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Liquidated Damages In Real Estate Transactions
Commercial real estate is a unique asset, making damages resulting from a breach of an agreement involving it are often difficult to measure. As a result, parties to such agreements must give careful thought to the remedies for such breach, including liquidated damages.
A Brief Primer
Provisions for liquidated damages — that is, a pre-determined amount of compensation that a party who fails to perform must pay — are common in many kinds of real estate transactions. They obviate the need to calculate (and potentially litigate over) damages and settle the parties' expectations by operating as both a floor and a ceiling on potential liability. And because a liquidated damages provision is negotiated at the outset of the transaction (before either party knows whether or how it will be triggered), it likely represents the parties' unvarnished view of what is fair.
Such provisions, however, are often subject to later challenges. Courts will not enforce them if the amount of liquidated damages is seen as disproportionate to any damage actually incurred, or if the parties knew or should have known when they entered the contract that actual damages would be readily ascertainable.
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