Reprinted from the September 2022 issue of ALI CLE’s The Practical Real Estate Lawyer.

This article is part of an ongoing project of the American College of Real Estate Lawyers Acquisi­tions Committee to answer 13 ques­tions related to liquidated damage remedies in real estate purchase and sale agreements under the laws of various jurisdictions. Included are answers to the questions under the laws of the state of Alabama.

In Alabama, liquidated damages are a sum to be paid in lieu of performance, while a penalty is a sum characterized as a security for the performance of the agreement or as punishment for default. Because penalty provisions are void as against public policy in Alabama, courts tend to lean against any interpretation of a contract that will make the provision one for liquidated damages and, often in cases where the parties intentions are not clear, will hold that the stipulated sum is a penalty.