A buyer and seller execute a California Residential Purchase Agreement for $520,000. The buyer deposits $15,000 as earnest money, and both parties properly initial the liquidated damages clause. The buyer subsequently defaults, and the seller retains the $15,000 deposit. The buyer challenges the liquidated damages amount in court. Under California Civil Code §1675, who bears the burden of proof, and why?
Correct Answer
D) The buyer bears the burden of proving the amount is unreasonable because the clause is presumed valid when it does not exceed 3% of the purchase price
Under California Civil Code §1675(c), in a residential purchase transaction involving one-to-four dwelling units, a liquidated damages clause that has been properly initialed by all parties and does not exceed 3% of the purchase price is presumed valid. Here, $15,000 is approximately 2.88% of $520,000, which falls within the 3% threshold. Because the presumption of validity applies, the burden of proof shifts to the party challenging the clause — the buyer — to demonstrate that the amount is unreasonable under the circumstances at the time the contract was made.
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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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