David enters into a C.A.R. RPA to purchase a $1,200,000 home in Beverly Hills. He deposits $50,000 as earnest money, and both parties initial the liquidated damages clause. David later breaches the contract after all contingencies have been removed. Under California Civil Code §1675, how should the deposit be handled?
Correct Answer
A) The seller retains $36,000, and $14,000 is returned to David
Under California Civil Code §1675, for residential property (1-4 units) intended for buyer occupancy, liquidated damages are presumed valid up to 3% of the purchase price. 3% of $1,200,000 = $36,000. Even though David deposited $50,000, the seller can only retain $36,000 as liquidated damages. The remaining $14,000 must be returned to David.
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Related Topics & Key Terms
Key Terms:
Related Concepts
A financing contingency makes the purchase contract conditional upon the buyer obtaining mortgage approval within a specified time period. If the buyer cannot secure financing, they can cancel the contract and receive their earnest money back.
An inspection contingency gives the buyer the right to have the property professionally inspected within a specified time frame and to negotiate repairs or cancel the contract based on the findings.
Liquidated damages are a predetermined amount of money specified in the contract that the non-breaching party is entitled to receive if the other party breaches. In real estate, the earnest money deposit typically serves as liquidated damages.
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