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6. The most probable result will be that the owner
Three months ago, a buyer agreed in writing to buy a property owner's single-family residence, Liveacre, for $110,000. The buyer paid the owner a $5,000 deposit to be applied to the purchase price. The contract stated that the owner had the right at his option to retain the deposit as liquidated damages in the event of the buyer's default. The closing was to have taken place last week. Six weeks ago, the buyer was notified by his employer that he was to be transferred to another job 1,000 miles away. The buyer immediately notified the owner that he could not close, and therefore he demanded the return of his $5,000. The owner refused, waited until after the contract closing date, listed with a broker, and then conveyed Liveacre for $108,000 to a subsequent purchaser found by the real estate broker. The subsequent purchaser paid the full purchase price and immediately recorded his deed. The subsequent purchaser knew of the prior contract with the original buyer. In an appropriate action, the original buyer seeks to recover the $5,000 deposit from the owner.
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A liquidated damages clause in a real estate contract is a reasonable and agreed upon amount that would be awarded to the seller, should the buyer breach the contract. Liquidated damages typically do not exceed 3% of the purchase price, although most courts uphold the retention of a deposit of up to 10% of the sale price without inquiring into its reasonableness.
Liquidated damages clauses are common in real estate contracts. For buyers, liquidated damage clauses limit their loss if they default. For sellers, they provide a pre-set amount, usually the buyer's deposit money, in a timely manner if the buyer defaults. To be enforceable in a real estate sales contract, the liquidated damages clause must be a good-faith attempt by both parties to reasonably approximate a fair amount for compensation to the non-breaching party. If there is a valid and enforceable liquidated damages clause contained within a real estate sales contract, it is controlling in the litigation.
Conversely, a liquidated damages clause will not be enforced if it is deemed to be a penalty or unconscionable. A liquidated damages clause is also invalid if it gives one party a choice of possible remedies while not providing any pre-determined remedy for the other party.
D is correct. When the original buyer entered into the real estate contract with the owner and paid $5,000 as a deposit towards the purchase price, they explicitly agreed that the owner had the right to retain the deposit if the buyer breached. By backing out of the deal, the original buyer was in breach of the real estate contract, with no applicable defense. The parties' liquidated damages clause will be enforced by the court and the owner will be able to keep the deposit as damages because it is less than 10% of the purchase price.
A is incorrect. This choice implicates that the buyer's performance is impossible now that his job is being transferred. Impossibility as a defense is typically invoked when unforeseen circumstances render performance impossible or impracticable, in a way the parties could not anticipate. Here, the fact that the buyer's employer transferred him 1,000 miles away does not qualify as a defense given that the buyer could have foreseen the possibility of being transferred and he could have also chosen to remain, execute the contract. This was a risk he took on when he entered into the contract.
B is incorrect. This answer choice is incorrect because it uses the word «must.» Per the parties' agreement, the owner may choose to retain the security deposit, which is a reasonable amount under the liquidated damages clause. Whether the buyer was justified in backing out of the contract is irrelevant to whether the court will enforce the liquidated damages clause.
C is incorrect. Even though the owner lost $2,000 in the actual sale to the other buyer, this is not dispositive in the action between the buyer and the owner. Their liquidated damages clause, which a court would find reasonable, will govern the outcome here, as stated above.