Liquidated Damages
Also known as: Stipulated Damages, Pre-Agreed Damages
A pre-agreed amount of money that one party pays the other as compensation if the contract is breached. In builder contracts, your earnest money deposit is usually designated as liquidated damages if you fail to close.
Detailed Explanation
A liquidated damages clause sets a fixed penalty for breaking the contract. Instead of going to court to figure out the actual harm caused by a breach, both parties agree upfront what the compensation will be.
In new construction, the most common liquidated damages scenario is the buyer forfeiting their earnest money deposit. The contract typically states that if the buyer defaults, the builder may keep the deposit as liquidated damages.
For a liquidated damages clause to be enforceable, the amount should be a reasonable estimate of the builder's anticipated loss at the time the contract was signed. If a court finds the amount is grossly disproportionate to the builder's actual damages, it may strike down the clause as an unenforceable penalty.
In Your Contract
Look for the phrase "liquidated damages" near the deposit or default sections of your contract. It may also appear as "buyer's default" or "forfeiture" provisions.
Key Points
- 1Liquidated damages are a pre-agreed amount — not actual damages.
- 2Your earnest money deposit is the most common form of liquidated damages in builder contracts.
- 3Some contracts allow the builder to pursue additional damages beyond the deposit.
- 4If the amount is disproportionate to actual damages, a court may find it unenforceable.
- 5The standard for enforceability varies by state.
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