125. WHAT YOU NEED TO KNOW ABOUT Liquidated Damage AGREEMENTS:

When a buyer fails to preform, what can the seller do?

The seller could sue the buyer to perform. The chance of winning is very uncertain. What would be certain is the cost of the lawsuit and the time lost in pursing a suit. The seller would have to prove to the court his actual losses unless a prior agreement had been negotiated between the buyer and seller in the event the buyer did fail to perform – thus the liquidated damage provision in the contracts.

A Liquidated Damage provision can limit the amount of the sellers damages to the amount of the buyers initial deposit or to monies other than the deposit alone. To be valid, however, the amount of damages agreed upon cannot be “excessive”. The amount should be a “reasonable estimate” of the actual loss the seller would suffer if the buyer did fail to perform. An excessive amount would be considered “punishment” against the failed buyer. The courts do not favor a failed buyer to be “punished” in excess of actual and or reasonable damages.

A common advisory of the Liquidated Damage provision in all contracts is the statement: “BUYER AND SELLER SHALL SIGN A SEPARATE LIQUIDATED DAMAGE PROVISION FOR ANY INCREASED DEPOSIT.

Thus, if the initial deposit is not equal to 3% of the purchase price, and it is the intention of the buyer and seller that the buyer is to make an additional deposit later on in escrow and it is their intention for that additional deposit to be subject to claim for damages by the seller, then another, separate, Liquidated Damage provision would have to be drafted and signed specific to that additional deposit.

What if the buyer initials the Liquidated Damage provision but the seller doesnt, but they agree on everything else? Would you still have a valid purchase contract? The answer lies in the contract itself!

The contracts specifically state, under TERMS AND CONDITIONS, …”All paragraphs with spaces for initials by Buyer and Seller are incorporated in this Agreement only if initialed by all parties. If at least one but not all parties initial, a counter offer is required until agreement is reached. Seller has the right to continue to offer the property for sale and to accept any other offer at any time prior to notification of Acceptance.”

The Liquidated Damage provision in the residential contracts are different from Liquidated Damage provision in the commercial contracts. The residential contracts limit the amount of the damages to 3% of the purchase price on sale of one to four units (a house, a duplex, a triplex or a four-plex) provided the buyer intends to occupy the home or occupy one of the units.

This limited amount of damages on residential sales was made a state law many years ago to protect buyers from abuse and to free up the court system from lawsuits stemming from this problem.

Real estate investors are not included in this provision; only buyers who intend to occupy the property are included.

The buyer and seller can agree to include a non-occupying buyer (investor) by crossing out the sentence which refers to that investor.

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