Although most buyers believe that their monetary exposure in
the event they breach the contract and fail to close on their purchase is
limited to the amount of their earnest money deposit, this is not the
case. The GCAAR Regional Sales Contract
provides that the seller may, at its option, accept the earnest money
deposit as full and “liquidated damages” for the breach. If this election is made, the seller will
accept the deposit as full payment for its damages and the buyer will have no
further liability to the seller. However,
a seller is not required to accept the deposit as liquidated damages and may
pursue the buyer for all its damages, an amount that could substantially exceed
the amount of the deposit. For example,
if an earnest money deposit was $5,000 and the seller incurred $10,000 in
damages as a result of the buyer's breach, the buyer could be liable for the whole
$10,000, plus the seller’s attorneys’ fees (and his or her own attorney’s fees,
as well).
A prudent buyer should consider amending the default provision of the
real estate contract to provide that, in the event of a breach, the seller
shall accept the earnest money deposit as its liquidated damages without
exception. Such an amendment would
establish with certainty the maximum liability the buyer would face if he or
she breached the contract and failed to close.
Otherwise, potential damages are unknown at the time of the contract and a
buyer could face significant liability in the event of a breach.
If you have any questions regarding real estate contract issues,
please feel free to contact me at (301) 444-4664 or via e-mail at
bruce@sternlegal.net.Bruce L. Stern, Esq.
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