Final answer:
In a real estate transaction, liquidated damages are a pre-determined amount of money that the buyer or seller agrees to pay if one party breaches the contract. It compensates the non-breaching party for any losses or costs incurred.
Step-by-step explanation:
In a real estate transaction, the liquidated damages are a pre-determined amount of money that the buyer or seller agrees to pay if one party breaches the contract. These damages are designed to serve as compensation for the injured party, rather than as a punishment for the breaching party. Liquidated damages can vary depending on the terms of the contract and the nature of the breach.
For example, if a buyer backs out of a real estate contract without a valid reason, they may be required to pay a certain percentage of the sale price as liquidated damages. This amount is agreed upon and stated in the contract before the transaction takes place.
It's important to note that liquidated damages should not be confused with punitive damages, which are intended to punish the breaching party for their actions. Liquidated damages, on the other hand, are meant to compensate the non-breaching party for any losses or costs incurred.