How Much Money for Liquidated Damages?

September 7th, 2021 at 3:52 pm

Fact Pattern: A buyer writes a $1 million offer for a single-family home using a C.A.R. Residential Purchase Agreement (RPA). The buyer indicates in paragraph 9A of the RPA that he will not be occupying the property as his primary residence. The seller accepts the offer, with both sides initialing the liquidated damages clause. The buyer submits his initial deposit of $50,000 into escrow.

Multiple Choice Question: If the buyer defaults on the contract, how much money can the seller recover as liquidated damages? Pick the best answer:

A. Zero.
B. $30,000.
C. $50,000.
D. Whatever the seller actually suffers as monetary damages. 

Answer: Answer A is wrong. A liquidated damages clause is a contractual provision that sets forth upfront how much money the seller can keep if the buyer fails to perform without any valid justification. Paragraph 21B of the RPA starts off by saying that, “If Buyer fails to complete this purchase because of Buyer’s default, Seller shall retain, as liquidated damages, the deposit actually paid.” The deposit actually paid in this situation is $50,000, not zero.

Answer B is also wrong, because the second sentence of paragraph 21B of the RPA limits the liquidated damages to 3% of the purchase price only if the purchase is for one-to-four residential units with the buyer intending to occupy one of the units. In this situation, the buyer does not intend to occupy the property, so the 3% maximum does not apply.

Answer C is the correct answer. The amount of liquidated damages is not limited to 3% of the purchase price if the buyer does not intend to occupy the property. The language in paragraph 21B of RPA is consistent with the underlying law on liquidated damages (commencing at section 1675 of the California Civil Code).

Answer D is wrong. One big advantage of a liquidated damages clause for sellers is that the amount of a seller’s damages is ascertained upfront at the time of contract, and the seller will not be required to prove his or her actual damages if and when the buyer defaults.

For more information, go to C.A.R.’s legal article on Liquidated Damages and Deposit Disputes (password-protected for C.A.R. members only).

-Thank You to Chris Serrano (Strategic Initiatives – Los Angeles) for suggesting this week’s legal tip!

Copyright© 2021 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 September 7, 2021. 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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