LD Clause Can Strengthen Contract

When a prospective homebuyer defaults on a purchase contract, there can be substantial financial harm to the seller.

A concept called "liquidated damages" attempts to quantify the amount of damage for lenders or other sellers seeking redress and avoids litigation in the event that a buyer backs out. The legal department of the California Association of Realtors recently released an update on this subject, which contains information particularly relevant to sellers of real estate-owned, according to REO Nationwide.

But because other states sometimes follow the lead of California on contract law, REO Nationwide said in its recent newsletter that the state offers a good bellwether for everyone in the industry.

A "liquidated damages" clause in the contract enables the buyer and seller to agree upfront on the amount of monetary damages a party will be entitled to in the event the other party fails, breaches or defaults on the contract. It becomes part of the contract only if buyer and seller both initial the clause.

The California law prohibits "excessive damages" even if both parties agree to the amount, but it does little to define "excessive."

However, a number of factors may delay a closing, such as an unsatisfied contingency or the seller's ability to provide clear title.

The clause is not the same as a "nonrefundable deposit." Typically, the deposit goes to the seller no matter what caused the failure to close.

If there is a disagreement between the parties as to whether or not a buyer actually did breach a contract, the money will not be released until either both parties agree or until a court states the money must be released.

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