Liquidated Damages in Purchase and Sale Agreements: Oklahoma
A buyer and seller of real estate will often include a liquidated damages provision in the purchase and sale agreement as a means for stipulating the amount of damages the seller will receive in the event of a breach of the agreement by the buyer. This article addresses issues specifically related to a seller’s rights when a liquidated damages provision is included in a real estate purchase and sale agreement.
1. May the seller choose specific performance instead of liquidated damages (so that liquidated damages are not an exclusive remedy)?
As an initial matter, specific performance is available to a seller in Oklahoma. Dillon v. Ringleman, 155 P. 563, 565 (Okla. 1916). See Also Kendall v. Hastings, 198 P.2d 998, 1000 (Okla. 1948), (“if the vendor is able to make a good title at the time stipulated for conveyance, he may ordinarily maintain an action…to compel specific performance on the part of the vendee.”); Shelton v. Wallace, 137 P. 694, 695 (Okla. 1913) (acknowledging a seller’s right to specific performance.)
In Oklahoma, a seller may seek specific performance even if a liquidated damages provision is not included in the agreement, if the agreement provides for “mutually exclusive” remedies of liquidated damages or other remedies at law or in equity. In Oltman Homes v. Mirkes, 190 P.3d 1182, 1186-1187 (Okla. Civ. App. 2008), the Oklahoma Court of Civil Appeals held that upon the breach of the contract a seller could seek damages under two mutually exclusive measures: a claim for retention of the earnest money as liquidated damages, or alternatively “it could choose to forego the liquidated damages provided by the contract and seek any other legal or equitable remedy.” Although Oltman Homes primarily addressed whether a seller could seek actual damages in lieu of liquidated damages, the holding broadly accepts the proposition that a seller could forego liquidated damages and seek any other remedy available, which in Oklahoma includes the right to specific performance as noted above.
Oltman Homes specifically addressed a situation where the parties contracted for the seller to have mutually exclusive remedies. While there is no specific case in Oklahoma that addresses a seller’s right to specific enforcement if the seller includes a liquidated damages provision as its exclusive remedy, Oklahoma courts likely would not allow a seller to seek specific performance in such a situation. See JPMorgan Chase Bank, N.A. v. Specialty Restaurants, Inc., 243 P.3d 8, 13 (Okla. 2010) (the parties are free to bargain as they see fit, and the courts will neither make a new contract or rewrite existing terms); Siloam Springs Hotel, LLC v. Century Surety Company, 392 P.3d 262, 268 (Okla. 2017) (Oklahoma courts will exercise their power to nullify contracts made in contravention of public policy only rarely, with great caution and in cases that are free from doubt).
2. May the seller choose actual damages instead of liquidated damages (so that liquidated damages are not an exclusive damages remedy)?
There is a split of authority in Oklahoma on whether a seller may choose actual damages instead of liquidated damages. In 1414 Partnership v. Taveau, 815 P.2d 1228, 1230 (Okla. Civ. App. 1991), the Oklahoma Court of Civil Appeals (Division No. 3) held that a valid and enforceable liquidated damages provision removes the question “from the authority of 23 O.S.1981 § 28” which is the statutory measure of actual damages. However, as noted above, in Oltman Homes, the Oklahoma Court of Civil Appeals (Division No. 2) held that upon the breach of the contract a seller could seek damages where the purchase agreement specifically stated that the seller had the mutually exclusive alternative remedies of retaining the earnest money as liquidated damages or foregoing the liquidated damages and seeking any other legal or equitable remedy. Oltman Homes, 190 P.3d at 1186-1187.
Notably, the facts in 1414 Partnership do not indicate that the buyer and seller had included a mutually exclusive scheme of remedies as was the case in Oltman Homes, so there is a potential means for reconciling the two holdings. Absent any such distinguishing opinion, it remains unclear whether or not a seller may choose to seek actual damages in the presence of a contractual liquidated damages provision where the agreement does not specifically limit the remedies exclusively to liquidated damages. However, in any event, a contract specifically limiting the remedies to liquidated damages would likely preclude the seller from seeking actual damages for the same reasons discussed above.
3. If the seller may choose liquidated damages or actual damages,
may it have both?
Even with the split of authority with respect to whether a seller may choose actual damages instead of liquidated damages, Oklahoma case law is consistent in that a seller may not choose both liquidated damages and actual damages. Under the 1414 Partnership rule, actual damages are not available at all if there is a liquidated damages provision in the agreement. Under Oltman Homes, though actual damages is a permissible remedy notwithstanding the inclusion of a liquidated damages provision, actual damages is only available as a mutually exclusive remedy such that the seller must forego liquidated damages before the seller can seek actual damages. Therefore, regardless of whether Oltman Homes and 1414 Partnership are contradictory in both respects, both cases stand for the proposition that a seller is not entitled to both actual and liquidated damages.
4. If the seller may choose liquidated damages or actual damages,
but not both, when must it decide?
Under 1414 Partnership, there is no deadline by which a seller must elect actual or liquidated damages because inclusion of a liquidated damages provision precludes the seller from seeking actual damages.
There is little guidance under Oklahoma case law for a seller’s election of liquidated damages or actual damages other than Oltman Homes. In Oltman Homes, the court held the seller may “upon breach of the contract” elect liquidated damages by “retaining the earnest money” or the seller could forego liquidated damages and seek actual damages (which implies, though the court does not specifically state such, that the seller must relinquish the earnest money in order to pursue actual damages). Oltman Homes, 190 P.3d at 1187.
5. Is there an applicable statute addressing liquidated damages clauses?
Yes. Title 15, section 215(B) of the Oklahoma Statutes provides:
“A provision in a real estate sales contract, providing for the payment of an amount which shall be presumed to be the amount of damages sustained by a breach of such contract, shall be held valid and not a penalty, when such amount does not exceed five percent (5%) of the purchase price. In the event such amount exceeds five percent (5%) of the purchase price, such provision shall be held invalid and a penalty unless the party seeking to uphold the provision establishes that such amount is reasonable. If such provision is valid under this subsection, the limitations of Section 28 of Title 23 of the Oklahoma Statutes do not apply.”
This statute was enacted in 1985 as a direct response to Oklahoma courts frequently finding that liquidated damages provisions were an unenforceable penalty under the test of Section 215(A) of Title 15 of the Oklahoma Statutes which provided prior to 1985 that “a stipulation or condition in a contract providing for the payment of an amount which shall be presumed to be the amount of damage sustained by a breach of such contract, shall be held valid, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage. In a now overturned decision in Reid v. Auxier, 690 P.2d 1057, 1061 (Okla. Civ. App. 1984), the Oklahoma Court of Civil Appeals (Division No. 4) stated the often held opinion of the courts that “it would be neither impracticable nor extremely difficult [to determine damages as outlined in Section 28 of Title 23 of the Oklahoma Statutes] and therefore the liquidated damage proviso is void.” Shortly thereafter, in 1985, the Oklahoma legislature enacted Section 215(B). 1414 Partnership analyzed the new statute and specifically called for the overruling of the Reid decision (holding “Reid is thereby no longer controlling with respect to application of the above new Subsection B statute as a measure of damages in a real estate contract”). 1414 Partnership, 815 P.2d at 1230.
6. What is the test for a valid liquidated damages clause?
The test for a valid liquidated damages clause is statutorily prescribed. A liquidated damages clause “shall be held valid and not a penalty, when such amount does not exceed five percent of the purchase price.” 15 Okla. Stat. § 215(B).
The author notes that pursuant to the statutory prescribed test the purchase and sale agreement need not recite an acknowledgement by the seller and buyer that “damages are impractical or extremely difficult to fix,” which has become commonplace to do in support of a claim that the provision did not amount to a penalty under Section 215(A). However, it remains a customary practice in Oklahoma purchase and sale agreements for such a recitation to be included within the liquidated damages clause, and it may be beneficial in the event the seller and buyer chose to implement a liquidated damages amount in excess of five percent of the purchase price (in which event the party seeking to uphold the provision must prove its reasonableness, as noted above).
7. Who has the burden of proof?
There is no burden of proof if the liquidated damages amount does not exceed five percent of the purchase price, as it is statutorily deemed valid. If, however, the liquidated damages amount is in excess of five percent of the purchase price, it is presumed a penalty unless the party seeking to uphold it establishes that the amount is reasonable. 15 Okla. Stat. § 215(B).
8. As of when is reasonableness tested?
The test of validity in Oklahoma is statutorily prescribed as a factor of the purchase price. If the liquidated damages amount does not exceed five percent of the purchase price, reasonableness is not in question.
If, however, a seller seeks to enforce a liquidated damages in excess of five percent of the purchase price (which by statute is presumed to be a penalty unless the party seeking to uphold it establishes that the amount is reasonable), it is most likely (though not expressly stated in the statute) to be analyzed by the courts on the same lines as liquidated damages provisions falling under the scope of Section 215(A), i.e. a provision not in the context of a real estate sales contract. In Sun Ridge Investors, Ltd. v. Parker, 956 P.2d 876, 878 (Okla. 1998), which involved a liquidated damages provision in a lease, the Oklahoma Supreme Court held that “the sum stipulated must be a reasonable pre-breach estimate of the probable loss.” The court was not specific in its use of the phrase “pre-breach” but it logically follows that it would be tested as of the time of the contract, as that is when the parties would have made the determination to use the stipulated amount. In other words, though the court was not clear, it is likely that “pre-breach” means at the time of contract, as opposed to sometime after the breach occurs. So, if the liquidated damages amount in a real estate purchase and sale agreement is in excess of five percent and the seller is seeking to prove that the amount is reasonable, it is likely that reasonableness will be tested based on an estimate of the probable loss determined at the time of the contract.
As noted above, there is no specific case in Oklahoma that addresses a seller’s right to specific enforcement if the seller includes a liquidated damages provision as its exclusive remedy. So, sellers should be cautious of implementing a liquidated damages provision as its exclusive remedy if the stipulated amount is in excess of five percent of the purchased price, because there is no guidance regarding what remedies (if any) a seller would be entitled to if such liquidated damages (as the exclusive remedy) was deemed unreasonable and therefore unenforceable.
9. What percentage of the purchase price is likely acceptable as liquidated damages?
If the liquidated damages amount does not exceed five percent of the purchase price, it is deemed a valid liquidated damages provision. 15 Okla. Stat. § 215(B).
10. Are actual damages relevant for liquidated damages and, in particular, will liquidated damages be allowed when there are no actual damages?
Actual damages are not relevant for liquidated damages, and liquidated damages are allowed even if there are no actual damages. In Oltman Homes, the court held that liquidated damages measured by Title 15, Section 215(B) of the Oklahoma Statutes are not limited by Title 23, Section 28, i.e. the actual damages statute, which restricts damages to those equal to “the amount which would have been due to the seller under the contract, over the value of the property.” Even if the amount of liquidated damages exceeds the difference between the contract price and the value of the property, such damages are valid so long as they do not exceed five percent of the purchase price. 15 Okla. Stat. § 215(B). See also McQueen, Rains & Tresch, LLP v. Citgo Petroleum Corp., 195 P.3d 35, 46 (Okla. 2008), rejecting the notion that there is a prerequisite requirement that the amount denominated as liquidated damages must be related to the damages actually suffered at the time of the breach. The McQueen case did not involve a real estate purchase and sale agreement (it involved an attorney-client retainer fee agreement), but it is nonetheless persuasive authority for the proposition that actual damages are irrelevant to the determination and validity of liquidated damages in a real estate purchase agreement.
11. Is mitigation relevant for liquidated damages?
There is no reported case law in Oklahoma addressing whether the mitigation of damages is relevant or required under a liquidated damages provision. But because actual damages are not relevant in determining whether a liquidated damages provision is enforceable, it follows that mitigation of actual damages is also irrelevant.
12. Is a “Shotgun” liquidated damages clause enforceable?
In Graves v. Fitzpatrick, 260 P. 10, 11 (Okla. 1927), the Oklahoma Supreme Court held “[w]here a contract provides for a number of distinct things to be done by one of the parties, and further provides a sum certain to be taken as liquidated damages, if there is only a partial breach, the sum agreed upon as liquidated damages must be held a penalty, and the plaintiff can only recover his actual damages.” Notably, however, the Graves decision was issued well before the enactment of Section 215(B), i.e. when the standard for a valid liquidated damages provision was whether “it would be impracticable or extremely difficult to fix the actual damage.” Applying that standard to a multiplicity of potential breaches the buyer could commit would most likely result in a disparity between the stipulated damages amount and the varying materiality of the various possible breaches. However, Section 215(B) does not limit its application to just breaches of the contract by failure to close, but instead merely states “by a breach of such contract.” So, it appears Section 215(B) stands to overrule the application of Graves if the liquidated damages amount does not exceed five percent of the purchase price. However, the Graves ruling may have an impact on the reasonableness analysis of a liquidated damages provision calling for stipulated damages in excess of five percent of the purchase price.
One final note regarding “shotgun” liquidated damages should be observed as a possible trend toward a new development in this application. In American Multi-Cinema, Inc. v. Southroads, 119 F.Supp.2d 1190, 1207 (D. Kan. 2000), the United States District Court of Kansas (applying Oklahoma law) rejected the “antiquated” holdings of the past, citing a trend toward acceptance of liquidated damages provisions, and held that “the proper approach here is to reject a rule that would require this court to construe the stipulated damage provision…as a penalty as to one clause…simply because the court concludes that the provision is a penalty as to [another] clause.” The court ultimately favored an integrated approach that evaluates enforceability of the liquidated damages approach on a covenant by covenant basis, meaning the liquidated damages could be enforceable with respect to the breach of one covenant, but not with respect to the breach of a different covenant.
13. Does a liquidated damages clause preclude recover of attorneys’ fees by the seller?
There is no reported Oklahoma case law specifically holding that attorneys’ fees are recoverable notwithstanding the existence of a liquidated damages provision in the agreement. However, in Oltman Homes, the court implied that, notwithstanding the fact that the parties had an enforceable liquidated damages provision, attorneys’ fees would have been awarded if the parties had included an express provision in the agreement providing for the award of attorneys’ fees, noting that “Seller may be allowed a counsel fee only if…the contract in suit provides for recovery of attorney’s fee”. Oltman Homes, 190 P.3d at 1191-1192. The Oltman Homes court ultimately did not award attorneys’ fees because there was no contractual attorneys’ fee provision and no other statutory mandate for the award of attorneys’ fees. This outcome is consistent with other Oklahoma Supreme Court rulings that employ the “American rule” with respect to attorneys’ fees, i.e. attorneys’ fees are awarded in Oklahoma only if authorized by agreement of the parties, by statute, or where the fee is an item of damage caused by the wrong itself rather than an item of expense incurred in attempting to secure redress for the wrong. Eagle Bluff, L.L.C. v. Taylor, 237 P.3d 173, 179 (Okla. 2010).