BROKER RISK MANAGEMENT

 

 BROKER RISK MANAGEMENT

WEEKLY PRACTICE TIP

 

Increase in Deposit – Liquidated Damages

Q: I am representing a seller on a home sale. The buyer put $5,000 into escrow as an initial deposit per the contract. Both parties have initialed Liquidated Damages. The buyer had to increase the deposit by an additional $20,000 upon removal of all inspection contingencies, which occurred this week. I checked that the deposit has been made.

Now, my manager is telling me that I need to get the Receipt for Increased Deposit form signed by both parties in order for that increased deposit to be a part of the Liquidated Damages. Why is that necessary? The parties have already agreed to have Liquidated Damages as a part of the contract.

A: The simple answer is that the law requires that each separate deposit made by a buyer must be the subject of a separately signed or initialed Liquidated Damages clause, in order to become a part of the previously agreed to Liquidated Damages.

Civil Code Section 1677 states:

“A provision in a contract to purchase and sell real property liquidating the damages to the seller if the buyer fails to complete the purchase of the property is invalid unless:

(a) The provision is separately signed or initialed by each party to the contract; and

(b) If the provision is included in a printed contract, it is set out either in at least 10-point bold type or in contrasting red print in at least eight-point bold type.”

Civil Code Section 1678 then goes on to state:

“If more than one payment made by the buyer is to constitute liquidated damages . . the amount of any payment after the first payment is valid as liquidated damages only if

(1) the total of all such payments satisfies the requirements of Section 1675 and

(2) a separate liquidated damages provision satisfying the requirements of Section 1677 is separately signed or initialed by each party to the contract for each such subsequent payment.”

Remember, the Liquidated Damages clause basically provides that, if initialed, the parties agree that, in the case of a breach by the buyer, the damages to the seller will be the amount of the deposit actually paid; but not more than 3% of the sales price if the property is a 1-4 residence one of which buyer intends to occupy.

 

In addition, where Liquidated Damages has been agreed to, the parties must comply with the above Civil Code requirements for any increase in the original deposit.

PRACTICE TIPS

1. Listing agents should always check to confirm that a buyer’s increase in deposit has actually been made as required by the contract.

2. For each increase in deposit, it is important that the parties sign a separate Liquidated Damages clause. This can be accomplished by using the CAR Receipt for Increased Deposit (WinForms form RID).

For More Information See Weekly Practice Tips:

“Liquidated Damages – Six Common Questions” and

“Who Gets the Deposit?”

 

Copyright© Broker Risk Management 2009 08/28/09