Liquidated Damages and Your Listing Agreement
Q: Will the courts enforce the liquidated damages provision in my listing agreement?
A: That depends on a few things.
A liquidated damages provision in a listing agreement sets forth the amount of money both parties agree will be paid to the broker in the event that certain events occur, including, first and foremost, the seller’s breach of the agreement.
Liquidated damages provisions are typically used in listing agreements and other contracts in which the parties, at the time they draw up the contract, can’t accurately calculate what damages the parties could suffer in the event of a breach.
These provisions will usually be enforced unless a court determines that the damages amount included in the contract constitutes a penalty, in which case it will be deemed unenforceable.
So, what makes it a penalty?
The Florida courts have held that “in order for a liquidated damages clause to constitute a penalty, damages must be readily ascertainable at the time of the drawing of the contract.” In other words, if you’re asserting your right to collect a commission under a listing agreement, based upon a liquidated damages clause, you will need to show that, at the time the contract was drafted, you and your seller couldn’t have “readily ascertained” the amount of your damages, in the event of the seller’s breach.
Of course, inherent in any listing agreement is the fact that while the parties may agree on a listing price at the time the agreement is written, neither the seller nor the broker can accurately predict the ultimate sales price, or the amount of the broker’s commission, which would be calculated as a percentage of that price. To illustrate this point, one Florida court held that “it is well known that the distance between asking price and accepted price in real estate transactions is often a long mile indeed,” in finding a broker’s commission was not readily ascertainable and the liquidated damages clause at issue was therefore not an unenforceable penalty.
Nonetheless, since the parties can’t accurately predict what the ultimate sales price or commission amount will be, a liquidated damages provision in a listing agreement will usually be enforced, it’s always in your best interest, as the broker, to leave nothing to chance and to clearly spell out in your agreement that (1) at the time the contract was drafted, the parties could not readily ascertain the amount of the broker’s damages in the event of a breach, and (2) the parties agree that the stated amount is reasonable, and does not constitute a penalty.
Lastly, keep in mind that when a breach of contract dispute crops up, the relationship between the broker and the seller has almost always gone irretrievably bad. So, just in case, even in the face of your exceptionally well-crafted liquidated damages clause, your seller insists on fighting you in court, be sure that your agreement also contains an attorneys’ fees provision, which awards legal fees and costs to the prevailing party in any litigation arising out of the agreement. That way, you won’t run the risk of spending most of your commission on the legal fees you incur to obtain it.