In real estate contracts, Liquidated Damages are a specific sum of money agreed upon in advance by the parties as compensation if a contract is breached. This amount represents a reasonable estimate of the damages that would result from the failure to perform.
Liquidated damages are commonly used in purchase agreements, such as allowing a seller to retain a buyer’s earnest money if the buyer defaults. To be enforceable, the amount must be reasonable and not function as a penalty.
