Liquidated Damages
Definition and meaning of Liquidated Damages in real estate.
Liquidated damages are a predetermined sum of money specified in a contract that one party agrees to pay to the other if they breach the agreement. In real estate sales contracts, this is typically represented by the buyer's earnest money deposit.
In more detail
This clause provides a clear remedy if either party defaults, avoiding the need for a lengthy and expensive lawsuit to prove actual damages. If a buyer backs out of a home purchase without a valid contingency, the seller is usually entitled to keep the earnest money as liquidated damages.
The amount must be a reasonable estimate of potential losses at the time the contract is signed. Courts may strike down liquidated damages clauses if they are excessively high and act as a penalty rather than a remedy.
Key facts
| Category | Legal, Titles & Closing |
|---|---|
| Common form | Earnest money deposit held in escrow |
| Required condition | Must be a reasonable estimate of actual damages |
| Applies when | A party breaches the purchase contract without a legal excuse |
A buyer backs out of a home sale after all contingencies have passed, allowing the seller to retain an earnest money deposit of five thousand to ten thousand dollars as liquidated damages.
Frequently asked questions
Can a seller sue for more money if they accept liquidated damages?
Generally no, accepting the earnest money as liquidated damages usually waives the seller's right to sue the buyer for additional losses.
What happens if a liquidated damages clause is ruled invalid?
If a court rules the clause invalid, the injured party must prove their actual financial losses in court to recover damages.
Related terms
Sources & references
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