Enforcing the Liquidated Damages Clause in the RPA

A common topic that comes up with many sellers is how do I actually enforce my right to liquidated damages. The RPA contains a liquidated damage clause that most parties agree too. But in the event of a buyer breach — how do you actually enforce that remedy. Today we take a look at the enforcement mechanism for liquidated damages.

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Enforcing the Liquidated Damages Clause in the RPA
By: D. Keith B. Dunnagan, Esq.

The RPA is framed in such a fashion that the primary liability for a breaching buyer is the payment of liquidated damages to the seller which we previously discussed last year. In short, liquidated damages are a contractually agreed to sum of money that the parties agree will serve as damages should a party breach. The concept is that the determination of the liquidated damages is an estimation by the parties as to what the actual damages would be suffered should the buyer breach the agreement.

In California, liquidated damages have been set forth by statute. In California Civil Code Section 1671(b) the statute states that generally a liquidated damages clause in a contract is valid. The statutes go on to state that in cases involving a 1-4 unit residential dwelling a liquidated damage provision that does not exceed 3% is valid unless the buyer proves it is unreasonable and a liquidated damage provision in excess of 3% is invalid unless the seller proves that it is reasonable. (See Ca. Civ. Code 1675(1)(c&d). However, the RPA strictly restricts the liquidated damage provision to 3% and states in paragraph 21B of the RPA states that “the amount retained shall be no more than 3% of the purchase price.” The contract goes on to state that any amount in excess of the 3% shall be returned.

While the seller initially/immediately demands the buyer to pay the liquidated damage there is a process the seller must navigate to be able to collect the liquidated damages.

First, Seller must establish that the buyer did in fact breach the RPA that would trigger the liquidated damage clause. Then, the seller must establish that the seller properly delivered either a Notice to Perform or Demand to Close (depending on when the breach occurred), that the buyer subsequently failed to preform or close and the seller properly cancelled the contract. Then and only then, would the seller have a potentially viable claim against the buyer for liquidated damages.

Assuming the buyer does not readily part with the escrow deposit as liquidated damages, then the Seller must bring an action to enforce their contractual rights. If the amount is less than $10,000, the seller can bring an action in small claims to pursue their rights. Small claims, is fast and allows the party to get a remedy within just a few months. However, if one does not want to go small claims court or if the amount exceeds $10,000 then the seller must look at the dispute resolution mechanisms in the contract, which usually requires mediation and arbitration.

If that is the case, then the seller will have to make a demand for mediation and then pursue arbitration. Assuming the seller is successful at arbitration — if the buyer still does not release liquidated damages, the seller will have to go to court to have the arbitration award confirmed. A process that further delays recovery and adds expense.

Once the arbitration award is confirmed then and only then can the seller force escrow to deliver the escrow deposit as liquidated damages to the seller as contemplated in the contract. While this seems straightforward – the limitations must be understood. If the contract contemplates liquidated damages, the seller will be capped at the liquidated damage number and if actual damages exceed that number the seller will likely be prohibited from recovering the higher damages. Further, there is no guarantee that the seller will prevail. While the statutes presume that the liquidated damage clause is valid, the buyer could still prove that the amount is unreasonable and if done that would render the liquidated damage provision invalid. However, the burden is on buyer to prove the unreasonableness of the value of the liquidated provision.

This provision is often a stumbling block for both the buyer and the seller. The seller is not sure if the liquidated damages will cover actual losses, the buyer is afraid of losing their deposit. The key element in liquidated damages clause is that at some level it creates certainty for both parties. That certainty is what should help them see the process through.


The attorneys of BPE Law Group, PC. have been advising our clients on real estate, business and estate planning issues for over 20 years and have assisted numerous clients in business and real estate matters and have represented and advised brokers on their professional obligations as well as consumers on their rights. If you have questions concerning legal matters, give us a call at (916) 966-2260 or e-mail Keith at kbdunnagan@bpelaw.com. 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.