Earnest Money Forfeited Pursuant to a Liquidated Damages Provision

A recent case, Karimi v. 401 North Wabash Venture, 2011 IL App (1st) 102670 (July 26, 2011) Cook Co., 2d Div. demonstrates that earnest money, no matter how much, can be forfeited when a liquidated damages provision is properly enforced.

In Karimi, the buyer contracted to purchase a $2.188 million condominium at Trump Tower in 2003.  When the unit was almost ready, as per contract, the seller identified a closing date for October of 2008.  At that time, the buyer was unable to obtain financing.  The parties agreed to extend the closing date to May of 2009.  The buyer was still unable to obtain financing and the condominium did not close.  Subsequently, the seller terminated the contract and kept the earnest money (well over $300,000) as liquidated damages pursuant to the contract.  The seller later sold the unit for $2.5 million.

The buyer sued for the return of his earnest money.  The court found that per the terms of the contract, the buyer was not entitled to his earnest money.  The parties had agreed to a liquidated damages whereby buyer would forfeit his earnest money if he did perform his end of the contract.  Both parties had taken a risk when they signed the contract.  The buyer failed to close as per contract, and the court held that the seller properly kept the earnest money.

When the buyer signed the contract in 2003, he could not have anticipated that the real estate market would plummet by the time his condominium was ready.  Unfortunately, when it came time to close, the economy had changed drastically.  Regardless, the buyer’s contract was still valid and enforceable, and the court felt that the buyer should honor his end of the bargain!