Liquidated Damages and the RPA
Today we continue our series on the CAR contracts and look at how to effectively cancel a contract and liquidated damages when the buyer breaches the agreement. The RPA has a very defined process that a seller must utilize before canceling a contract. Failure to properly use the contractual procedure can be troublesome for a seller.
As always, if you have any questions about your real estate, business, estate planning, or any other legal issue, please let us know by e-mailing me at email@example.com.
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The Residential Purchase Agreement Part 2- Liquidated Damages
By: D. Keith B. Dunnagan, Esq.
In part 2 of this series on February 20, 2018, we examined the impacts of the contingencies and the contractual importance. We examined the writing requirements and survival of contingencies even when time lapses. Today, we look at how to effectively cancel a contract and what happens when the buyer the breaches the agreement and remedy of liquidated damages.
Your client is in contract, but the buyer’s 17 day inspection period ran out yesterday. Your seller, recognizes that the market is trending upwards and wants to cancel. Hold on, as you recall from the previous installment, the contingency remains in effect until removed in writing. While the buyer is technically in default of the contract by not removing the contingency timely, it is a minor default and does not allow the cancellation. Therefore, pursuant to Section 14(D)(1) and 14(E) before a seller can cancel a contract they must first provide a Notice to Buyer to Perform and the notice should specify what action to perform.
If contingency removal is the required action, then the notice should so state what contingencies to be removed. Further, under Section 14(E) the minimum time the seller is required to provide to comply with the notice is 2 days. Remember, if the last day falls on a holiday or weekend it shifts over to the next business day. In giving the notice, remember, pursuant to the contact that during the notice period, the Buyer can cancel and retain their escrow deposit. (See Section 14(D)(1)). Failure to utilize the proper cancellation method could expose the seller to a legal challenge from the buyer if the cancellation is ineffective.
However, if the buyer removes contingencies and then subsequently cancels the contract, they then and only then may become liable to the seller. However, the question is what are they liable for. Many seller’s are put out when the buyer waits to the last minute to cancel a contract. The seller may have moved, they may have spent money to repair portions of the property, they may have rented or purchased a new home. All of which increased or may have been unanticipated costs. However, such actual damages are generally not recoverable.
Unlike a seller who breaches the RPA, the buyer cannot be made to perform on the contract. If the buyer can’t be required to perform then what is the remedy that a seller has in the event of a buyer’s breach. The contract generally limits the seller’s remedy to liquidated damages. The idea behind liquidated damages is that the potential damage is so uncertain that parties agree to a fix sum of damages that one party will receive should the other breach the contract.
In the RPA almost every buyer initials and obligates themselves to the liquidated damage clause contained at paragraph 21 of the RPA. This paragraph provides that if the buyer breaches the RPA and fails to close the transaction that buyer will forfeit their earnest money deposit not to exceed 3% of the purchase price. Why cap at 3% of the purchase price. Well because in California, for a liquidated damage clause to be enforceable it must be reasonable. Additionally, in broad sweeping terms the law at Civil Code Section 1675 has created a rebuttable presumption that a liquidated damage clause capped at 3% is reasonable.
If the parties initial the liquidated damages clause, the seller is capped at what can be recovered at the amount of the deposit or 3% in some situations. The contract and the law state that when the RPA is for a residential dwelling of less than 4 units which is to be a primary residence of the buyer, then the liquidated damages is capped at 3%. What that means, is if a Seller incurs repair costs, moving/relocation costs, new rents, etc., and then the buyer breaches the contract none of the actual damages suffered by the seller would be compensable. In some situations, this cap on damages can leave the seller in a worse position because of the limited amount available through liquidated damages, therefore, the seller should be mindful of the amount of the escrow deposit.
In the next article we will look at the remedy for a seller’s breach and closing escrow.
The attorneys of BPE Law Group, PC. have been advising our clients on real estate and business issues for over 20 years and have significant experience navigating all aspects of the residential real estate transaction. If you have questions concerning any legal matter, give us a call at (916) 966-2260 or e-mail Keith at firstname.lastname@example.org. Our flat fee consult for new clients may get you the answers you need for the questions you have.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.