A buyer in California agrees to purchase a single-family home in Riverside for $680,000. The buyer deposits $25,000 as earnest money. The contract includes a liquidated damages clause per California Civil Code §1675. If the buyer defaults, what is the maximum amount the seller may retain as liquidated damages?
Correct Answer
C) $20,400
Under California Civil Code §1675, liquidated damages in a 1-4 unit residential transaction where the buyer intends to occupy are capped at 3% of the purchase price. Calculation: $680,000 × 0.03 = $20,400. Even though the buyer deposited $25,000, the seller may only retain $20,400 and must return the remaining $4,600.
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Related Topics & Key Terms
Key Terms:
Related Concepts
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.
Novation is the substitution of a new contract for an existing one, or the replacement of one party with a new party, with the consent of all parties involved. The original party is completely released from all obligations.
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