[Offers and Negotiations – Contract Remedies] If a buyer defaults on a purchase agreement just prior to settlement, what clause in the contract would…

A liquidated damages clause is a provision in a contract that specifies a predetermined amount of money to be paid as damages for a specific breach. In North Carolina real estate transactions, the earnest money deposit is typically designated as liquidated damages. If the buyer defaults, this clause allows the seller to retain the earnest money as their sole remedy, compensating them for the breach without having to prove the extent of their actual financial losses in court. This provides certainty for both parties regarding the consequences of a buyer's default.

A. Actual damages: These are the specific, provable financial losses a seller incurs from a breach, which would have to be calculated and proven in court, rather than being a pre-agreed amount.

B. Compensatory damages: This is a broad legal category of damages intended to compensate for a loss; liquidated damages are a specific, pre-agreed type of compensatory damage, but "compensatory damages" is not the name of the clause itself.

D. Punitive damages: These are intended to punish a wrongdoer for egregious conduct, not to compensate for a loss, and are generally not available for a simple breach of contract.

1. North Carolina Real Estate Commission. (2023). North Carolina Real Estate Manual.

Chapter 10, Sales Contracts and Practices, Section "Remedies for Breach of Contract," pp. 10-25 - 10-26. The manual states, "If the buyer breaches the contract, the seller may...elect to terminate the contract and recover the earnest money deposit as liquidated damages...The standard Offer to Purchase and Contract (Form 2-T) provides that if the buyer breaches the contract, the earnest money deposit will be forfeited by the buyer and paid to the seller as liquidated damages."

2. Hetrick, P. M., & McLaughlin, J. B. (2017). Webster's Real Estate Law in North Carolina (6th ed.). LexisNexis.

Chapter 9, Contracts for the Sale of Land, § 9.11[1] Liquidated Damages. This section explains that parties to a real estate contract may agree in advance on the amount of damages to be paid in the event of a breach. It notes that earnest money provisions are frequently upheld as valid liquidated damages clauses if the amount is reasonable.

3. UNC School of Government. (2012). Introduction to Real Property Transfer Law in North Carolina.

Chapter 3, The Sales Contract, p. 28. The text discusses remedies for breach and notes: "The contract may provide for liquidated damages. A common liquidated damages clause provides that if the buyer defaults, the seller is entitled to keep the earnest money." This confirms the standard practice and legal principle in North Carolina.