquidated damages to the total purchase price of the office building was not grossly disproportionate. See, e.g., Johnson v. Wortzel, 517 So.2d 42 (Fla. 3d DCA 1987) (18.2%); Dade Nat'l Dev. Corp. v. Southeast Inv. of Palm Beach Cty., 471 So.2d 113 (Fla. 4th DCA 1985) (18%); Hooper v. Breneman, 417 So.2d 315 (Fla. 5th DCA 1982) (13.3%).

The trial court found that "[t]he contract specified the County could assess liquidated damages against the Contractor in the amount of $250 per day for every day final completion was delayed beyond the contracted-for final acceptance date." Because

[333 So.3d 289]

final acceptance did not occur until the homeowner settled his claim with the insurance company on April 27, 2020, the court found that the County was entitled to $177,750 in liquidated damages for the 711 days beyond the final acceptance date. SUI cross-appeals from that award, arguing that because SUI did not cause the delay in resolving the homeowner's claim and the County did not suffer damage from the delay, the liquidated damage clause is unenforceable. We agree.

"[T]he parties to a contract may stipulate in advance to an amount to be paid or retained as liquidated damages in the event of a breach." Lefemine v. Baron , 573 So. 2d 326, 328 (Fla. 1991). For a liquidated damages clause to be enforceable, "the damages consequent upon a breach must not be readily ascertainable," and "the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach." Id. "[L]iquidated damages clauses can exist only when they provide for ‘damages’ (something to be given by one party who breaches the contract to the other party to compensate the other party for his loss which is a consequence of that breach)." Hawk's Cay Invs., Ltd. v. Brandy Marine of the Keys, Inc., 524 So. 2d 681, 683 (Fla. 4th DCA 1988) (quoting Bayshore Royal Co. v. Doran Jason Co. of Tampa, Inc., 480 So. 2d 651, 652 (Fla. 2d DCA 1985)).

The County failed to show that it suffered any loss from the delay of final acceptance of restoration. SUI obtained an insurance policy to cover damage caused by the drilling; thus, the County was never responsible for damage to the homes adjacent to the project. The homeowner negotiated directly with the insurance company and ultimately reached a settlement—at no expense to the County. The trial court specifically found that SUI completed all work required by the contract on March 7, 2018, except resolving the homeowner's claim. Thus, because the County had the full use of the completed construction project for over two years before final acceptance, "the sum stipulated to be forfeited" was "grossly disproportionate to any damages that might reasonably [have been] expected to follow from a breach." See Lefemine, 573 So. 2d at 328; see also Goldblatt v. C.P. Motion, Inc., 77 So. 3d 798, 800-01 (Fla. 3d DCA 2011) (holding that a court can invalidate a liquidated damage clause where the stipulated amount of damage is disproportionate to the damages actually suffered).

Accordingly, we affirm the amended final judgment except for the portion of the judgment that deducts liquidated damages from SUI's award and remand for the trial court to recalculate the award to SUI in accordance with this opinion.