C.A.R. is OPPOSING AB 1406 (Ward) which more than triples the statutory cap on liquidated damages in transactions where a buyer is purchasing a newly constructed owner-occupied condominium from a developer. The cap will triple from 3 percent to 10 percent of the purchase price. C.A.R. opposes AB 1406 because it dismantles strong long-standing consumer protections for buyers, putting their savings, life-changing sums of money, at risk to finance the condominium projects. The bill will be voted on soon by the entire Assembly.
TAKE ACTION TODAY! Urge your legislator to vote NO on AB 1406. Send a letter to your Assemblymember by clicking the links below.
Click here for Republican Red Alert Call-for-Action Center
Click here for Democrat Red Alert Call-for-Action Center
Background
For decades California’s 3% cap on liquidated damages on homes a buyer intends to occupy has served as a critical consumer protection, protecting buyers from unreasonable losses. It ensures that a buyer is protected from forfeiting an unreasonable amount that may far exceed the seller’s actual loss. California courts have affirmed that the statutes being amended by this bill were designed specifically to protect buyers from losing unreasonably large sums of money (Guthman v Moss (1984)).
Under this scheme, condo buyers could be forced to forfeit an average of $67,000 based on the current median condo price of $670,000.
Why C.A.R. is OPPOSING AB 1406:
AB 1406 Dismantles Strong Consumer Safeguards. At today’s statewide median condo price of approximately $670,000, a 10% forfeiture approaches $67,000—a figure that bears no reasonable relationship to a seller’s foreseeable damages. This shift moves liquidated damages from a compensatory tool to a punitive one and forces buyers to prove that developers didn’t suffer 10% of the purchase price worth of harm.
The Liquidated Damages Law was never intended to finance construction. In the testimony before the recent Assembly Judiciary Committee, the bill’s supporters made clear that the intended purpose of the bill was to raise capital to finance construction of the project. This was NEVER the intent of the law. The intent of the law was to protect consumers. This does the opposite.
AB 1406 disproportionately harms first-time homebuyers. First-time homebuyers will be forced to accept an enormous and unreasonable financial risk. The loss of a deposit of this amount could result in a buyer being unable to purchase a home. A buyer utilizing a low-downpayment program like FHA with a 3% downpayment ($20,100 at the median condo price), would be responsible for paying the seller nearly $47,000, more than twice their entire downpayment. This blocks opportunities for moderate-income families and in particular communities of color who often utilize such loans potentially taking them out of the housing market. Under AB 1406, first time condo buyers would have significantly fewer protections that purchasers of single-family homes, which is nonsensical.
AB 1406 shifts the leverage from the buyer to the seller. The threat of losing 10% of the deposit creates an almost coercive environment for the buyer. If a buyer discovers problems with the property such as unpermitted work or other safety issues after removing contingencies, they may feel forced to proceed rather than risk a loss which could prevent them from ever buying a property.
Furthermore, AB 1406 will force buyers to prove that the seller’s losses were less than 10%, adding legal costs to their costs of purchasing a home. Current law presumes a 3% deposit is reasonable; moving the cap to 10% shifts the leverage to the seller. Buyers would be forced into costly litigation to prove that a seller or developer’s actual losses—typically limited to carrying and remarketing costs—were less than the 10% cap incurring legal fees in addition to the 10% they have already put forward. This is at odds with the intent of the original statute, which was meant to protect buyers from forfeiting an unreasonable amount to sellers.
AB 1406 shifts leverage to developers in particular: New-home purchase agreements are typically drafted by developers with rigid timelines and limited contingencies. AB 1406 allows developers to potentially retain massive deposits over technical defaults or minor timing issues, such as delays in securing property insurance or appraisals, in direct contravention of the law’s original purpose.
Current law already allows developers to ask for an increased down payment. If a developer requires additional funds to move the project forward, they can include those provisions in their contracts today.
AB 1406 does NOTHING to alleviate the state’s homeownership crisis. As we continue to look for ways to bridge the homeownership gap for California families, this bill widens the chasm by making it harder for families to be able to choose homeownership. By exposing buyers to extraordinary financial risk, this bill will scare moderate income families away from homeownership.
REALTORS® contact your Assemblymember and tell them to oppose ACA 13. To do so, use the following links:
Click here for Republican Red Alert Call-for-Action Center
Click here for Democrat Red Alert Call-for-Action Center