David signs a purchase agreement for a commercial property in Los Angeles for $2,500,000 with a $75,000 earnest money deposit. The contract includes a liquidated damages clause. David defaults on the purchase. The seller wants to retain the entire $75,000 deposit. Under California Civil Code §1675, which statement is correct?
Correct Answer
B) The seller can retain the full $75,000 because the 3% liquidated damages cap does not apply to commercial properties
California Civil Code §1675 limits liquidated damages to 3% of the purchase price only for residential properties of 1-4 units intended for buyer occupancy. For commercial properties, the 3% cap does not apply, and the liquidated damages clause is governed by the general reasonableness standard under Civil Code §1671. A $75,000 deposit (3% of $2,500,000) on a commercial property is generally considered reasonable.
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Related Topics & Key Terms
Key Terms:
Related Concepts
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.
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.
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