New York Real Estate Salesperson ExaminationContractsHard
A real estate agent represents a seller who is under contract to sell their property. Just before closing, the buyer informs the agent that they have decided not to proceed with the purchase because they found a more desirable property. The purchase agreement included a liquidated damages clause stating that if the buyer defaults, the seller may retain the earnest money deposit of $15,000 as full compensation. What is the most appropriate action for the seller to take?
- ADemand that the buyer complete the purchase or face a lawsuit for the full contract price.
- BSue the buyer for specific performance to force the sale.
- CSue the buyer for actual damages, regardless of the liquidated damages clause.
- DRetain the $15,000 earnest money deposit as stipulated in the contract.
Show answer & explanationAnswer & explanation
Correct answer: D. Retain the $15,000 earnest money deposit as stipulated in the contract.
A liquidated damages clause specifies a predetermined amount of money that must be paid as damages for a breach of contract. If it's a valid and reasonable estimate of potential damages at the time the contract was made, it will typically be enforced, and the non-breaching party's remedy is limited to that amount.
Why the other options are wrong
- A. The liquidated damages clause already defines the remedy for buyer default, limiting the seller's ability to demand full performance or the entire contract price.
- B. Specific performance is typically sought when monetary damages are inadequate, and a valid liquidated damages clause usually precludes this option for the seller.
- C. A valid liquidated damages clause generally prevents the non-breaching party from suing for actual damages if the actual damages exceed the liquidated amount, as the clause sets the agreed-upon remedy.
Liquidated Damages
A provision in a contract that specifies a predetermined amount of money to be paid as compensation for a breach of contract.
- Must be a reasonable estimate of actual damages.
- Cannot be a penalty.
- Often used with earnest money deposits in real estate.
- Limits recovery to the specified amount.
Memory trick: Damage, Perform, or Keep the Cash: Seller's choices.