## Facts

- Buyers and seller signed a residential purchase-and-sale agreement using a standard form, modified to add a mortgage financing contingency requested by the buyers.
- The contingency required the buyers to apply for a specified mortgage loan and allowed termination with return of deposits if, despite the buyers’ diligent efforts, a loan commitment was not obtained by a stated deadline.
- The buyers paid a $25,400 deposit.
- The buyers’ financing activity consisted largely of rate and option inquiries, applications to two lenders, withdrawal of one application to avoid a $275 fee, and no completed application to a third potential lender as the deadline approached.
- One lender proposed a bridge-loan structure requiring mortgages on two properties owned by the buyers; the buyers declined that arrangement, and the lender did not extend financing.
- On the deadline date, the buyers gave notice purporting to terminate for failure to obtain financing and demanded return of the deposit.
- The seller refused, asserting the buyers had not made diligent efforts, and later sold the property for less than the contract price.
- After a bench trial, the court found the buyers’ efforts lacked diligence but treated the deposit-forfeiture term as an unenforceable penalty, limiting the seller to $8,400 in actual damages; both parties appealed.

## Issues

1. Whether the buyers used the contractually required “diligent efforts” to obtain financing, entitling them to terminate under the mortgage contingency and recover the deposit.
2. Whether the contract provision allowing the seller to retain the full deposit upon the buyers’ default was enforceable as liquidated damages or void as a penalty.

## Decision

- The appellate court upheld the finding that the buyers did not exercise diligent efforts and therefore could not invoke the financing contingency to recover the deposit.
- The appellate court held the deposit-retention provision was a valid liquidated damages clause, not a penalty.
- The judgment was modified to allow the seller to retain the entire $25,400 deposit and, as modified, affirmed.

## Legal Principles

- When a mortgage contingency permits termination only if financing is not obtained despite the buyer’s “diligent efforts,” the buyer must make genuine, sustained, and reasonable attempts to secure a commitment; limited inquiries, partially pursued applications, and abandonment of available options may constitute a failure of diligence.
- A real estate deposit forfeiture clause will be enforced as liquidated damages when, at the time of contracting, damages from breach are difficult to estimate and the deposit amount is a reasonable forecast of anticipated loss rather than a punishment.
- The enforceability of liquidated damages is assessed based on circumstances at contract formation, not by comparing the agreed amount to actual damages later calculated with hindsight.

## Conclusion

The court concluded that the buyers’ inadequate financing efforts barred reliance on the mortgage contingency and that the parties’ deposit-forfeiture term was enforceable liquidated damages, entitling the seller to keep the full deposit.


Lynch v. Andrew, 481 N.E.2d 1383 (Mass. App. Ct. 1985)