Generally, a typical real estate contract will include terms that specify reimbursement to the buyer or seller, should one default from the business agreement. Without this provision, should the buyer of said real estate fall through on closing the title, the seller could potentially take the buyer to court and try to have the buyer legally required to purchase the property – which is known as ‘specific performance’. The liquidated damages provision is basically a way to protect the interests of both the seller/buyer, and at times, more one than the other.
Here is an example of a liquidated damages provision within a contract:
“Earnest Money
Buyer and Seller agree that the earnest money received by the escrow agent in connection with this contract shall be deposited within ten (10) banking days after the ‘acceptance deadline’ date. Additional earnest money, if applicable, is to be deposited by escrow agent within ten (10) banking days after receipt. Any earnest money received within ten (10) banking days prior to the scheduled closing date, shall be in the form of a cashier’s check or any other form acceptable to the escrow agent. If sale is closed, earnest money to apply to the purchase.
In the event of a dispute over any earnest money held by the escrow agent, the escrow agent shall continue to hold said deposit in its escrow account until escrow agent has a written release from all parties consenting to its disposition, or until a civil action is filed to determine its disposition (at which time payment may be made into court, and in such event, court costs and escrow agents attorney fees will be paid from earnest money) or until a final court judgement mandates its disposition.
(Note: An escrow agent who is not a licensed real estate broker is not necessarily bound by the states statutes and regulations which apply to earnest money deposits. If the escrow agent is not a licensed broker, the parties are urged to have the escrow agent agree in writing to be bound by the provisions of the contract before being named as the escrow agent.)
Remedies Upon Default
If either party defaults in the performance of any obligation of this contract, the party claiming a default shall notify the other party in writing of the nature of the default and his/her election of remedy. The notifying party may, but is not required to, provide the defaulting party with a deadline for curing the default.
If the default is by buyer, seller may either accept the earnest money as liquidated damages and release buyer from the contract in lieu of making any claim in court, or may pursue any remedy at law or in equity. If seller accepts the earnest money, it shall be divided as follows: expenses of broker and seller in this transaction will be reimbursed, and balance to go equally between listing broker and selling broker in lieu of commission on this contract.
If the default is by seller, buyer may either release seller from liability upon seller’s release of the earnest money and reimbursement to buyer for all direct costs and expenses, as specified in buyer’s notice of default (in lieu of making any claim in court), or may pursue any remedy at law and in equity, including enforcement of sale. Buyer’s release of seller does not relieve seller of his liability to brokers under the listing contract.
In the event of litigation between the parties, the prevailing party shall recover, in addition to damages or equitable relief, the cost of litigation including reasonable attorney’s fees. This provision shall survive closing and delivery of seller’s deed to buyer.”
The liquidated damage provision is not meant as a penalty, but if the buyer has reneged on a real estate contract by deciding not to close, and has refused to surrender the escrow money, the seller is not bound by the liquidated damages clause.