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.