08 November, 2012

Liquidated Damages and Deposit Forfeitures

Real estate transactions sometimes fail - it’s a fact of life. When they do, the parties face the potentially daunting task of figuring out who might be at fault and whether either has recourse against the other. The resolution of contract disputes can be quite complex.

The PRDS Real Estate Purchase Contract form that is most often used by our local agents has a liquidated damage clause that, if initialed by both buyer and seller, enables both parties to agree up front on the amount of monetary damages a party will be entitled to receive in the event the other party fails to perform. It states in part:

In the event of failure to complete this purchase due to buyer’s breach of the contract and not for reason of default by the seller, a) seller is released from the obligation to sell to buyer, b) seller shall retain buyer’s deposit paid as seller’s only recourse, and c) if the property contains one to four units, one which buyer intends to occupy, then any deposit retained by the seller shall not exceed 3% of the purchase price, with any excess promptly returned to buyer.
The liquidated damages clause does not automatically entitle the seller to the buyer's deposit if a transaction does not close - it does only determines the amount of money the seller can recover if the buyer in fact breached the contract. If the buyer and seller disagree as to whether the buyer breached the contract, the seller generally must prove in court or in arbitration that the buyer's failure to close the transaction was wrongful.

The PRDS Real Estate Purchase Contract instructs the escrow holder to not release any deposited funds unless agreed to in writing by both buyer and seller or pursuant to court or arbitration order.
In our area most buyers and sellers include the liquidated damages clause in their purchase contracts.

NB. The information contained in this article is not, nor is it intended to be, legal advice. You
should consult an attorney for advice regarding your individual situation.

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