Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing What are Liquidated Damages in Real Estate.
Real estate contracts will always contain clauses that protect both the buyer and the seller. In this episode, Charles discusses what liquidated damages are, and why they are included in most real estate contracts.
· Liquidated damages refer to a predetermined amount that in case of non-performance, of some or all obligations, the party in breach is required to pay the other party compensation.
· Liquidated damages are commonly used in construction and real estate agreements.
· Sometimes, “liquidated damages” is a general term for clauses that allow the parties to specify a penalty if one party fails to perform any obligation under the contract. In others, it is a term that refers to clauses where both parties agree to a specific amount of money in the event of a breach of contract.
· What are the Benefits of a Liquidated Damages Clause?
o It forces a true commitment between parties since there is now a consequence of having to pay liquidated damages to the other party, after a breach.
o It allows all parties to understand their potential risk in the agreement if they were to breach it.
o It helps to avoid a possibly unfavorable judgment from a court on damages following a breach.
o It provides compensation for a party that was harmed because of another party’s actions, or inactions.
o It provides a realistic amount for damages in cases where it might be very difficult to calculate the loss.
o It provides a reasonable estimate of actual damages.
· What are Liquidated Damages in Real Estate Contracts?
o Within the realm of real estate contracts, liquidated damages clauses are a predetermined amount that one party must pay to the other party for failing to perform under the terms of the contract. Since it is difficult to place a value on a real estate contract, the liquidated damages clause is an efficient solution.
o Liquidated damages normally occur in a real estate contract because either party is unable or unwilling to complete the sale.
o Typically, when a party is buying or selling a property, once a contract is signed, they enter into other agreements and avoid other agreements because of the real estate contract. These other agreements may have costs involved. For example; a buyer orders a number of inspections and places a deposit with a contractor to make repairs once they close. Canceling these agreements will most likely cost the buyer money.
o You are a real estate investor, and you locate a vacant lot that would be perfect for a self-storage complex. You put the property under contract, which includes a liquidated damages clause for $100,000.
§ After the contract is signed, you speak to a self-storage developer who wants to purchase the lot from you, and you agree. You then sign a contract with the developer, with a liquidated damages clause for $50,000 since the developer will be purchasing some of the materials immediately because it takes 3 months to receive them.
§ The property owner then changes his mind, and because he wants to build the self-storage complex himself. The property owner disputes the liquidated damages terms with you the investor, and you seek judgment in court.
§ The judge chooses to only award the developer the $50,000 of liquidated damages because it is a more reasonable measure considering the actual expenses the developer incurred.
· What are Liquidated Damages in Construction Contracts?
o Liquidated damages in construction contracts are designed to compensate a party that is adversely harmed by a contractor as a result of a breached contract.
o Liquidated damages are able to protect different potions of the contract; including construction defects, delays, and/or other failure to perform under the contract.
o In reverse, if a property owner was to not pay a contractor for the services they have provided under the terms of the contract, a contractor may place a construction lien on the property.
o For example; you are noticing minor leaks in your roof, and you speak to a roofing contractor. They quote the job, and the timeline for completion (which states that the job will be completed before May 1st; which is right before the start of the rainy season). Since going past this date may cause further damage to your property, a $20,000 liquidated damages clause is added. The contractor disappears halfway through the project, and you are unable to find another roofer before a large rainstorm occurs, that causes major damage. You as the property will most likely be able to enforce the $20,000 liquidated damages provision.
· Many states place limitations on the enforceability of a liquidated damages clause in a contract. In other words, the liquidated damages must be reasonable when accounting for the actual or anticipated harm caused by the breaching party. For example; if a party has $10,000 in actual losses under a contract, and the liquidated damages clause states an amount of $100,000, it will be very difficult to enforce the full liquidated damages amount. Most courts will void unreasonable liquidated damages clauses.
Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what are liquidated damages in real estate.
Charles:
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Charles:
Liquidated damages refer to a predetermined amount that in case of non-performance of some or all obligations, the party in breach is required to pay the other party compensation. Liquidated damages are commonly used in construction and real estate agreements. Sometimes liquidated damages is a general term for clauses that allow the parties to specify a penalty if one party fails to perform any obligation under the contract. In others, it is a term that refers to clauses where both parties agree to a specific amount of money in the event of a breach of contract. So what are the benefits of a liquidated damages clause? Well, it forces a true commitment between the parties since there is now a consequence of having to pay liquidated damages to the other party after a breach. It allows all parties to understand their potential risk in the agreement if they were to breach it. It helps to avoid a possibly unfavorable judgment from a court on damages Following a breach, it provides compensation for a party that was harmed because of another party’s actions or inactions.
Charles:
It provides a realistic amount for damages in cases where it might be difficult to calculate the loss and it provides a reasonable estimate of actual damages. What are the liquidated damages in real estate contracts? So within the realm of real estate contracts, liquidated damages clauses are a predetermined amount that one party must pay to the other party for failing to perform under the terms of the contract. Since it’s difficult to place a value on a real estate contract, the liquidated damages clause is an efficient solution. Liquidated damages normally occur in a real estate contract because either party is unable or unwilling to complete the sale. Typically, when a party is buying or selling a property, once a contract is signed, they enter into other agreements and avoid other agreements Because of the real estate contract they just signed. These other agreements may have costs involved with them.
Charles:
For example, a buyer orders a number of the inspections and places a deposit with a contractor to make re repairs. Once they close canceling these agreements will most likely cost the buyer money. Say you’re a real estate investor and you locate vacant lot that would be perfect for a self-storage complex. You put the property under contract, which includes a liquidated damages clause for $100,000. After the contract is signed, you speak to a self-storage developer who wants to purchase the lot from you and and you agree. You then sign a contract with a developer with a liquidated damages clause for $50,000, since the developer will be purchasing some of the materials immediately because it takes three months to receive ’em. Now the property owner then changes his mind, and because he wants to build the self-storage complex himself, and now the property owner disputes the liquidated damages terms with you, the investor, and you seek judgment in court.
Charles:
Now, the judge chooses to only award the developer of the $50,000 of liquidated damages because it is a more reasonable measure considering the actual expenses the developer incurred. U F C investor, they say, didn’t incur any. So a lot of the liquidated damages clauses, if they’re unreasonable, they will not be held up in court. So what are liquidated damages in construction contracts? Liquidated damages in construction contracts are designed to compensate a party that is adversely harmed by a contractor as a result of a breach contract. Liquidated damages are able to protect different portions of the contract, including construction, defects, delays, and other failure to perform under the contract. In reverse, if a property owner was to not pay a contractor for the services they have provided under the terms of the contractor contract, a contractor may place a construction lien on the property. For example, you are noticing minor leaks in your roof and you speak to a roofing contractor.
Charles:
They quote the job and the timeline for completion, which states the job will be completed before May 1st, which is right before the start of the rainy season, since going past this date may cause further damage to your property. A $20,000 liquidated damage in the clause is added by you. The contractor disappears halfway through the project, and you’re unable to find another roofer before a larger rainstorm occurs that causes a major damage to your property. You as a property owner will most likely be able to enforce the 20,000 liquidate damages provision. Uh, many states place limitations on the enforceability of a liquidated damages clause in a contract. In other words, the liquidated damages must be reasonable when accounting for the actual or anticipated harm caused by the breaching party. For example, if a party has $10,000 in actual losses under a contract and the liquidated damages clause states an amount of a hundred thousand, it’ll be very difficult to enforce the full liquidated damages amount. Most courts will avoid unreasonable liquidated damages clauses. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments, and potential show topics@globalinvestorspodcast.com. Look forward to two more episodes next week. See you then.
Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.
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