I thought earnest money constitutes buyer's consideration. So, without earnest money, the seller can void the contract on the ground of Buyer's Lack of Consideration. Because of that, I occasionally heard people putting down a token amount of $10 or $100 for consideration. On the other hand, I also heard that buyer's purchase price payment itself is buyer's consideration, and according to this post, earnest money is instead used to compensate liquidated damage in the event of buyer's preach of contract. My question is, if the sole purpose of earnest money is to pay for the potential liquidated damage, will the contract still be enforceable if the buyer pays absolutely no earnest money given that both parties agree with this arrangement?
asked Jul 8, 2017 at 0:33 67 1 1 gold badge 1 1 silver badge 12 12 bronze badgesThe contract will still be enforceable if no earnest money is given. The exchange of the real estate for the purchase price is completely adequate consideration sufficient to support a contract, even without earnest money.
It could be enforced by specific performance, or conceivably by a suit for actual money damages.
In general, lack of consideration almost never prevails as a defense to a claim for breach of contract and even when it does, if the non-breaching party relied on a promise that was allegedly a contract, there is still an action for promissory estoppel available, which is essentially identical to a breach of contract action, but substitutes reliance for consideration in the elements of the claim that must be established.
The main downside of not having earnest money with a liquidated damages clause for a seller is that it is likely to be hard to prove the a breach of the contract caused damages in a particular dollar amount that couldn't be mitigated by finding another buyer. Specific performance (i.e. compelling the buyer to purchase the property) is also often not a viable remedy as the buyer may very well be unable to perform (e.g. due to lack of loan financing) when the lawsuit is finally resolved.
The main downside of not having earnest money with a liquidated damages clause for a buyer is that the buyer's exposure to damages if the contract is breached is not well defined. For example, if the buyer breaches a contract to buy a house for $1,500,000 and then a real estate bubble pops before the property can sold and the property eventually sells for $500,000, the buyer in breach is exposed to $1,000,000 of damages when a typical earnest money deposit in a deal like that one might be $50,000 and would not result in costly litigation.