November 17th, 2018 at 8:50 am

Fact Pattern: You are a buyer’s agent. In discussing the liquidated damages clause with your buyer, he asks you whether there could be a liquidated damages clause protecting the buyer in the event that the seller defaults.

Multiple Choice Question: How should you respond to the buyer? Pick the best answer:

A. No, it’s illegal.
B. Yes, as the agent, you can draft one to include in the buyer’s offer.
C. Yes, but the buyer should hire his own attorney to draft it.
D. None of the above.

Answer: Answer A is wrong. A liquidated damages clause is an agreement made when parties enter into a contract for the amount of monetary damages that a contractual party will owe if he or she eventually defaults on that contract. Although C.A.R.’s Residential Purchase Agreement (RPA) has a liquidated damages clause that addresses a buyer’s default, the law does not prohibit a liquidated damages clause addressing a seller’s default. Answer B is also wrong. Creating a liquidated damages clause involves a complicated legal analysis, and an agent should not be drafting such a provision. Answer C is a correct statement, but Answer D is the best answer. Although the buyer could hire an attorney to draft a liquidated damages clause addressing a seller’s default, the buyer may be wasting his time and money. Homes for sale in Southern California are hot commodities. Sellers are highly unlikely to agree to a liquidated damages clause addressing the seller’s default, and more importantly, they are unlikely to place a deposit into escrow to make that clause meaningful for the buyer.

-Happy Thanksgiving to you and your loved ones!

Copyright© 2018 Berkshire Hathaway HomeServices California Properties (BHHSCP). All rights reserved. Any unauthorized reproduction or use of this material is strictly prohibited. This information is believed to be accurate as of November 19, 2018. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals.

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