Question

Jeff and Marian sign a real estate purchase agreement by which Jeff agrees to buy Marian's house. The contract states that Jeff will deposit $1,000 into escrow upon execution of the agreement and that if the parties are unable to conclude the sale for any reason, Marian will retain the $1,000 as liquidated damages, less the escrow costs to that point. If the results of the termite inspection show that there is damage to the property and Jeff cancels the sale as a result, how is a court likely to treat the $1,000?

(A) A court would likely find that the $1,000 payment to Marian is a valid liquidated damages provision.
(B) A court would likely find that the $1,000 is invalid as a
penalty or forfeiture.
(C) A court is likely to split the $1,000 between Jeff and Marian regardless of what their contract says.
(D) A court would likely order that the full $1,000 be returned to Jeff because he acted reasonably based on the results of the termite inspection.

Answer 1

A court would likely find that the $1,000 payment to Marian is a valid liquidated damages provision.The correct answer is option A.

Step-by-step explanation:

A court would likely find that the $1,000 payment to Marian is a valid liquidated damages provision (option A).

In this case, the contract between Jeff and Marian specifically states that if the parties are unable to conclude the sale for any reason, Marian will retain the $1,000 as liquidated damages, less the escrow costs.

This means that Jeff agreed to the terms and conditions of the contract, including the provision for liquidated damages.

In the scenario given, if the termite inspection shows damage to the property and Jeff cancels the sale as a result, this would fall under the conditions stated in the contract. Jeff's cancellation is a reason for not being able to conclude the sale, and therefore Marian would likely be entitled to retain the $1,000 as liquidated damages.

It's important to note that liquidated damages provisions are included in contracts to provide certainty and avoid the need for parties to prove the actual amount of damages suffered. As long as the provision is reasonable and not excessive, courts typically uphold them.The correct answer is option A.