{"id":900645,"date":"2022-12-01T15:47:05","date_gmt":"2022-12-01T22:47:05","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=900645"},"modified":"2022-12-01T15:47:14","modified_gmt":"2022-12-01T22:47:14","slug":"liquidated-damages-factors-to-consider","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/liquidated-damages-factors-to-consider\/","title":{"rendered":"Liquidated Damages: Too High and It\u2019s a Penalty. Too Low and You\u2019re Out of Luck."},"content":{"rendered":"\n

Christian Fernandez | Real Estate Ligitation Blog<\/a><\/p>\n\n\n\n

Liquidated damages provisions<\/a> in commercial and residential real estate contracts play a vital role when a transaction goes south, and should be given careful consideration when negotiating a real estate contract. Liquidated damages may be referred to in a variety of ways, such as \u201cearnest money,\u201d a \u201cgood-faith deposit,\u201d or a \u201cnon-refundable deposit,\u201d but each typically denote a negotiated amount of money that a seller is entitled to retain should a buyer breach a purchase and sale agreement. The purpose of liquidated damages is to provide the parties with certainty when actual damages arising from a breach of contract may be difficult to calculate. Accordingly, liquidated damages provisions alleviate the need for potentially expensive litigation associated with proving damages.<\/p>\n\n\n\n

While parties are free to negotiate the amount of liquidated damages, the amount must approximate the loss anticipated at the time of contracting, or the loss that actually occurs as a result of a breach. Arizona courts have held that where the amount of liquidated damages is unreasonably large when compared to the anticipated loss or actual loss, the liquidated damages provision is unenforceable as a penalty. A breaching party faced with high liquidated damages will often seek to invalidate the provision as a penalty. If a court agrees, the non-breaching party may still recover damages, but must go through the process of proving such damages. Therefore, when negotiating a real estate contract, consideration should be given as to whether a liquidated damages amount is arbitrarily high when compared to an anticipated loss in the event of a breach.<\/p>\n\n\n\n

In contrast, setting the amount of liquidated damages too low may have the undesirable consequences of preventing a non-breaching party from recovering the actual and full amount of damages that the party suffered. For example, this may occur when the real estate market experiences a rapid downward trend during escrow such that a seller can no longer sell the property for nearly as much after the breach as before going under contract. However, in Roscoe-Gill v. Newman<\/em>, 188 Ariz. 483 (Ct. App. 1996), the court held that the principles that justify invalidating a liquidated damages provision for being an unreasonably large penalty do not support invalidating a liquidated damages provision that is claimed to be insufficient. Rather, unless the non-breaching party can establish fraud, duress, or unconscionability, a liquidated damages provision will be enforced despite the liquidated damages amount being inadequate to compensate the non-breaching party for damages actually incurred. Therefore, care should be taken when determining what anticipated damages may be incurred that are covered by a liquidated damages provision.<\/p>\n\n\n\n

Factors that a party may consider when determining a liquidated damages amount include:<\/p>\n\n\n\n