ContractsIntermediateCalifornia Exam

What is 'liquidated damages' in the context of a California residential purchase agreement?

ADamages that are calculated after trial, per standard contingency and disclosure practice
BA pre-agreed amount (typically the earnest money) that the seller receives if the buyer defaultsCorrect
CThe cost of repairs after inspection, under standard California purchase contract terms
DThe lender's penalty for early payoff, as typically drafted in a residential purchase agreement

Why A pre-agreed amount (typically the earnest money) that the seller receives if the buyer defaults Is Correct

Answer B: A pre-agreed amount (typically the earnest money) that the seller receives if the buyer defaults

Liquidated damages is a clause where both parties agree in advance that if the buyer defaults, the seller's remedy is limited to keeping the deposit (up to 3% of the purchase price in California residential transactions). Both parties must initial this clause for it to be valid.

Exam Tip: Contracts

Contract questions frequently test the essential elements required for a valid contract. Remember: competent parties, mutual consent, lawful object, and sufficient consideration. Watch for void vs. voidable distinctions.

Key Contracts 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.

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