Legal Memorandum: Breached Real Estate Contract in NJ

Issue: In New Jersey, when a real-estate contract is breached, under what circumstances does the seller retain the deposit paid by the purchaser?

Area of Law: Business Organizations & Contracts, Real Estate Law
Keywords: Rreal-estate contract breach; Seller retains the deposit; Liquidated damages clause
Jurisdiction: New Jersey
Cited Cases: 296 N.J. Super. 172; 501 A.2d 932; 124 N.J. 500; 602 A.2d 75; 882 A.2d 980
Cited Statutes: None
Date: 12/01/2008

Prior to the New Jersey Supreme Court’s decision in Kutzin v. Pirnie, 124 N.J. 500, 501 A.2d 932 (1991), New Jersey followed the common law rule automatically allowing the seller to retain the buyer’s deposit when the buyer breached under a land purchase agreement, with or without a liquidated damages clause.  In Kutzin, the court finally rejected that rule and, as most other jurisdictions had already done, held that in the absence of a liquidated damages clause, “[w]henever the breaching buyer proves that the deposit exceeds the seller’s actual damages suffered as a result of the breach, the buyer may recover the difference.”  124 N.J. at 517.  Thus, the seller in such cases is limited to his or her actual damages and must return the balance of the deposit.  Moreover, even if there is a liquidated damages clause, the seller may retain the entire deposit only if it bears a reasonable relationship to the anticipated loss caused by the breach and the difficulties of proof of loss.  Id. at 518-19; see also Nohe v. Roblyn Dev. Corp., 296 N.J. Super. 172, 686 A.2d 382 (App. Div. 1997) (“seller who has suffered no harm cannot retain a deposit even in the face of a liquidated damages clause”); Van Es v. Honeyleaf Props., Inc., 253 N.J. Super. 566, 602 A.2d 75 (App. Div. 1992) (summary judgment allowing seller to retain entire deposit based on liquidated damages clause was improper where issues […]

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