National Real Estate Exam (PSI)ContractsMedium
A purchase agreement includes a liquidated damages clause stating that if the buyer defaults, the seller's sole remedy is to retain the buyer's $10,000 earnest money deposit. The buyer later defaults on a $300,000 purchase. What can the seller legally do?
- AReturn the deposit and sue the buyer for the full $300,000
- BRetain the $10,000 deposit and also sue the buyer for additional damages
- CForce the buyer to complete the purchase through specific performance
- DRetain the $10,000 deposit as full compensation and cannot sue for more
Show answer & explanationAnswer & explanation
Correct answer: D. Retain the $10,000 deposit as full compensation and cannot sue for more
A liquidated damages clause pre-determines the seller's remedy in the event of buyer default, typically limiting the seller to retaining the earnest money and precluding further legal action for additional damages.
Why the other options are wrong
- A. This contradicts the purpose of the clause, which sets the deposit as the remedy.
- B. A valid liquidated damages clause bars additional claims beyond the specified amount.
- C. Specific performance is an alternative remedy, but it's excluded if liquidated damages apply.
Liquidated Damages Clause
A contract provision specifying a predetermined amount (often the earnest money) as the sole remedy for breach, replacing the need to prove actual damages.
- Common in real estate purchase contracts
- Limits seller's remedy to a set amount
- Must be reasonable, not a penalty, to be enforceable
- Alternative remedies include specific performance or compensatory damages
Memory trick: Liquidated = 'Locked-in' amount, no extra lawsuits allowed