In real estate contracts, what are "liquidated damages"?

Liquidated damages refer to a specific amount of money that is outlined in a contract as a pre-agreed compensation to be paid if one party breaches the contract. This is often included in real estate contracts to provide clarity and certainty around the consequences of a breach. The parties involved determine this amount at the time the contract is signed, making it clear what the repercussions will be if one party fails to fulfill their obligations.

This mechanism helps to avoid disputes over the extent of damages in the event of a breach, as it is predetermined and agreed upon in advance. In real estate transactions, this is particularly important due to the potential complexity and financial implications of contract breaches. It provides a straightforward remedy without needing to engage in lengthy litigation to assess actual damages, which may be hard to quantify.