AB 1406 reshapes when a seller may treat buyer payments as liquidated damages in residential real estate contracts and creates a special accounting-and-refund regime for initial sales of newly constructed attached condominium units in larger buildings. The bill preserves traditional enforceability rules for ordinary small forfeitures but shifts the burden and timing of proof when larger amounts are retained, and it requires sellers in covered condo projects to document actual losses and refund any excess retained amounts after an accounting.
Professionals in residential real estate sales, title and escrow, construction developers, and litigation counsel should pay attention: the bill changes contract drafting incentives, requires new documentation and timing for post-default accounting, and introduces new dispute points about what counts as a seller’s actual loss and how quickly refunds must be made.
At a Glance
What It Does
The bill conditions enforceability of liquidated-damages clauses on actual payment and statutory reasonableness rules, sets a clearer evidentiary allocation for small versus larger forfeitures, and imposes an accounting, mitigation duty, and refund process for large forfeitures in initial sales of attached condo units in specified multiunit structures.
Who It Affects
Owner-developers and builders selling newly constructed attached condominium units in larger structures, buyers who intend to occupy 1–4 unit residential properties, escrow and title companies handling forfeited deposits, and litigators who contest liquidated-damages claims.
Why It Matters
The measure reduces the ability of sellers to retain large forfeitures without accounting for actual loss, likely prompting developers to document construction and sales costs, adjust contract templates, and change how earnest money and post-default procedures are handled.
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What This Bill Actually Does
The bill begins by narrowing the statutory definition of the covered housing: “residential property” means a dwelling with no more than four units where the buyer intends to occupy the property as a residence. For those transactions, a liquidated-damages clause can be enforceable only when the buyer actually makes the payment in cash or check and the clause satisfies existing statutory requirements for liquidated damages, plus the additional rules the bill sets out.
For everyday cases the bill draws a line between smaller and larger forfeitures. When the amount actually paid as liquidated damages does not exceed a lower statutory threshold, the seller may keep the amount unless the buyer proves it to be an unreasonable penalty.
If the amount exceeds that lower threshold, the seller must affirmatively prove the amount is reasonable. In deciding reasonableness, adjudicators must consider circumstances present when the contract was made and the price and terms of any resale or subsequent contract if that resale happens within six months of the buyer’s default.The bill then creates a distinct regime for initial sales of newly constructed attached condominium units (as defined by reference to Section 783) when the unit is in a structure meeting a size threshold.
If, in those covered projects, the seller actually retains an amount that exceeds a higher statutory threshold, the seller must perform a detailed accounting of costs and revenues fairly allocable to that unit within specified timeframes following resale events. That accounting must include costs, revenues, and any delay caused by the buyer’s default; the seller must make reasonable efforts to mitigate damages; and, after the accounting, the seller must refund any retained liquidated damages that exceed the greater of the applicable threshold or the seller’s calculated losses.
The bill sets deadlines for completing the accounting and for mailing refunds, and it includes an alternative trigger that accelerates the accounting when a new qualified buyer signs a purchase contract.To operationalize the special condo rules the bill defines key terms: what counts as a “structure” for multiunit projects and what qualifies as a “new qualified buyer” (either an institutional loan commitment satisfying the loan contingency or a contract at a purchase price at least as large as the original price). The bill also carves out that the ordinary burden-shifting rule for larger forfeitures does not apply to disputes governed by the special condo-accounting subdivision, meaning those disputes are resolved under the accounting-and-refund framework rather than the general seller-bears-burden rule.
The Five Things You Need to Know
The bill requires actual payment in cash or check for a liquidated-damages clause to be enforceable in covered residential transactions; the clause must also meet Sections 1677 and 1678 plus the bill’s rules.
If the amount actually paid as liquidated damages is at or below 3% of the purchase price, the seller may keep it unless the buyer proves it is an unreasonable penalty; amounts above 3% are presumptively invalid unless the seller proves reasonableness.
Reasonableness must be judged using (1) the circumstances at contract formation and (2) the price and terms of any resale or subsequent contract for the same property made within six months of the buyer’s default.
For initial sales of newly constructed attached condominium units in structures of the statutory size, if retained damages exceed the bill’s higher threshold the seller must, within specified triggers, perform an accounting of costs and revenues allocable to the unit, mitigate damages, and refund any retained amounts exceeding the greater of that threshold or the seller’s calculated losses.
The bill defines the project-level terms: a “structure” covers improvements on a common foundation or those that must be built concurrently, and a “new qualified buyer” is one with an institutional loan commitment satisfying the contingency or a contract at an equal-or-higher price; these definitions control when the accelerated accounting timing applies.
Section-by-Section Breakdown
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Scope — definition of residential property
This subsection limits the statute’s coverage to dwellings with no more than four residential units where the buyer intends to occupy the property. Practically, single-family homes, duplexes, triplexes, and fourplexes sold to owner-occupants fall inside; investor purchases or larger multifamily buildings do not. That occupant-intent requirement makes these buyer protections focused on owner-occupant transactions rather than investor flips.
Baseline enforceability and the reasonableness standard
Subsection (b) conditions enforceability on actual payment in cash or check and compliance with existing liquidated-damages statutes (1677 and 1678). Subsections (c) and (d) create a two-tiered evidentiary regime: smaller forfeitures (at or below the statutory lower threshold) are presumptively valid unless the buyer shows unreasonableness, while larger forfeitures require the seller to prove the amount is a reasonable estimate of anticipated or actual damages. Subsection (e) prescribes the two-factor reasonableness inquiry: the facts at contract signing and any quick resale results within six months, giving courts an objective post-default comparator when resales occur rapidly.
Special accounting and refund rule for certain newly constructed attached condominiums
This core provision applies to the initial sale of newly constructed attached condominium units in a structure that meets the bill’s size threshold. When the seller actually retains damages exceeding the bill’s higher threshold, the seller must produce a full accounting of costs and revenues allocable to the unit within a set calendar window after a closing event. The accounting must show construction costs, sales-related revenues, and any delay costs from the buyer’s default; the seller must attempt to mitigate losses. After reconciling, the seller must refund amounts retained above the greater of the statutory threshold or its documented losses.
Timing triggers, refunds, and alternative acceleration
The bill requires the refund to be mailed to the buyer’s last known address within 90 days after the final close of escrow of the sale or lease of all units in the structure. However, if a new qualified buyer signs a purchase contract earlier, the seller must complete the accounting within 60 days after that contract. The provision thus ties the seller’s obligations to practical resale events and creates an alternative, accelerated timing trigger tied to a new qualified buyer rather than waiting for all units to be sold or leased.
Key definitions controlling application
The bill defines “structure” to mean improvements on a common foundation or improvements that must be constructed concurrently due to design or physical constraints, which controls whether multiple units are treated together for accounting. It also defines “new qualified buyer” as either a buyer with an institutional loan commitment satisfying the contract’s loan contingency or a buyer contracting at a price at least as high as the original contract, which narrows which resale events trigger the accelerated accounting.
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Explore Housing in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Owner-occupant buyers of 1–4 unit residential properties — the bill gives these buyers clearer legal grounds to challenge excessive forfeitures and, for certain condo projects, a mechanism to recover amounts the seller cannot tie to actual losses.
- Purchasers of newly constructed attached condominium units — they gain an accounting-backed check on developer forfeitures, reducing the chance that developers keep large deposits as windfalls.
- Secondary buyers and the resale market — by requiring consideration of quick resale prices when evaluating reasonableness, the bill brings price discovery into the damages analysis and can deter overstatement of harm.
Who Bears the Cost
- Developer-sellers of newly constructed attached condominiums — they must perform unit-level accounting, attempt mitigation, and potentially refund retained amounts, increasing administrative and financial exposure after buyer defaults.
- Escrow and title companies — they will likely need to adjust procedures for holding and disbursing forfeited funds and may face more frequent post-closing refund flows and documentation requests.
- Smaller builders and projects meeting the structure test — preparing defensible, auditable cost allocations across units can be resource-intensive, potentially increasing transaction costs or prompting contract redesigns to limit exposure.
Key Issues
The Core Tension
The central tension is between predictability for sellers and protection for buyers: sellers want a simple, enforceable forfeiture to deter defaults and cover transaction costs; buyers need protection against penalties that exceed the seller’s real loss. The bill tries to thread that needle by allowing modest pre-agreed forfeitures to stand while forcing sellers in large condo projects to prove and document actual losses — but that choice shifts uncertainty into accounting disputes and timelines rather than eliminating it.
The bill introduces practical and doctrinal friction points. First, allocation methodology: performing a ‘‘fairly allocable’’ unit-level accounting in multiunit construction raises tough questions about overhead, common-area costs, financing costs, and how to allocate delays across units.
The statute requires mitigation efforts by sellers, but it does not prescribe an allocation method or an evidentiary standard for cost items, leaving fertile ground for disputes and inconsistent outcomes. Second, timing mechanics create operational risk: the refund deadline is tied to events that can be months or years away (final sale or lease of all units), but the alternative trigger depends on a ‘‘new qualified buyer’’ whose financing or price may itself be contested.
Those timing structures could either delay buyer recovery or rush sellers into preliminary, contested accountings.
A drafting ambiguity in the text compounds these implementation challenges: the bill text contains an apparent numeric token in the special-condo provisions (rendered as “10 6 percent”), which makes it unclear what the higher threshold should be for triggering the accounting-and-refund rules. That ambiguity will require legislative clarification or judicial interpretation.
Finally, the cash-or-check payment requirement narrows the universe of enforceable forfeitures but may push parties to seek alternative deposit mechanisms (escrowed noncash instruments or contractual fee arrangements) to achieve comparable certainty, potentially circumventing the statute’s consumer-protective intent.
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