Earnest Payment Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Earnest Payment, written in plain English, along with examples of how it is used.

What is Earnest Payment?

n. a deposit paid to demonstrate commitment and to bind a contract, with the remainder due at a particular time. If the contract is breached by failure to pay, then the earnest payment is kept by the recipient as pre-determined (liquidated) or committed damages.

History and Meaning of Earnest Payment

An earnest payment, also known as an earnest money deposit, is a sum of money paid by a buyer to a seller to demonstrate their commitment to a real estate transaction. This payment is made before the completion of the sale, with the remainder of the payment due at a later, agreed-upon time. If the buyer fails to make the payment, the seller can keep the earnest payment as damages.

The purpose of an earnest payment is to give a seller peace of mind that the buyer is serious about their intention to purchase the property. For the buyer, it shows a level of commitment to the transaction and sets them apart from other potential buyers.

Examples of Earnest Payment

  1. John is interested in buying a house and makes an offer to the seller. As a demonstration of his commitment to the purchase, he includes an earnest payment of $5,000 with the offer.

  2. Mary is looking to purchase a commercial property for her business. She agrees to make an earnest payment of $10,000 to the seller before the completion of the sale.

  3. Joe and Sue are buying a vacation property together. They decide to split the earnest payment of $2,500 as a show of their shared commitment to the purchase.

Legal Terms Similar to Earnest Payment

  1. Liquidated damages - this refers to a sum of money predetermined in the contract that will be paid to the injured party if a breach occurs.

  2. Escrow - a neutral third party holds onto money or property until the terms of a contract are fulfilled.

  3. Consideration - anything of value exchanged between parties to a contract, which can include money, goods, or services.