James and Patricia are buying a home in Howard County, Maryland. Their purchase agreement includes a clause stating that if the buyer defaults, the seller shall retain the earnest money deposit as liquidated damages, and neither party shall have any further obligation to the other. James loses his job and cannot proceed with the purchase. Patricia, the seller, is furious and wants to sue James for the full purchase price rather than accepting the $10,000 earnest money deposit. Under Maryland law, what is the most accurate statement?
Correct Answer
D) Patricia is limited to retaining the $10,000 earnest money as liquidated damages because both parties agreed to this remedy in the contract
Under Maryland contract law, a valid liquidated damages clause that specifies the earnest money as the seller's sole remedy upon buyer default is enforceable, provided the amount is a reasonable pre-estimate of damages and not a penalty. When both parties agree in writing that the seller's remedy is limited to retaining the earnest money, that clause governs and the seller cannot pursue additional damages. Patricia is bound by the agreed liquidated damages provision.
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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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