A buyer in San Bernardino enters into a California RPA to purchase an investment property (a 6-unit apartment building) for $1,800,000 with a $90,000 earnest money deposit. The contract includes a liquidated damages clause. The buyer defaults. Under California Civil Code §1675, how does the court analyze the liquidated damages provision?
Correct Answer
B) The 3% cap does not apply because the property has more than 4 units, so the clause is evaluated under the general reasonableness standard
California Civil Code §1675 applies the 3% liquidated damages cap only to residential properties of 1-4 units where the buyer intends to occupy the property. A 6-unit apartment building does not qualify for the 3% cap. Instead, the liquidated damages clause is evaluated under the general reasonableness standard of Civil Code §1671, where the clause is presumed valid unless the party challenging it proves it was unreasonable at the time the contract was made.
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Related Topics & Key Terms
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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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