On June 14, 2013, the Supreme Court of Arizona ruled in Thomas v. Montelucia Villas, CV-12-0156-PR that, payments by the buyer to the builder can be forfeited for breaching the contract only if the builder can show the ability to perform under the contract at the time of the closing date.  In other words, if the builder could not get a certificate of occupancy by the closing date, the buyer would be entitled to the return of payments made to the builder even though the buyer breached the contract.  See Facts below.

Facts

   The buyer and the builder entered into a purchase contract for $3,295,000.00 for the purchase of a custom villa in Montelucia Villas.  The close of escrow was May 16.  After the contract was executed the buyer made several payments to the builder totaling $659,000.00 of the purchase price.

   On May 6 the buyer anticipatorily beached the contact by writing a letter to the builder saying that the contract was unenforceable, and demanding the return of the $659,000 in payments.  Under the contract the $659,000 in payments were called “earnest money,” and were subject to forfeiture as liquidated damages if the buyer breached the contract.  Although the builder tried several times to get a certificate of occupancy, the builder was not successful until August 27.

   The Supreme Court initially said that, although the $659,000 payments were called “earnest money,” they were actually payments used to pay for the construction of the condominium.  The Supreme Court said that earnest money is generally a small amount of the purchase price held in escrow to show that the buyer is serious about performing under the contract.

   The Supreme Court then ruled that, unless the builder could show the ability to perform under the contract, the builder was not entitled to the $659,000.00 in payments.

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