At first glance, the standard California Association of Realtors (“C.A.R.”) form for the purchase of residential real property seems to limit amount of liquidated damages the seller can recover to 3% of the purchase price. Specifically, the clause governing liquidated damages provides:
LIQUIDATED DAMAGES: If Buyer fails to complete this purchase because of Buyer’s default, Seller shall retain, as liquidated damages the deposit actually paid. If the Property is a dwelling with no more than four units, one of which Buyer intends to occupy, then the amount retained shall be no more than 3% of the purchase price. Any excess shall be returned to Buyer. Release of funds will require mutual, signed release instructions from both Buyer and Seller, judicial decision or arbitration award. AT TIME OF THE INCREASED DEPOSIT BUYER AND SELLER SHALL SIGN A SEPARATE LIQUIDATED DAMAGES PROVISION FOR ANY INCREASED DEPOSIT.
However, a close reading of this provision reveals that the 3% limitation only applies if the property being sold “is a dwelling with no more than four units, one of which the Buyer intends to occupy” – i.e., in essence what the California Civil Code defines as “residential property.” (Civil Code § 1675.) In other words, if the buyer is purchasing a dwelling with no more than four units as an investment property and does not intend to occupy it, the 3% limit liquidated damages does not apply. In such cases the buyer will usually have checked the box in paragraph 5(A) of the C.A.R. form indicating he or she does not intend to occupy the property. If the buyer checks this box, the seller may be able to recover all of the money deposited into escrow, even if it is in excess of 3% of the purchase price, as liquidated damages if the buyer fails to perform. This is because Civil Code § 1676 governs instead of § 1675 in such cases. In such circumstances, the only way for the buyer to avoid forfeiture of the entire deposited amount is demonstrate to a court by the preponderance of the evidence that the amount of liquidated damages was not reasonable as of the time the parties entered into the agreement.
If you are a buyer or seller of real property and you have questions pertaining to liquidated damages, please feel free to contact us for more information. The attorneys at Schorr Law, APC can help you determine whether or not the 3% liquidated damages limitation applies to you. Call us for your free consultation today – 310.954.1877 or visit our other site at www.schorr-law.com.