What Are Liquidated Damages Provisions in Real Estate Contracts?

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  2. What Are Liquidated Damages Provisions in Real Estate Contracts?
What Are Liquidated Damages Provisions in Real Estate Contracts
Business Law

Liquidated damages provisions are common in many contracts, including real estate contracts. When you need assistance drafting, interpreting, or enforcing a liquidated damages clause in a real estate contract, an Arizona realtor lawyer can help. An Arizona real estate attorney at Provident Law® also can represent your interests in other types of legal matters affecting your Arizona real estate transaction that may arise. Call our office today at (480) 388-3343 to set up a time to talk with a real estate lawyer about your real estate-related legal issue.

Understanding Liquidated Damages Provisions

Liquidated damages provisions allow parties to a contract to agree in advance to a legal remedy if one party defaults. This type of provision creates certainty for all parties involved in knowing what to expect if one party fails to fulfill the terms and conditions of a real estate purchase agreement or similar contract. Liquidated damages provisions also eliminate any problems with proving a breach of contract and calculating damages stemming from a breach by setting the amount of damages in advance.

A common type of liquidated damages clause provides that a party who fails to fulfill the terms of a contract or otherwise breaches its terms must pay the other party a specified sum of money. This sum is meant to substitute for the damages the non-breaching party could win by enforcing the contract in court. These provisions permit the parties to forego the time and expense often involved in litigation while still requiring the breaching party to compensate the non-breaching party for their losses.

Enforceability of Liquidated Damages Provisions

Arizona courts typically will uphold reasonable liquidated damages provisions. Generally, courts will enforce liquidated damages provisions if the amount of liquidated damages is “a reasonable forecast of just compensation for harm caused by the breach.” Additionally, the harm caused by the breach must be “incapable or very difficult of accurate estimation,” Dobson Bay Club II DD, LLC v. La Sonrisa De Siena, LLC, 366 P.3d 1022, 239 Ariz. 132 (Ariz. Ct. App. 2016).

However, the amount of liquidated damages is unreasonably high compared to the actual or reasonably anticipated loss due to a breach of contract. In that case, a court may invalidate the liquidated damages provision. If a court finds that the liquidated damages provision is legally unenforceable, the non-breaching party can still sue and potentially recover damages due to the breach of contract. However, that party will have to prove the breach and the amount of damages it suffered due to the breach.

On the other hand, one must also consider the situation in which the amount of liquidated damages in the contract is unreasonably low compared to the actual damages suffered. For instance, this scenario might occur if the real estate market has dropped precipitously during the failed real estate transaction to the point that the owner can no longer sell the property for the same amount as contemplated in the contract.

In this case, the liquidated damages amount may be insufficient to make the non-breaching party – in this case, the seller – whole. However, a court is unlikely to invalidate a provision because it is unreasonably low. In most cases, the court will hold the parties to their agreement absent some evidence of fraud, duress, or unconscionability in the execution of the contract.

Factors to Consider in Drafting Liquidated Damages Provisions

Parties to real estate contracts should include appropriate amounts of damages in these provisions. As discussed above, inflated liquidated damages can lead to the court invalidating these provisions. Insufficient provisions can lead to losses that a non-breaching party cannot recoup. Factors that parties should consider when drafting liquidated damages provisions in real estate contracts include:

  • The time, expense, and challenges in finding another buyer should the real estate transaction fail;
  • The expenses of continuing to own and maintain the real estate until the owner can find another purchaser and close the transaction;
  • The status of the real estate market and its impact on the sale of the property in the future; and
  • The potential for consequential damages, or those that could arise indirectly from any breach of contract.

We Are Here to Assist You with Your Arizona Real Estate Matter

We aim to help you understand the impact of liquidated damages provisions in your real estate contracts and any other issues that may concern you. We will advocate on your behalf throughout your real estate transaction or in response to legal problems that may arise from that transaction. Contact the offices of Provident Law® today at (480) 388-3343 or online and schedule an appointment to speak with an Arizona real estate attorney about your legal matter.

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