Contracts
When a buyer fails to perform under a purchase agreement without legal excuse, the seller may retain the earnest money as:
ACompensatory damages
BPunitive damages
CLiquidated damages✓ Correct
DConsequential damages
Explanation
Earnest money retained by the seller upon buyer default typically functions as liquidated damages — a predetermined amount agreed upon in advance to compensate the seller for the buyer's breach, avoiding the need to prove actual damages.
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Key Terms to Know
Earnest Money
A deposit made by the buyer when submitting a purchase offer, demonstrating serious intent and serving as consideration for the contract.
Purchase AgreementA legally binding contract between a buyer and seller that outlines the terms and conditions of a real estate sale.
ContingencyA condition in a purchase contract that must be satisfied before the sale can proceed to closing.
Option ContractA contract giving the buyer the right, but not the obligation, to purchase a property at a specified price within a specified time period.
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