I was able to erase FileVault encrypted drive My Mac mini was running Sierra. It had FileVault enabled. I read that you shouldn't be able to erase a FileVault encrypted drive. I logged into Recovery and I was able to erase the drive. 

The next step I did was "Restore" and now I see a OSX Base System partition created. So, I thought heck, macOS would be installed and I restarted but I led me to Recovery Menu again, so I went to the reinstall macOS. But, when I select the hard drive, it shows the "This disk is locked". 

So, I read that if you go to file menu in Disk Utility there should be an unlock option, but I don't see any.

Further in Disk Utility, it shows that the OS X Base System has consumed all the space.

I obviously know the password, how do I recover from this?
As you discovered, you can indeed erase a FileVault-encrypted disk even without the password.

The "Unlock" option is under the File menu when booted in Recovery. Be sure to select the volume first for the option to become available.

If all else fails I use the following to erase a FileVault disk and start over:

diskutil cs list


Get the UUID of the Logical Volume Group for the next command:

diskutil cs delete &lt;UUID of Logical Volume Group&gt;