Earnest Money in the Sale of a Residence is a Bargained for Liquidated Damage Provision

Almanza, Blackburn, Dickie & Mitchell LLP > News and Updates > News > Earnest Money in the Sale of a Residence is a Bargained for Liquidated Damage Provision

A buyer who breached a One to Four Family Residential Contract refused to release $60,000 in earnest money to the sellers on the basis that the escrowed money was an unenforceable liquidated damage provision.  The sellers, who were represented by ABDM at trial, were awarded a judgment for the full amount of the earnest money plus the full amount of their attorneys’ fees.  

The buyer appealed the judgment and in one of the few appellant cases addressing the issue, the 6th Court of Appeals in Texarkana, Texas ruled that earnest money in a real estate transaction is an enforceable liquidated damage provision.   Despite the buyer contending that the earnest money provision was an unreasonable penalty and that the sellers were able to quickly resell the property at or near full asking price, the Court ruled that the contract’s liquidated damage provision was not a penalty and therefore fully enforceable. 

The Court reasoned that it did not have the power to retroactively invalidate a liquidated damage provision that was reasonable when the parties agreed to its terms even if the forecast of potential damages was ultimately inaccurate.  The Court made it clear that it must measure the stipulation of damages at the time the parties entered into the agreement and that the agreement for the payment of the earnest money to the non-breaching party was mutually bargained for in the prospective sale of the residence.  The Court stated that “[w]hen a provision is mutually bargained for by equally competent parties, we give deference to its enforcement.”

ABDM specializes in representing parties in all types of real estate transactions and this important Court decision secures the right of a seller to collect the earnest money when a buyer refuses to close. 

You can view the full decision here: