Liquidated damages
National Real Estate Exam glossary · Contracts
Definition
A sum the parties agree in advance will be paid if one of them breaches, sparing the need to prove actual loss. In real estate, the buyer's earnest money commonly serves as liquidated damages to the seller upon the buyer's default. The amount must be a reasonable estimate of harm, not a penalty.
Liquidated damages in plain English
Liquidated damages is a 'we agreed the penalty ahead of time' clause: both sides decide up front how much the breaker pays if they back out, so nobody has to fight in court over the exact dollar loss later. In home sales, the buyer's earnest money — the good-faith deposit they put down, often a few thousand dollars — usually becomes this pre-set payout to the seller if the buyer walks away without a valid reason. The catch is the amount has to be a fair guess of the real harm, not a scary over-the-top fine; courts won't enforce it if it's really just a punishment.
Learn these first
Practice Liquidated damages
Related National Real Estate Exam terms
National Real Estate Exam practice questions · National Real Estate Exam flashcards · National Real Estate Exam study guide