Purchase contracts: contingencies, deposits, and liquidated damages

Contingencies and performance

A purchase contract sets the parties' obligations and conditions for completing the sale. Financing, appraisal, and inspection contingencies address different risks. Loan approval does not itself resolve value or condition concerns. Read each condition's standard, deadline, notice requirements, and removal or cancellation procedure. Do not assume a deadline alone removes a contingency. A repair request proposes a change; it does not itself obligate the seller to make repairs.

A buyer who properly cancels under a contractual right is differently situated from a buyer who breaches an obligation to close. Determine which occurred before analyzing damages.

Deposits and custody

Earnest money is delivered toward the transaction and is ordinarily credited toward the buyer's payment at closing. A failed purchase does not automatically transfer the deposit to the seller. Entitlement depends on the agreement and the reason for termination. In California, a salesperson receiving trust funds for the responsible broker must immediately deliver them to the broker or, as directed by the broker, to the principal, a neutral escrow depository, or the broker's trust account (Bus. & Prof. Code § 10145(c)).

California liquidated damages

Liquidated damages establish an agreed measure of damages for a specified breach. Civil Code section 1675's residential rule covers property primarily consisting of a dwelling of no more than four units when, at contract formation, the buyer intends to occupy the dwelling or one unit as a residence. The payment must actually be made in cash or by check, including a postdated check.

• Each party must separately sign or initial the provision. In a printed contract, it must use at least 10-point bold type or contrasting red print in at least eight-point bold type (Civ. Code § 1677).
• For later payments to count as liquidated damages, each needs a separate qualifying provision separately signed or initialed by each party. The total must satisfy section 1675 (Civ. Code § 1678).
• Under the ordinary residential rule, an amount actually paid of no more than 3% of the price is valid unless the buyer establishes unreasonableness. Above 3%, it is invalid unless the party seeking to uphold it establishes reasonableness (Civ. Code § 1675(c)-(d)).

Three percent is not a mandatory deposit or an absolute ceiling. For a $600,000 price, $600,000 × 0.03 = $18,000. Reasonableness considers circumstances at contract formation and a resale or resale contract within six months of default. Initial sales of certain newly constructed attached condominiums have a special accounting and refund rule rather than the ordinary above-three-percent test (Civ. Code § 1675(e)-(f)).

First decide whether cancellation was authorized; then identify any breach; then evaluate the damages clause and actual payments.