In Utah, if you are a seller of real property, you have to let the bird in the hand go before pursuing the two in the bush. The seller of a motel trying to recover damages from a prospective buyer for breach of contract got a rough start on the holidays when the Utah Supreme Court recently affirmed the trial court’s dismissal of a suit seeking damages for a failed motel sale, citing the seller’s failure to remit earnest money prior to filing suit. In Rocky Mountain Hospitality, LLC v. Mountain Classic Real Estate, Inc., 2022 UT 44, the Court considered whether a trial court had properly dismissed a suit for damages arising from a failed motel purchase. In that case, the buyer (Rocky Mountain) had entered into a contract with seller (Mountain Classic) to purchase a Super 8 motel for $3.4 million. Buyer tendered a $30,000 earnest money with the offer to purchase, which the seller accepted. Importantly, the contract had a provision stating that if the buyer failed to complete the purchase, the seller had to make an election, choosing either to retain the earnest money as liquidated damages for the failed sale, or return the earnest money, and then sue for any other remedies. Buyer failed to close on the sale, and the seller eventually sold the motel for $2.75 million. Claiming more than $780,000 in the reduced selling price as damages for the failed sale, the seller filed suit against the buyer for breach of contract without first releasing the $30,000 earnest money back to the buyer. When buyer filed a motion to dismiss the complaint, citing a Utah Court of Appeals decision considering the same issue (McKeon v. Crump, 2002 UT App 258), seller tried to tender the earnest money back to the seller. The trial court dismissed and, on appeal, seller made two arguments, both of which the Utah Supreme Court rejected. The first argument was that the McKeon court got the law wrong in enforcing the specific provisions of the default clause. The Utah Supreme Court rejected that argument, citing a long history of Utah jurisprudence enforcing plain terms of contracts, specifically default clauses. Secondly, seller argued that equitable doctrines excused strict compliance with the contract. The Utah Supreme Court rejected that argument as well, citing to the same caselaw wherein multiple Utah courts had explicitly and implicitly required plaintiffs to make an election. The Utah Supreme Court did not find the “form over substance” or “substantial compliance” arguments persuasive when the contract language was plain and clear.

To help parties in the future, the Utah Supreme Court set forth four rules to guide plaintiffs in Utah seeking similar relief.

1. Default clauses like the earnest money clause at issue require sellers to choose between keeping the deposit, or pursuing other remedies;
2. If a seller retains the deposit, it has made an election without taking any other action;
3. A seller cannot simultaneously retain a deposit and pursue other remedies; and
4. A seller exercises the option of retaining the deposit if, at the time of declaring a breach, the seller has not tendered the deposit back to the buyer. The court here recognized that the result may seem “harsh,” but opted to make very clear, and to establish for parties to purchase contracts a “clear-cut, return-before-filing rule.” To further make the point, the court awarded fees to the buyer, again enforcing the specific provisions of the contract.

Perhaps the most surprising “rule” to come from this was number four, indicating that before a party even makes a claim for breach, it should consider whether retaining the deposit as liquidated damages is enough. If it is not, a seller should tender the money back, and only then start the claim process.