Most real estate contacts, in California at least, include an optional “liquidated damages” clause. If both parties initial the clause, that section becomes part of the contract. Almost everybody does this, but very few people (or agents) understand exactly why.

In the most basic sense, the liquidated damages clause sets a limit on the amount of damages the seller may collect if the buyer defaults on the contract. The limit is the amount of the deposit, up to a maximum of 3% of the purchase price. If the deposit is increased in stages, each addition must be accompanied by a new liquidated damages clause to make sure the entire amount is covered by this clause. That is why, in the San Francisco peninsula area at least, most sellers and their agents want to see an initial deposit of 3% right up front. In a competing offer situation, if there are two equal offers and one has a 3% initial deposit and the other has a lesser amount, to be increased later, almost always the one with the initial 3% deposit will be the winner!

It sounds simple enough, but it is more complicated that it first appears. First of all, there is sometimes a dispute as to what constitutes a default. I always look at it as a failure to act in good faith to try to complete the transaction. If there is a loan contingency (rare in this area, where sellers expect buyers to be preapproved before even submitting their offer) and the buyer simply can’t get a loan, they can withdraw from the contract and get their deposit back. But, if there is a contingency for the buyer to have a roof inspection and the roof inspection turns up just fine, I would be mighty disturbed if the buyer refused to remove that contingency. Sometimes buyers will do that, thinking that as long as they have not removed the contingency they cannot be considered in default, but that might not stand up in court. There must be some good reason for them not to remove the contingency.

Also, even if the buyer does default, the escrow holder cannot automatically release the deposit to the seller. Both parties must agree or the court must order the release before the fund can be released. Sometimes deposit disputes go on for years. Buyers and sellers may release each other from the contract but stipulate that the deposit will remain with the title company until the issue can be resolved. Sometimes a seller will release the deposit if they get another, better offer for their property and that transaction closes. It would be pretty hard to demonstrate damages in that case. But it can happen.

Finally, it may not be in the seller’s best interest to include the liquidated damages clause in the contract. I had a transaction a few years ago where the buyer wanted a 6 month escrow. In this area 60 days is considered to be extraordinarily long. Many transactions close in 2 weeks or less. 30 days is considered at the outside edge of the norm. Many, many things can go wrong during an escrow, so I was uncomfortable with just a 3% deposit. We asked for, and got a 10% deposit and did NOT initial the liquidated damages clause (if we did and the buyer defaulted, the maximum we could keep would have been 3%). Not only that, but the buyer agreed to have the deposit released to the seller immediately after all the contingencies were removed. That put a lot of pressure on the buyer to complete the transaction, because he know that if he did not, he would have great difficulty in getting any of his deposit back.

Sure enough, wouldn’t you know it, that was the year of the 1989 Loma Prieta earthquake? Property values took a dive (although not by 10%.) Without the 10% deposit, the buyer may very well have withdrawn from the contract. But the transaction closed and everybody ended up happy. My seller was very impressed by the way I had protected him by understanding the benefits and the limitations of the liquidated damages clause.

© by Lynne Mercer 2006

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Dupicated or Reprinted Without Permission of Author

One of the areas in a real estate transaction where there are frequent disputes is the section on Fixtures. A fixture, by definition, is anything that is “fixed” (physically attached) to the property. That includes sinks and faucets, built-in appliances, light fixtures, towel bars, in-ground plants, awnings, shutters, etc. The list is long.

At first glance it would seem simple enough, but there are grey areas. For example, in our area window coverings (drapes) are listed in the contract as being fixtures. Also, sometimes appliances that are not “fixed” but are housed in a built-in cabinet that was specially built for that specific appliance will be considered a fixture.

Misunderstandings arise when a seller wants to keep a cherished fixture such as a chandelier or wall sconces that were wedding presents, custom made drapes that match the sofa they are taking with them, or the plasma TV that is hanging on the wall and hard wired to the speakers. When I take a listing, I always advise the seller to remove and replace any fixtures they want to keep before any potential buyers see the property. That prevents any misunderstanding. However, some sellers insist on leaving them because they look good, but specify in the listing contract that they are not included (or put “not included” signs up on them.) The problem is that it really doesn’t matter what the listing contract says or what the posted signs say. In a dispute, the contract rules, and if these exclusions are not listed in the contract, they are not excluded.

I sold a house a couple of years ago where my buyers allowed the sellers to “rent back” for a period after escrow closed. The custom drapes (worth about $3000) were there at close of escrow, but when the buyers arrived to take possession they had been replaced by cheap, flimsy drapes that were not even close to the quality of the originals. Fortunately we had a $5000 security deposit for the rent back (and photos of the original drapes), but the sellers were furious because their agent had never explained to them that the window coverings were included.

On another occasion the seller had removed the lamp shade on the dining room ceiling lamp, the same lamp shade that my buyers had fallen in love with when they decided to buy the house. Their argument was that the shade was removable, but we argued back that it clearly was part of the ceiling fixture. The seller finally agreed to give the buyers a reasonable sum of money so they could buy another lamp shade that was special to them and everybody ended up happy.

The moral of the story is to hire a professional agent who can avoid potential problems and possibly save you money by advising you in advance about details of the transaction that might not be obvious. Moral #2 is to read the fine print. As soon as we get the property prepared and on the market I hand my sellers a purchase contract, ask them to read it carefully, and schedule an appointment with them to review the contract together before we even look at any offers. This way, they will be alert to situations that may arise and could easily be forgotten in the excitement of hearing and responding to the offers.