The Significance of the Liquidated Damages Provision in the Residential Purchase Agreement

legal-contract

The vast majority of real estate agents and brokers are familiar with pre-printed purchase contracts for land such as the Residential Purchase Agreement and Deposit Receipt published by the California Association of Realtors Form RPA-CA Rev. 11/14 (C.A.R. ©). However,  you may not be familiar with paragraph 21 B of this document entitled “Liquidated Damages”. This provision states:

“21. REMEDIES FOR BUYER’S BREACH OF CONTRACT:

A. Any clause added by the Parties specifying a remedy (such as release or forfeiture of deposit or making a deposit non-refundable) for failure of Buyer to complete the purchase in violation of this Agreement shall be deemed invalid unless the clause independently satisfied the statutory liquidated damages requirement of the Civil Code.

B. LIQUIDATED DAMAGES: If Buyer fails to complete this purchase because of Buyer’s default, Seller shall retain, as liquidated damages the deposit actually paid. If the property is a dwelling with no more than four units, one of which Buyer intends to occupy, then the amount retained shall be no more than 3% of the purchase price. Any excess shall be returned to Buyer. Release of funds will require mutual, signed release instructions from both Buyer and Seller, judicial decision or arbitration award. AT TIME OF ANY INCREASED DEPOSIT BUYER AND SELLER SHALL SIGN A SEPARATE LIQUIDATED DAMAGES PROVISION INCORPORATING THE INCREASED DEPOSIT AS LIQUIDATED DAMAGES (C.A.R. FORM RID).

                   Buyer’s Initials_________/_________                               Seller’s Initials _________/_________

The liquidated damage provision in the above C.A.R.© form is very important for the buyer of the land designated in the document. In the event the buyer who has agreed to the liquidated damage provision (initialing it along with the seller) waives all contingencies to close escrow, they are solely obligated to pay the amount designated as the liquidated damages (up to 3% of the purchase price) to the seller.

This is in contrast to the seller’s contract damages. The seller is not obligated to pay damages in the event they sell the parcel to a third party below the contract price of the buyer who was in contract and who had waived all contingencies but was unable to close.

Without this liquidated damage provision, the buyer of land in the event of his or her breach could be liable for breach of contract damages. In short, a liquidated damage provision sets a “cap” for damages that a buyer would be obligated to pay the seller, in the event of the buyer’s breach of the contract after waiving all contingencies in writing for the purchase of a given property.

A liquidated damage provision in a document only comes into play where there is a written contract signed and dated by all parties for a given matter having such a provision within it. The amount of liquidated damages to be given the seller of land or any other item is agreed upon ahead of time and is clearly stated in the written contract.

California Civil Code section 1670 states, “Every contract by which the amount of damage to be paid, or other compensation to be made, for a breach of an obligation, is determined in anticipation thereof, is to that extent void, except as expressly provided in the next section.”

California Civil Code section 1671 states, “The parties to a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.”

Under these two Civil Code sections, a plaintiff who seeks the enforcement of a liquidated damage clause has the burden of establishing that at the time the contract was entered into, the nature of the agreement was such that it would be impracticable or extremely difficult for a court to fix the actual damage in the event of a breach. (Robert Marsh & Co., Inc. v. Tremper ( 1930) 210 Cal. 572).

Overview

Assessment is that paragraph 21 of the California Association of Realtors Form RPA-CA Rev. 11/14 is initialed by both the seller and the buyer in a given real estate transaction. It protects the buyer in the event he or she waives all contingencies of a given land purchase but fails to close escrow. This is done by creating an agreed upon “cap” for damages of three percent (3%) of the earnest money deposit of the property’s agreed upon purchase price paid into escrow by the buyer.

One caveat as to the assessment is if the seller decides to seek specific performance against the buyer to purchase the parcel as opposed to being content with receipt of the agreed upon liquidated damages provision.

From a risk management perspective, the selling agent should recommend in writing to his or her buyer client that he or she wait until the last possible moment before close of escrow to waive all contingencies in writing for a given transaction, in order to not place the earnest money deposit at risk for a forfeiture under paragraph 21 of the California Association of Realtors Form RPA-CA Rev. 11/14 if the buyer in the end fails to close escrow on the property under contract.

About the Author
Edward McCutchan
B. Edward McCutchan, Jr.
Sunderland | McCutchan, LLP

Mr. McCutchan’s practice is primarily civil litigation with an emphasis in defending professionals and businesses in real estate, mortgage brokering, construction, banking and agricultural industries and all phases of dispute resolution through trial and appeal. His area of practice is also agricultural law (viticulture and wineries), trusts and estates, probate, real estate transactions, business law and elder abuse. B. Edward McCutchan, Jr. was admitted to the Bar in 1985 and is admitted and qualified to practice in all California courts and the U.S. District Court, Eastern and Northern Districts of California as well as the United States Tax Court.

Category: , ,

Have to purchase your next E&O policy? Why you should consider CRES Real Estate E&O + ClaimPrevent™ insurance polic… https://t.co/Qw6TAYz7eA 4 real estate marketing trends to help realtors crush it in 2017 per@InmanNews https://t.co/ZlBXCu5uvL https://t.co/ZlBXCu5uvL