As you can imagine, there are many parts of the Residential Purchase Agreement that cause confusion. Among the issues most commonly giving rise to questions is the liquidated damages clause in paragraph 25. Agents are often unsure what it means, or even if it is part of their contract. With that confusion in mind, here is a little explanation.

1. ? ? First, liquidated damages are only a part of the contract if paragraph 25 is initialed by both the buyer and seller. Even if the buyer’s offer includes that clause, if the seller signs an acceptance but does not initial liquidated damages, it is not part of the contract. In fact, the Counter Offer form makes this point explicitly: “Paragraphs in the Offer that require initials by all parties, but are not initialed by all parties, are excluded from the final agreement unless specifically referenced for inclusion in paragraph 1C of this or another Counter Offer.” (Counter Offer, paragraph 1A.) In other words, to be part of an agreement, both parties must explicitly signify their intent to agree to this clause. Without that, or with only one party’s acceptance, liquidated damages are not part of your contract.

2. ? ? Next, please understand that liquidated damages is intended as a protection for the buyer. As you know, in a normal case, if the buyer breaches its contract, the seller would be entitled to recover all the damages they suffered. The only requirement is that they prove what those damages are. In the case of liquidated damages, on the other hand, the parties agree to an amount up front and, if a breach occurs, the seller gets that amount, no matter what his actual damages are. So, even if buyer’s breach cost the seller $100,000, if the liquidated damages were only $10,000, that is all the seller gets.

3. ? ? Additionally, liquidated damages are limited to “the deposit actually paid.” (RPA, paragraph 25.) As a result, if the contract calls for a deposit of $25,000 and the buyer only actually deposits $10,000, then upon breach, assuming liquidated damages is part of the contract, the seller only gets $10,000.

4. ? ? Liquidated damages can only be 3% of the purchase price, by law. As a result, if the seller wants more than that amount given to him as a “nonrefundable deposit,” there must be an explanation as to what the amount above 3% is. After all, if the seller gets to keep that money on the buyer’s breach, then the court will assume it is damages and is covered by the liquidated damages clause. So we cannot just say something is “nonrefundable.” Unless that extra (above 3%) is reasonable and supported by independent consideration (like an option) the buyer could probably get the overage back if they wanted to go to court and fight.

5. ? ? Finally, if your client asks you whether they should initial this clause, try not to answer directly. After all, this is a strictly legal issue and we don’t give legal advice. However, paragraph 47 of the Statewide Buyer and Seller Advisory (CAR Form SBSA) gives a great explanation of this clause. As a result, refer your client to that document. That referral lets them understand the clause without you being required to give legal advice.

As always, please contact your manager with any questions you may have. They will contact the Legal Department if necessary.