Short answer
Two rules that drive home-purchase deposit disputes don’t reach office, retail or industrial deals. Civil Code §1057.3’s penalty for refusing to release a deposit covers only one-to-four-unit homes the buyer will occupy, and so does §1675’s 3% presumption. A liquidated damages clause in a commercial purchase is tested under §1671(b): it stands unless the party challenging it proves it was unreasonable when the contract was made. It still needs separate initials under §1677, and the deposit stays in escrow until both sides sign release instructions or a court or arbitrator decides.
A commercial deal falls apart, and the deposit is stuck. The buyer cancelled during due diligence, or couldn’t close on time, or the seller claims the buyer defaulted. The seller won’t sign the release. Escrow says it can’t do anything without instructions from both sides. And much of what the buyer reads online about getting a deposit back turns out to be about houses.
Deposits in commercial deals are often large, and the rules are different. This post is for buyers of office, retail, industrial and other non-residential property in California.
No §1057.3: the residential release penalty doesn’t apply
In a home purchase, a party who refuses for 30 days after a written demand to sign release instructions, without a good-faith dispute, can owe the money plus treble damages between $100 and $1,000, and attorney fees (Civil Code §1057.3). That statute reaches only property of one to four units where the buyer will occupy a unit. An office building, a retail center, or an industrial building is outside it, and so are investor purchases.
So a commercial buyer has no statutory penalty to point to. The leverage comes from the contract itself: who actually defaulted, whether the liquidated damages clause is valid, the mediation and attorney fee clauses, and what the seller can really prove it lost.
No 3% rule: §1671(b) governs
For an owner-occupied home of one to four units, Civil Code §§1675 and 1676 make a liquidated damages clause presumptively valid at 3% of the price or less, and put the burden on the seller to prove reasonableness above 3%. That 3% figure is a burden shift, not a cap, and it applies only to that residential category.
Commercial deals fall under §1671(b). A liquidated damages clause is valid unless the party challenging it proves it was unreasonable under the circumstances when the contract was made. The C.A.R. Commercial Property Purchase Agreement reflects this: its liquidated damages paragraph lets the seller keep “the deposit actually paid,” with a statement that the amount is reasonable, and it contains no 3% language at all. AIR CRE purchase forms, also common in commercial deals, have their own deposit and liquidated damages terms, so read the form you actually signed.
That doesn’t make every forfeiture enforceable. A charge triggered by a default that bears no relation to the damages the default could cause is an unenforceable penalty (Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970). But the buyer carries the burden, and courts give sophisticated commercial parties room. In one case, a $20,000 payment that investors agreed would be “irrevocably disbursed” to the sellers for an escrow extension was not a penalty (Horowitz v. Noble (1978) 79 Cal.App.3d 120).
The initials still matter
Outside the owner-occupied residential rules, §1676 still requires the clause to meet §1677: it must be separately signed or initialed by each party, and in a printed contract it must be set out in bold type of a minimum size. Pull the signed contract and every counter offer and look.
- A clause that wasn’t separately initialed is not automatically void; courts have treated it as voidable at the buyer’s option (Guthman v. Moss (1984) 150 Cal.App.3d 501).
- The current C.A.R. counter offer forms say a liquidated damages clause not initialed by every party drops out of the contract, unless it was fixed in the offer or a separate addendum.
- Without a valid clause, the seller can keep only what it proves as actual damages, usually the contract price minus the property’s value, plus consequential damages (Civil Code §3307). A buyer whose deposit exceeds the seller’s actual loss may recover the excess (Freedman v. Rector, Wardens & Vestrymen of St. Matthias Parish (1951) 37 Cal.2d 16).
Was the deposit ever at risk?
Liquidated damages apply only if the buyer defaulted. Many commercial deposit disputes turn on whether the buyer cancelled properly. Under the C.A.R. commercial form, contingencies must be removed in writing, and either side generally must send a notice to perform before cancelling for the other side’s failure. A buyer who cancelled within a live contingency, by the contract’s procedure, is usually entitled to the deposit back. A buyer who removed contingencies and then didn’t close is in a harder spot. The AIR forms handle contingencies differently, often treating silence as approval, so the form decides the question. Jimmy’s post on commercial due diligence covers those mechanics.
Be wary of deposits labeled “nonrefundable.” A forfeiture that isn’t a valid liquidated damages clause can sometimes be relieved against (Civil Code §3275; Freedman). But deposits released to the seller as the price of an extension, between experienced parties, are often upheld (Horowitz).
Escrow won’t release the money
An escrow holder is a stakeholder. It follows the escrow instructions, and in a disputed cancellation that usually means it releases the deposit only on matching signed instructions from both sides, a court judgment, or an arbitration award. Escrow will not decide who is right.
- Watch what you sign. C.A.R.’s cancellation form has a full mutual release, which also releases “all other claims,” and a partial release that cancels the deal while reserving rights to the deposit and damages. When the deposit is disputed, the full release is a trap.
- Interpleader. If the dispute drags on, the escrow holder can file an interpleader action: it deposits the money with the court, asks to be let out of the dispute, and leaves buyer and seller to litigate. Escrow instructions commonly let escrow recover its fees from the funds, which shrinks the pot for both sides.
Mediation first, or lose your attorney fees
The C.A.R. commercial form, like the residential one, requires mediation before a lawsuit, and its fee clause says a party who sues without first trying to mediate, or refuses a request to mediate, can’t recover attorney fees. Courts enforce that: a party who skips or refuses mediation can win the case and still lose its fees (Lange v. Schilling (2008) 163 Cal.App.4th 1412; Frei v. Davey (2004) 124 Cal.App.4th 1506). The safest course is to request mediation in writing early and to say yes to any mediation request from the other side. Arbitration generally applies only if both sides initialed the arbitration clause.
First steps for a buyer
- Gather the whole contract: the purchase agreement, every counter offer and addendum, deposit increases, and extensions. Check who initialed the liquidated damages and arbitration clauses.
- Build a timeline of every contingency, removal, notice to perform, demand to close and cancellation, with delivery dates.
- Read the escrow instructions and any supplemental instructions you signed.
- Don’t sign a full mutual release if anything is disputed. A partial release that cancels and reserves rights is the usual tool.
- Make a written demand for release of the deposit, and request mediation in writing.
- Look at what the seller really lost. If the property resold quickly at the same price or higher, the seller’s actual damages may be small, which matters if the clause is invalid.
- Calendar deadlines and talk to counsel before filing anything.
How Jimmy can help
Jimmy Nguyen represents buyers of office, retail and industrial property in California deposit disputes. He reads the purchase agreement, the counter offers and the escrow instructions as both a real estate attorney and a licensed broker, so he can tell you quickly whether the cancellation held up, whether the liquidated damages clause is enforceable, and how to use mediation to move the money. Commercial purchases are part of his commercial real estate practice, and deposit fights are covered on his earnest money disputes page.
Write out the property type, the deposit amount, who is holding it, and what each side has signed — a few sentences is plenty. Email jimmy@lawjn.com or use the form below for a free case evaluation.