New York Real Estate Salesperson ExaminationContractsMedium
A real estate broker is drafting a purchase agreement. The broker includes a clause stating that if the buyer defaults, the seller is entitled to retain the buyer's earnest money deposit as full compensation for damages. What is this clause commonly known as?
- AIndemnification clause
- BAcceleration clause
- CLiquidated damages clause
- DSubordination clause
Show answer & explanationAnswer & explanation
Correct answer: C. Liquidated damages clause
A liquidated damages clause specifies the amount of money that the breaching party must pay to the non-breaching party as compensation for a breach of contract. In real estate, earnest money is often designated as liquidated damages if the buyer defaults.
Why the other options are wrong
- A. An indemnification clause protects one party from liability caused by the other party.
- B. An acceleration clause allows a lender to demand full payment of a loan immediately upon a specific event.
- D. A subordination clause changes the priority of a lien.
Liquidated Damages Clause
A contractual provision that pre-determines a specific amount of money to be paid as damages in the event of a breach.
- Must be a reasonable forecast of actual damages.
- Prevents need to prove actual damages in court.
- Common in earnest money agreements.
Memory trick: Liquidated damages are like a pre-set 'ouch' fund for a broken promise.