Under Illinois law and contract practice, when may a seller retain a buyer's earnest money deposit as liquidated damages?
Correct Answer
A) Only when the contract contains language expressly authorizing the retention of earnest money as liquidated damages.
Illinois courts treat liquidated damages clauses as creatures of contract, not automatic legal entitlements. For a seller to retain earnest money as liquidated damages, the purchase agreement must contain express language authorizing that remedy — typically a clause stating that the deposit shall be forfeited to the seller as liquidated damages upon buyer default. Without that contractual basis, a broker who releases funds to the seller risks liability for conversion or breach of fiduciary duty. Brokers must follow the contract language and any lawful written disbursement instructions rather than inventing remedies not supported by the agreement.
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Related Topics & Key Terms
Key Terms:
Related Concepts
An inspection contingency gives the buyer the right to have the property professionally inspected within a specified time frame and to negotiate repairs or cancel the contract based on the findings.
Liquidated damages are a predetermined amount of money specified in the contract that the non-breaching party is entitled to receive if the other party breaches. In real estate, the earnest money deposit typically serves as liquidated damages.
Novation is the substitution of a new contract for an existing one, or the replacement of one party with a new party, with the consent of all parties involved. The original party is completely released from all obligations.
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