Ingrid listed her Minneapolis home with broker Carl under a listing agreement. A buyer, Tom, submitted a full-price offer with a $5,000 earnest money deposit, which Ingrid accepted. The purchase agreement stated that if the buyer defaulted, the seller could retain the earnest money as liquidated damages and that the broker's commission would be paid from the retained earnest money. Tom later defaulted without cause. Ingrid wants to retain the full $5,000 and pay Carl nothing. Under Minnesota law and standard practice, which outcome is most accurate?
Correct Answer
A) The earnest money should be split between Ingrid and Carl according to the terms of the listing agreement or purchase agreement, with Carl receiving his agreed share up to the amount of his commission
Under Minnesota practice, when a buyer defaults and the seller retains earnest money as liquidated damages, the listing agreement and/or purchase agreement typically specify how the retained earnest money is divided between the seller and the broker. The broker is generally entitled to a share of the retained earnest money up to the amount of the agreed commission, because the broker performed services (procured a ready, willing, and able buyer) and the listing agreement created an obligation to pay a commission upon procurement. The purchase agreement language referencing broker payment from retained earnest money governs the split.
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Related Topics & Key Terms
Key Terms:
Related Concepts
A counteroffer is a response to an original offer that changes one or more terms of the offer, effectively rejecting the original offer and creating a new offer. The party who makes the counteroffer becomes the new offeror.
Earnest money is a deposit made by the buyer at the time of the offer or shortly after to demonstrate good faith and serious intent to purchase the property. It is also called a good faith deposit.
Equitable title is the buyer's interest in a property after a purchase contract is signed but before closing, giving the buyer the right to acquire legal title in the future. The seller retains legal title until the deed is delivered at closing.
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