Obligation of Breaching Buyer to Pay Additional Earnest Money Deposit

QUESTION: I am a buyer’s agent. My client went under contract using the Offer to Purchase and Contract(form 2-T). An Initial Earnest Money Deposit was delivered to the Escrow Agent according to the terms of the Contract. The Due Diligence Period has now expired. Yesterday, my client learned that he cannot obtain financing. He asked me to notify the listing agent that he will not be able to proceed with the purchase. Paragraph 1(d) of the Contract requires the Buyer to deliver an Additional Earnest Money Deposit to the Escrow Agent. My client wants to know if he terminates the Contract now whether he is still obligated to pay the Additional Earnest Money Deposit. What do I tell him?

ANSWER: Tell him to see if the Seller makes a request for the payment. If a request is made, the Buyer probably is obligated by the Contract to pay up. Here is why. Because the Buyer did not terminate the Contract during the Due Diligence Period, and assuming there was no breach of contract by the Seller, the buyer’s termination of the Contract will be considered a breach of the Contract. Paragraph 1(e) of the Contract sets forth the measure of damages in the event of a breach by the Buyer. It states that the “Earnest Money Deposit” shall be paid to Seller upon Seller’s request as liquidated damages.

“Earnest Money Deposit” is a defined term in the Contract. It includes the Initial Earnest Money Deposit and the Additional Earnest Money Deposit. As a result, if the Seller asks for the Buyer to make the Additional Earnest Money Deposit, the Buyer is obligated to make that payment to the Seller or risk becoming responsible for attorney fees and court costs.