A predetermined amount, often the earnest money, agreed as compensation if a party breaches the contract.
Why Liquidated Damages matters on the exam
This term belongs to Contracts. The questions below are real items from Freehold's bank that use it - each one cites its source.
Exam questions using Liquidated Damages
Every Freehold question shows why the right answer is right — and cites its source.
A purchase contract includes a valid liquidated damages clause stating that if the buyer defaults, the seller keeps the earnest money as forfeited damages. If the buyer defaults, the broker should:
Disburse the earnest money to the seller according to the contract's forfeiture clause, following any state-required notice procedures
Return the earnest money to the buyer automatically once the closing date passes, regardless of what the contract's forfeiture clause says
Keep the funds as the broker's commission for the failed transaction
Split the funds between the buyer and seller regardless of contract terms
Show answer & explanation
Disburse the earnest money to the seller according to the contract's forfeiture clause, following any state-required notice procedures — When a contract clearly specifies how earnest money is to be handled upon default, the broker follows those written terms, subject to any procedural notice requirements imposed by state law.
Source: PSI National Real Estate Exam Content Outline — Broker Supplement
A buyer defaults, and under the contract the seller keeps the earnest money as the sole remedy. This remedy is called:
Specific performance
Liquidated damages
Punitive damages remedy
Rescission
Show answer & explanation
Liquidated damages — Liquidated damages are an amount agreed in the contract as compensation for a breach — commonly the forfeited earnest money. Specific performance instead asks a court to force completion of the sale.
Source: PSI National Real Estate Exam Content Outline §7 Contracts
The fee paid by a prospective buyer for the right to purchase property within a specified period, under an option contract, is called the:
Option consideration
Earnest money deposit
The liquidated damages
Origination fee
Show answer & explanation
Option consideration — Option consideration is the payment made by the optionee to the optionor in exchange for the exclusive right to purchase the property during the option period.
Source: PSI National Real Estate Exam Content Outline §7 Contracts
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