In a previous post, we discussed how real estate agents show they were the “procuring cause” of a transaction – and thus entitled to their commission. Today, we cover one of the ways an agent can recover their commission: Liquidated damages outlined in their contract.

Liquidated damages clauses appear in many real estate contracts; however, they are not always enforceable. Below we discuss the basics of liquidated damages and under what circumstances New York courts choose to go against what the parties contracted for.

What are liquidated damages supposed to do?

Liquidated damages are a predetermined dollar amount included in a contract to cover harms that are otherwise difficult to quantify. The parties estimate how much monetary damage a specific type of breach of contract would cause. Then, rather than having to calculate their losses after the fact, the injured party can recover the prearranged amount.

In a real estate transaction, a home seller will often agree to pay their real estate agent a percentage of the proceeds from the sale. If they fail to pay, the agent can seek liquidated damages from their contract.

When are liquidated damages clauses unenforceable?

New York courts sometimes nullify these clauses when they seem to constitute a penalty on one party. Provisions that give a party the option between liquidated and actual damages are also generally unenforceable in New York. These issues are often extremely fact-intensive. Determining whether a liquidated damages clause is valid depends on the type of transaction, the parties involved, and what happened to cause a breach.

In real estate transactions, there are often large sums of money at stake. Everyone involved can benefit from consulting with an attorney experienced in real estate, to ensure their rights are protected.