In real estate transactions, what does the term “liquidated damages” refer to?

The term “liquidated damages” refers to a predetermined amount of compensation that is outlined in a contract, in the event of a breach of that contract. This concept is primarily used to provide clarity and certainty for all parties involved, as it sets the specific amount that one party will owe to the other in case a contractual obligation is not fulfilled.

In real estate transactions, having liquidated damages specified in the contract helps to avoid lengthy legal disputes over how much compensation is owed after a breach occurs. Instead of having to prove actual damages, which can be time-consuming and complicated, the parties simply refer to the agreed-upon amount in the contract. This not only streamlines the enforcement of contract terms but also helps in managing expectations between buyers and sellers.