Liquidated Damages and Earnest Money
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM #LAW 663
By Ilyce R. Glink and Samuel J. Tamkin
Summary: The reader wonders what happens to
earnest money if a real estate deal falls through but the seller has no damages.
Ilyce and Sam explain the in and outs of the "liquidated damages"
Q: I'm sure I read this in a recent column but I can’t find it on your
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A buyer made an offer to purchase a home and placed a deposit. For some reason
the sale did not go through and the seller kept the buyer’s deposit as
damages. The seller later sold the property at a higher price and actually benefited
from the first deal falling apart. The seller then had to return the first buyer’s
deposit because the seller didn’t have any damages. Is this true?
A: It is true that in some real estate contracts, a seller can retain earnest
money to cover his or her damages in case the buyer fails to close on the sale.
But if the seller has no damages, the earnest money must be returned to the
However, not all real estate contracts are drafted the same way, and not all
states have the same legal requirements.
Some states allow for what is called a “liquidated damages” clause.
If a contact contains a liquidated damages clause, a seller keeps the earnest
money as his or her only remedy. If the seller’s damages are more than
the earnest money, the seller can’t get more money from the buyer. If
the seller’s damages are less than the amount he or she received, the
seller is out of luck.
Some courts take a dim view of liquidated damages clauses and in many cases
will look to the transaction to determine what the parties’ intent was
and whether the provision was fair at the time it was entered into.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com