A liquidated damages clause is included in a contract when actual damages from a breach would be difficult to calculate at the time of contracting. The amount must be a reasonable estimate of potential damages — if the amount is excessive, a court may strike it down as a penalty, which is unenforceable. When a buyer defaults and the contract includes a liquidated damages clause, the seller retains the earnest money as the agreed-upon compensation.
A purchase contract includes a clause stating that if the buyer defaults, the seller may retain the $15,000 earnest money deposit as liquidated damages. The buyer fails to close, and the seller keeps the $15,000. The seller cannot sue for additional damages because the liquidated damages clause limits the remedy.
Know the difference between liquidated damages and actual damages. Liquidated damages are agreed upon in advance; actual damages are proven after the breach. The exam may test whether a liquidated damages amount can be challenged — yes, if it is unreasonably large, it may be considered a penalty and deemed unenforceable.
Related Terms
Related Concepts
A purchase agreement is a legally binding contract between a buyer and seller that outlines the terms and conditions for the sale of real property. It is also commonly called a sales contract, purchase and sale agreement, or earnest money agreement.
Offer and acceptance is the process by which one party proposes specific terms for a contract and the other party agrees to those exact terms, creating mutual assent. This mutual agreement, also called a meeting of the minds, is an essential element of every valid contract.
A counteroffer is a response to an original offer that changes one or more terms of the offer, effectively rejecting the original offer and creating a new offer. The party who makes the counteroffer becomes the new offeror.
Consideration is something of value exchanged between parties to a contract, making the agreement legally binding. It can be money, a promise to act, a promise to refrain from acting, or anything else of value.
Earnest money is a deposit made by the buyer at the time of the offer or shortly after to demonstrate good faith and serious intent to purchase the property. It is also called a good faith deposit.
Frequently Asked Questions
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