Earnest Money & Deposit Disputes: Who Gets the Money?

Why the Money Just Sits There

The most disorienting feature of a deposit dispute is that no one seems able to move the money — and that's by design. A deposit in Canada or earnest money in the US is normally held by a neutral stakeholder: a brokerage trust account, a lawyer's or notary's trust account, or a licensed escrow or title company. That stakeholder is not empowered to decide who's right. It can release funds only on a written direction signed by both parties or a court order. So the instant the two sides disagree, the holder freezes the money to avoid its own liability, and the dispute becomes a waiting game in which whoever refuses to sign a release controls the clock.

This structural stalemate reshapes strategy. A party who is clearly entitled to the funds can still be kept waiting for months or years by a counterparty who simply won't sign, unless a court is asked to intervene. That reality is why experienced practitioners weigh a pragmatic negotiated split — even one that feels unfair — against the time, cost, and uncertainty of litigation. A deposit paid directly to the seller instead of into trust is a different and worse situation: there's no neutral holder to release it, and recovery may depend on the seller's solvency and good faith.

Entitlement Follows the Breach, Not the Blame

Who gets the deposit turns on who breached the contract — a legal analysis, not a shouting match. If the buyer terminated by properly exercising a live condition or contingency (financing, inspection, condo-status review) — the right notice, in the right form, before the deadline — the deposit is generally returnable. If the buyer walked from a firm deal, the deposit is typically forfeited. But labels mislead: a seller who couldn't deliver good title or vacant possession may be the true defaulter even though the buyer is the one who refused to close. Reconstructing the closing chronology — tender, requisition letters, condition notices, correspondence — is what actually decides entitlement.

The remedy architecture then differs sharply by country. In Canada, a genuine deposit can generally be forfeited even without the seller proving any loss, and it functions as the floor: the seller may also sue for the resale shortfall and carrying costs, crediting the deposit against the total. Many US contracts instead use a liquidated-damages clause that makes the earnest money the seller's sole remedy — a cap that fundamentally limits the buyer's downside. Knowing which regime your contract creates is the difference between a sound demand and an empty threat.

When a Forfeiture Becomes a Penalty

Very large forfeitures invite a distinct challenge. Canadian courts recognize that while a true deposit can be forfeited without proof of loss, they retain a discretion to grant relief against forfeiture where the sum is out of all proportion to the seller's actual damages and it would be unconscionable to keep it — an argument that gains force as the deposit climbs toward and beyond ten percent of price. In the US, liquidated-damages clauses are enforceable only if the stipulated amount was a reasonable pre-estimate of anticipated damages at the time of contracting; an amount that operates as a punishment rather than compensation can be struck down as an unenforceable penalty, sending the parties back to proving actual loss.

Practically, this means the size of the deposit is itself a strategic fact. A modest, standard deposit rarely generates a penalty argument; an outsized one does, and a buyer facing a large forfeiture should always test it. Whichever side you're on, the route to resolution runs through the same choices: a written demand for a mutual release, a negotiated settlement (splits are common), or a court application or interpleader in which the holder pays the funds into court and a judge decides. Limitation periods apply throughout — commonly two years from the breach in Canadian provinces and varying by US state — so the waiting game has an outer edge. This tool frames your position; a real estate lawyer working from your actual contract and chronology is what turns framing into recovery.

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