A Tennessee purchase agreement contains a clause stating that if the buyer defaults, the seller shall retain the earnest money as liquidated damages and that this shall be the seller's sole remedy. The buyer defaults. The seller believes the actual damages from the breach are much greater than the earnest money amount. Under Tennessee law, what is the effect of the liquidated damages clause?
Correct Answer
A) The seller is bound by the liquidated damages clause and may only retain the earnest money, provided the clause was a reasonable pre-estimate of damages
Tennessee courts enforce liquidated damages clauses in real estate contracts when two conditions are met: (1) actual damages were difficult to estimate at the time of contracting, and (2) the liquidated amount was a reasonable pre-estimate of those damages — not a penalty. When these conditions are satisfied, the clause is enforceable and limits the non-breaching party to the agreed remedy. If the clause specifies that retained earnest money is the seller's 'sole remedy,' the seller cannot also pursue additional damages.
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Related Topics & Key Terms
Key Terms:
Related Concepts
A counteroffer is a response to an original offer that changes one or more terms of the offer, effectively rejecting the original offer and creating a new offer. The party who makes the counteroffer becomes the new offeror.
Earnest money is a deposit made by the buyer at the time of the offer or shortly after to demonstrate good faith and serious intent to purchase the property. It is also called a good faith deposit.
Equitable title is the buyer's interest in a property after a purchase contract is signed but before closing, giving the buyer the right to acquire legal title in the future. The seller retains legal title until the deed is delivered at closing.
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