Penalty clause when buying real estate: wording is essential

If you have a real estate purchase agreement Almost always a penalty clause is included. Whether you can successfully appeal to it, or to what extent such an appeal is possible, depends on the wording of the penalty clause. A fairly recent judgment of the District Court of Midden-Nederland (ECLI:NL:RBMNE:2023:7452). The judge denied the claim for payment of a additional compensation off because the penalty clause was unclear. How exactly? Real estate law attorney Robert van Ewijk explains.

Real estate purchase agreement with penalty clause

The case at hand involves a closed purchase agreement relating to commercial real estate. The purchase agreement contains a penalty clause. The penalty clause provides that the seller of the real estate must pay a penalty to the buyers if he fails in his obligations. It does. The seller falls short of compliance and the and the buyers dissolve the purchase agreement. In doing so, they invoke the penalty clause and the seller pays the amount owed to them.

However, the amount only covers part of the damage and the buyers do not think that is reasonable. Therefore, they want to be compensated for the full damages. This includes in addition to the actual damages suffered interest, expert fees as well as extrajudicial collection costs and legal costs.

Provision in penalty clause

The buyers believe they are entitled to additional damages through the following provision included in the penalty clause:

“Buyer and seller agree that if either party fails to perform its obligation under the purchase agreement in part or in full, it shall forfeit to the other party a penalty [sic] of at least 10% of the purchase price, without prejudice to that party's right to demand performance, rescission, or damages.”

According to the buyer, this states that in addition to the penalty, he can also claim damages. The seller disagrees and argues that the buyers are not entitled to such additional damages because the penalty clause implies liquidated damages. According to him, the parties only agreed on a penalty clause and no more than that.

Objective language explanation

It is up to the court to assess what the parties mutually stated and could reasonably expect of each other. In doing so, the court assumes the objective linguistic interpretation of the penalty clause, because the text of the penalty clause was not discussed or negotiated. If there had been, the intention of the parties, evidenced by their negotiation of the penalty clause (the so-called Haviltex measure).

In the court's opinion, the meaning of the words included in the penalty clause plays a role “then so” an important role. Should they be interpreted as ‘or,’ or as ‘and’? That determines the difference in scope of the clause. According to the court, the penalty clause can be interpreted by the words ‘then or’ in different ways, viz:

1. In addition to the fine, dissolution, performance or damages are claimed, or;
2. in addition to the fine, performance or rescission may be sought, or no fine, but damages.

Judgment on penalty clause against drafter

This creates ambiguity, and the judge in this case rules according to the ‘contra proferentem principle. That means that the ambiguity must be interpreted to the disadvantage of the drafter of the clause. In this case, that is the buyers. Moreover, the law states that a penalty clause replaces damages unless you agree otherwise. Because it is not clear in this case whether anything else was agreed upon, the buyers’ claim to pay damages in addition to the penalty is dismissed. In addition, the buyers are ordered to pay the costs of the proceedings also on the other party's side.

Sometimes fine and damages

In another proceeding, on the contrary, damages were awarded in addition to the forfeited fine. In that case, a standard NVM purchase agreement. This does clearly state that there is both a right to fine as compensation.

Legal advice penalty clause purchase agreement real estate

Are you in a dispute where the buyer and seller interpret the penalty clause differently? Or do you need help formulating or revising a penalty clause? Lexys can assist you with advice and assistance. Feel free to contact with us. Then we will be happy to help you.