Allen v. Smith: A San Diego home buyer gets a big deposit refund

In my last post I explained that California has a strict rule that in most circumstances people who have put down a deposit on a house or a condo in the state are entitled to a refund of all but 3% of the purchase price from their deposit. Thus, for a million dollar condo with a 100,000 deposit, in California the buyer presumptively entitled to a refund of $70,000 from his $30,000 deposit.

This general rule has exceptions however. First, the buyer may have cause to rescind the house/condo purchase agreement, and receive a complete refund of his deposit. Or the seller may try to convince a court that it suffered damages in excess of 3% of the purchase price, though this is typically a difficult task. For the most part, however, when a buyer decides not to follow through and close on a condo purchase agreement, the seller may not keep any more deposit money than 3% of the purchase price.

One interesting example of a California buyer successfully suing to get most of her purchase price back involves a mansion right here in San Diego, in the Rancho Santa Fe neighborhood. The case is Allen v. Smith, 94 Cal. App. 4th 1270 (4th Dist. 2002).

In March 1999 Plaintiff Barbara Allen agreed to pay $1.775 million of the house of Defendants Frank and Jeri Smith. Allen put down an initial deposit of $20,000, and about two weeks later paid a second deposit of $80,000, just as the purchase agreement specified.

In May 1999 Ms. Allen told the Smiths that she was backing out of the purchase, and asked for a return of her second deposit of $80,000. The Smiths refused to return any money, so Ms. Allen sued.

So the position of Ms. Allen is that she should get $80,000 of her $100,000 deposit back because the second payment really wasn’t a purchase deposit. The Smiths’ position was that they should get to keep all of the deposit because the plain words of the purchase agreement that Ms. Allen signed said the deposit was “nonrefundable.”

The California Court of Appeals, however, give neither side exactly what it wanted, but instead followed both the spirit and the letter of California law, and let the Smiths keep 3% of the purchase price from the deposit, and ordered them to return the rest of the money to Ms. Allen. Ms. Allen’s $100,000 deposit was 5.6% of the purchase price, so the Smiths had to return 2.6% back, or $46,750.

Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com. Comments about the blog via e-mail are welcomed.

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One response to “Allen v. Smith: A San Diego home buyer gets a big deposit refund

  1. Pingback: Residential Real Estate Purchase Contract Cancellation in California: Several relevant laws apply « Greg’s Law & Economics Blog

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