Escrow & TitleIntermediateCalifornia Exam

In California escrow, when a buyer cancels the transaction after all contingencies have been removed, the seller may be entitled to retain:

ANothing — all deposits must be returned to the buyer by law, as typically handled by an escrow officer, under standard California escrow and title practice, consistent with customary closing procedure
BThe buyer's earnest money deposit as liquidated damages, if the contract includes a liquidated damages clause initialed by both partiesCorrect
CThe full purchase price as a penalty, consistent with standard title insurance practice, under standard California escrow and title practice, consistent with customary closing procedure
DOnly the escrow fees already paid, per customary closing procedure in California, under standard California escrow and title practice, consistent with customary closing procedure

Why The buyer's earnest money deposit as liquidated damages, if the contract includes a liquidated damages clause initialed by both parties Is Correct

Answer B: The buyer's earnest money deposit as liquidated damages, if the contract includes a liquidated damages clause initialed by both parties

California Civil Code Section 1675 allows liquidated damages clauses in residential purchase agreements. If such a clause is included and initialed by both parties, and the buyer defaults after contingency removal, the seller may retain the earnest money deposit (up to 3% of the purchase price for residential property) as liquidated damages.

Exam Tip: Escrow & Title

Escrow questions test the neutral third-party role and the sequence of closing events. Remember that the escrow agent acts as a dual agent for both buyer and seller and cannot advocate for either side.

Key Escrow & Title Terms in This Question

Earnest Money

A deposit made by the buyer when submitting a purchase offer, demonstrating serious intent and serving as consideration for the contract.

Contingency

A condition in a purchase contract that must be satisfied before the sale can proceed to closing.

Purchase Agreement

A legally binding contract between a buyer and seller that outlines the terms and conditions of a real estate sale.

Title Insurance

Insurance protecting against financial loss from defects in a property's title that existed before closing but were unknown at the time of purchase.

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