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By Jeffrey L. Marcus*

      A liquidated damage provision contractually sets forth a specific dollar amount to be paid by the breaching party to the non-breaching party.  Today, a vast majority of business and real estate contracts contain a liquidated damage provision because damages for breach of contract can be difficult to determine and the provision allows for the payment of breach of contract damages without the time and expense of court intervention.  In choosing whether to use a liquidated damage provision and in drafting one, care should be taken to maintain its enforceability.

Validity of a Liquidated Damages Provision:
      A liquidated damage provision should be reasonable and should set forth the anticipated loss. 

The following are a few factors in analyzing whether a liquidated damage provision is reasonable:

Ø      the relationship between the liquidated damages and the anticipated harm/damage

Ø      the equality of the parties’ bargaining power

Ø      whether the parties were represented by attorneys

Note, in a real property purchase and sale agreement, a liquidated damage provision must be separately signed/initialed by each party and if included in a pre-printed form it must be in at least 10-point bold type.

Liquidated Damage Provision and Specific Performance:
      In a real estate transaction, specific performance is an important remedy for the parties.  If the parties agree upon a liquidated damage provision, the remedy of specific performance may be waived. In drafting the liquidated damage provision, make sure it reflects the intent of the contracting parties in connection with specific performance.  

Advantages and Disadvantages of a Liquidated Damage:
      You are a seller of real property receiving an offer.  The buyer tenders with his signed purchase offer a $50,000 deposit.  The purchase and sale agreement requires liquidated damages as the sole remedy in the amount of the $50,000 deposit should buyer breach.  As a seller, the liquidated damage provision may require escrow to disburse the deposit to the seller upon buyer’s breach.  The advantage to the seller is a non-judicial means of recovering a specified amount of damages generally in a short period of time.  The disadvantage is that the seller may give up other forms of relief including damages for the lost opportunity of a sale to other buyers at a potentially higher price and the right to seek specific performance of the transaction.  The advantage of liquidated damages to the buyer is the knowledge of a specific payment amount should he/she breach.

      Generally, in most commercial transactions liquidated damage provisions are presumed valid unless determined to be unreasonable.  Reasonability is an imprecise concept where the court considers and weighs several factors.  Care must be taken at the drafting stage to minimize the possibility of a court invalidating the liquidated damage provision.

This article is from a newsletter published for the interest of friends, clients and prospective clients of the Law Offices of Jeffrey L. Marcus and should not be relied upon or considered as legal advice.

*Jeffrey L. Marcus, Esq. provides litigation services and transactional advice to the firm’s clients. He has more than 21 years’ experience in private and corporate practices involving business transactions and real estate. Mr. Marcus can be contacted at jeff@marcuslawgroup.com or at the above address/telephone number.

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