Enforceability Status
California applies heightened scrutiny to liquidated damages provisions in residential real estate contracts under Cal. Civ. Code Section 1671. Daily closing penalty clauses may face challenges if the per-diem amount is deemed unreasonable or if the provision was not separately initialed by the buyer as required for residential transactions.
Legal Analysis
California law subjects liquidated damages in residential real estate contracts to specific statutory requirements. Cal. Civ. Code Section 1671(b) creates a presumption that liquidated damages provisions in residential purchase contracts are invalid unless the buyer separately initials the clause. This initialing requirement applies to per-diem closing penalty provisions and failure to comply may render the clause unenforceable.
Under Cal. Civ. Code Section 1671(d), liquidated damages in residential contracts for the purchase of property intended as the buyer's primary residence are presumed valid only if the amount does not exceed a specified percentage of the purchase price. While this section most directly addresses deposit forfeiture, courts may apply similar reasonableness principles to per-diem closing penalties.
California courts have a strong tradition of protecting residential buyers from oppressive contract terms. Under Cal. Civ. Code Section 1670.5, a court may refuse to enforce an unconscionable contract or clause. A daily closing penalty that is significantly disproportionate to the builder's actual carrying costs, or that is imposed without clear disclosure, may be found unconscionable.
The California Consumer Legal Remedies Act (Cal. Civ. Code Section 1750 et seq.) provides additional protection against unfair contract terms in consumer transactions, including new home purchases. Builders who include excessive per-diem penalties without clear disclosure may face liability under the CLRA.
Relevant California Law
Governs liquidated damages in contracts, with specific protections for residential real estate transactions including a separate initialing requirement and reasonableness standards.
Authorizes courts to refuse enforcement of unconscionable contract terms. Applicable to per-diem closing penalties that are disproportionate to actual builder costs.
Prohibits unfair and deceptive practices in consumer transactions. May provide a cause of action when builders impose excessive or undisclosed daily closing penalties.
Builders in California Using This Clause
What California Buyers Should Know
- Verify that the penalty clause was separately initialed. California law requires that liquidated damages provisions in residential real estate contracts be separately initialed by the buyer. If the per-diem penalty clause was not individually initialed, it may not be enforceable. Review your contract for this specific requirement.
- Assess whether the per-diem rate is proportionate to actual costs. California courts apply a reasonableness standard to liquidated damages. Ask the builder to document the specific costs (insurance, taxes, loan interest, HOA dues) that justify the daily penalty rate. A rate that significantly exceeds these demonstrable costs may be challenged as unconscionable.
- Consider whether the clause is unconscionable under California law. If the per-diem penalty is imposed on a take-it-or-leave-it basis with no opportunity to negotiate, and the amount is disproportionate to the builder's actual costs, the clause may be unconscionable under Cal. Civ. Code Section 1670.5. Consult a California real estate attorney if the daily rate seems excessive.
- Request mutual closing penalty obligations. California buyers should push for reciprocal provisions that penalize the builder equally for construction delays. One-sided penalty clauses that only burden the buyer may face additional scrutiny under California's consumer protection framework.