Are Penalty Clauses in Real Estate Contracts Enforceable?

Liquidated Damages, Penalty Clause, Unenforceable

In real estate contracts, a liquidated damages clause may be included to estimate damages if a party fails to perform. In general, if a liquidated damages clause is determined to be excessive, it will be regarded as a penalty. In Georgia, there are specific requirements for a contractual provision to act as an enforceable liquidated damages clause. It is the burden of the defaulting party on the contract to demonstrate that the clause functions as a penalty, which would render the provision unenforceable.

The factors that Georgia courts have considered to determine the enforceability of a liquidated damages clause are the following:

  • The extent of the injury resulting from the breach must be difficult or impossible to accurately estimate;
  • The intent of the parties must be to estimate damages rather than enforce a penalty; and
  • The estimated amount of damages must be a reasonable approximation of the loss that would occur upon a breach of the contract.

In analyzing the enforceability of liquidated damages clauses, the courts have provided guidance on the application of these factors. If all criteria are satisfied, then the clause will be deemed enforceable. The first criterion is probably the most straightforward. It is often simple to show that the damages were not able to be approximated. The difficulty of calculating future or unknown expenses or an admission in the contract that damages would be difficult or impossible to calculate will likely suffice to fulfill this criterion.

The second factor relies on intent rather than statements or documents. The court often looks at the contract for statements indicating the intent of the parties in drafting a liquidated damages clause. Of course, identifying the damages specifically as liquidated rather than a penalty is persuasive. However, courts have ruled that simply labeling the damages as such will not render the clause enforceable if other factors indicate the intent to impose a penalty.

Finally, the party must introduce evidence that a reasonable procedure was used to estimate the probable losses to be suffered by the party. It is insufficient to speculate about the degree of loss without implementing a concrete method for calculating such a sum. Courts have held that identifying a definite sum in the contract that is just a small percentage of the contracted-for price is enforceable as a matter of law.

The experienced team of attorneys at the Law Offices of Mark Weinstein, P.C. can help you litigate your real estate claims. Contact Mark Weinstein and his colleagues at (770) 888-7707 or visit them at https://www.markweinsteinlaw.com to find out how they can advise you.

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