California Assembly bill AB1406 seeks to raise from 3% to 10% the cost that a buyer of a newly constructed residence has to pay if they back out of their purchase contract (without contingencies).
This bill is widely supported by pro-housing and YIMBY groups. It is expected to make construction loans cheaper for builders. However, if a buyer backs out, the cost could dramatically affect the buyer’s ability to buy for a significant time. The bill is part of California’s “Fast Track Housing” package.
The California Building Industry Association (CBIA) has publicly backed the bill. However, there is no widespread endorsement from major construction labor unions yet.
The California Association of REALTORS appears to be the only group currently promoting opposition to AB 1406. The arguments CAR has used include:
1.) Liquidated damages were designed to protect buyers, not to benefit sellers. Raising the limit would fail to prevent disproportionate forfeiture that bears no reasonable connection to actual harm.
2.) Disproportionate forfeiture can create “windfalls”. The original limit was meant to be a substitute for proving damages, and the limit should reflect a reasonable, foreseeable loss. A 10% limit could result in sellers keeping sums well beyond actual losses.
3.) Liquidated damages should not impose punitive penalties on buyers.
4.) The higher limit could affect the balance of bargaining power between buyers and sellers by shifting risk to buyers in ways that are not clearly tied to market practice or established legal principles.