Updated on September 14, 2018
Many purchase and sale agreements in California contain liquidated damages provisions. To avoid uncertainty and litigation if a default occurs in a contract for the sale of real property, the parties to a contract may use a liquidated damages clause to determine the measure of damages in advance. (Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 977.) In a contract to purchase and sell residential property, a provision that all or any part of a payment made by the buyer will constitute liquidated damages to the seller on the buyer’s failure to complete the purchase of the property is valid to the extent that payment in the form of cash or check, including a postdated check, is actually made, if the provision satisfies statutory requirements and if the amount actually paid pursuant to the provision does not exceed 3% of the purchase price, unless the buyer establishes that the amount is unreasonable as liquidated damages. (Civ. Code § 1675(b), (c), referring to Civ. Code §§ 1677, 1678.)
Typically, a liquidated damages provision only comes into play where the buyer refuses to close escrow to complete the purchase of property after the buyer has removed all of the buyer contingencies. In these scenarios, the seller will try to retain the amount deposited into escrow as the initial purchase deposit as liquidated damages per the terms of the liquidated damages provision provided in the written purchase and sale agreement.
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