In my previous post, I discussed a case where the parties had a “non- refundable” deposit in their real estate purchase contract, but the court refunded it anyway.
Liquidated damages are damages whose amount the parties agree during the formation of a contract for the injured party to collect as compensation upon a breach.
In addition to the forfeiture concern, the court also noted that to find that the seller was entitled to keep the deposit without regard to actual damages would essentially create a “liquidated damages provision. Among other problems with this view, the court noted that California Civil Code section 1677 requires a liquidated damages clause to be”separately signed or initialed by each party to the contract.” That was not the case here. But what does it take to enforce a clause liquidating damages in a real estate purchase contract?
For contracts in general, a liquidated damages clause is presumed valid unless it can be shown to be unreasonable under the circumstances at the time the contract was entered. There are more specific requirements for residential real estate contracts.
As mentioned, the provision must be separately signed or initialed by the parties; if a printed form, it must be in specified type.
When the contract involves four or fewer residential units, it is also required that the amount to be forfeited does not exceed 3% of the purchase price. To avoid the clause in this instance, the buyer has the burden of proving that this amount is not reasonable.
If, on the other hand, the amount paid by the buyer to be held as liquidated damages exceeds 3% of the purchase price, it is presumed to be invalid. To enforce the clause in this instance, the seller has the burden of proving that the amount specified is reasonable
Different rules may apply to condominium units.