Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing What are Liquidated Damages in Real Estate.
Real estate contracts will always contain clauses that protect both the buyer, and the seller. In this episode, Charles discusses what liquidated damages are, and why they are included in most real estate contracts.
TALKING POINTS
➡ Liquidated damages refer to a predetermined amount that in case of non-performance, of some or all obligations, the party in breach is required to pay the other party compensation.
➡ Liquidated damages are commonly used in construction and real estate agreements.
➡ Sometimes, “liquidated damages” is a general term for clauses that allow the parties to specify a penalty if one party fails to perform any obligation under the contract. In others, it is a term that refers to clauses where both parties agree to a specific amount of money in the event of a breach of contract.
➡ What are the Benefits of a Liquidated Damages Clause?
o It forces a true commitment between parties since there is now a consequence of having to pay liquidated damages to the other party, after a breach.
o It allows all parties to understand their potential risk in the agreement if they were to breach it.
o It helps to avoid a possibly unfavorable judgment from a court on damages following a breach.
o It provides compensation for a party that was harmed because of another party’s actions, or inactions.
o It provides a realistic amount for damages in cases where it might be very difficult to calculate the loss.
o It provides a reasonable estimate of actual damages.
➡ What are Liquidated Damages in Real Estate Contracts?
o Within the realm of real estate contracts, liquidated damages clauses are a predetermined amount that one party must pay to the other party for failing to perform under the terms of the contract.
o Liquidated damages normally occur in a real estate contract because either party is unable or unwilling to complete the sale.
o Typically, when a party is buying or selling a property, once a contract is signed, they enter into other agreements and avoid other agreements because of the real estate contract.
o You are a real estate investor, and you locate a vacant lot that would be perfect for a self-storage complex. You put the property under contract, which includes a liquidated damages clause for $100,000.
§ After the contract is signed, you speak to a self-storage developer who wants to purchase the lot from you, and you agree. You then sign a contract with the developer, with a liquidated damages clause for $50,000 since the developer will be purchasing some of the materials immediately because it takes 3 months to receive them.
§ The property owner then changes his mind, and because he wants to build the self-storage complex himself. The property owner disputes the liquidated damages terms with you the investor, and you seek judgment in court.
§ The judge chooses to only award the developer the $50,000 of liquidated damages because it is a more reasonable measure considering the actual expenses the developer incurred.
➡ What are Liquidated Damages in Construction Contracts?
o Liquidated damages in construction contracts are designed to compensate a party that is adversely harmed by a contractor as a result of a breached contract.
o Liquidated damages are able to protect different potions of the contract; including construction defects, delays, and/or other failure to perform under the contract.
o In reverse, if a property owner was to not pay a contractor for the services they have provided under the terms of the contract, a contractor may place a construction lien on the property.
➡ Many states place limitations on the enforceability of a liquidated damages clause in a contract. In other words, the liquidated damages must be reasonable when accounting for the actual or anticipated harm caused by the breaching party.
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