Earnest Money Disputes in Colorado: Who Gets the Deposit When a Deal Falls Apart?
When a real estate deal falls apart, the first practical question is usually about the earnest money. The buyer wants it back. The seller believes they are entitled to keep it. The broker or title company holding it will not release it to either side on its own say-so.
This article explains how earnest money disputes are generally resolved under Colorado's standard residential contract, what Colorado courts have said about keeping earnest money as damages, and what options each side has when they cannot agree.
What earnest money is, and who holds it
Earnest money is a deposit the buyer makes to show commitment to the purchase. Under the Colorado Real Estate Commission's standard residential contract, the earnest money is held by the party named as the Earnest Money Holder, in its trust account, on behalf of both the buyer and the seller. It is usually due within three days of the contracts execution unless the parties agree to an unusual deadline. The holder is often the listing brokerage or a title company.
When a brokerage firm holds earnest money, Commission rules generally require it to deposit the funds in its trust or escrow account within three business days after receiving them or after the contract is fully signed, whichever is later.
The key point: the holder is not a judge. Under the Commission's published position on earnest money releases, a brokerage firm holding a disputed deposit is not required to do anything beyond what the contract specifies, and it does not decide who is entitled to the money.
When the buyer generally gets the earnest money back
The standard contract gives the buyer several rights to terminate, tied to deadlines for inspection, title, appraisal, loan availability, and more. If the buyer has a right to terminate and exercises it properly, meaning a written notice the seller receives on or before the applicable deadline, the contract terminates. The earnest money generally must then be returned to the buyer, subject to limited exceptions in the contract.
The buyer may also be entitled to the earnest money if the seller defaults. The standard contract lets a buyer facing a seller default cancel and recover the earnest money, in addition to potentially seeking damages. Alternatively, the buyer may ask a court to require the sale to go forward (specific performance).
When the seller may be entitled to keep it
The seller's claim usually arises when the buyer fails to perform and has no valid termination right. That could mean failing to close, or backing out after the relevant deadlines have passed.
The standard contract gives the parties two options for the seller's remedy when the buyer defaults:
Liquidated damages. Under this option, which applies unless the parties select the alternative, the earnest money is treated as liquidated damages and is the seller's sole remedy. The seller keeps the earnest money and gives up claims for specific performance or additional damages.
Specific performance or actual damages. If the parties select this option, the seller may pursue other remedies, including actual damages or asking the court to enforce the contract, rather than being limited to the earnest money. In practice, this option is rarely chosen by the parties.
Missing a termination deadline generally means the buyer loses that particular contractual right to terminate; it does not necessarily constitute a buyer default or automatically forfeit the earnest money. If the buyer later fails to perform a contractual obligation, including failing to close, the buyer may be in default and the earnest money may become payable to the seller under the contract's default remedies. A significant exception is the New Loan Availability Deadline: if the seller is not in default and does not timely receive the buyer's Notice to Terminate, the contract expressly makes the earnest money nonrefundable, except where another provision of the contract provides otherwise.
Are liquidated damages enforceable in Colorado?
Generally yes, if they meet the test Colorado courts apply. A liquidated damages clause is enforceable when:
the parties intended to liquidate damages;
the amount was a reasonable estimate of the presumed actual damages a breach would cause; and
actual damages were difficult to ascertain when the contract was made.
In Rohauer v. Little (1987), a case about earnest money in a home sale, the Colorado Supreme Court applied this test and rejected the buyers' argument that a $20,000 earnest money forfeiture was an unenforceable penalty. The court explained that reasonableness is judged as of the time the contract was made, and that the party challenging the clause bears the burden of showing it is a penalty. The court also sent other issues in the case back for further proceedings, so the case turned on its specific facts as well as the rule.
In Ravenstar, LLC v. One Ski Hill Place, LLC (2017), a case involving deposits on pre-construction condominium units, the Colorado Supreme Court held that parties may agree to a clause that lets the non-breaching party choose between liquidated damages and actual damages. That decision supports the enforceability of the standard contract's alternative remedy option.
These cases set the framework, but whether a particular earnest money amount is enforceable depends on the facts.
How the contract says disputes are handled
Release requires mutual instructions
Under the standard contract, the Earnest Money Holder releases the funds after receiving written mutual instructions, such as a signed Earnest Money Release form. When the contract terminates and one party is entitled to the earnest money, the other party must sign the release within three days of receiving the form. A party who fails to timely sign the release is treated as in default under the contract. The Commission's position also notes that when one party gives written authorization to release the deposit to the other party, a signature from the receiving party is not required.
The holder's options when the parties disagree
If there is a dispute, the standard contract gives the Earnest Money Holder several options:
wait for a court or arbitration proceeding between the buyer and seller;
deposit the money with a court through an interpleader action, with the contract entitling the holder to recover its court costs and reasonable attorney fees for doing so; or
give the parties written notice that, unless the holder receives a summons and complaint or claim within 120 days, it may return the earnest money to the buyer.
That third option puts real pressure on a seller who believes they are entitled to the deposit. A seller who wants to keep the funds generally needs to act within that notice period.
Mediation first
The standard contract requires the parties to try mediation in good faith before starting arbitration or litigation over a dispute relating to the contract. Unless the parties agree otherwise, the duty to mediate ends if the dispute is not resolved within 30 days after written notice requesting mediation. Mediation is almost always the best route to take initially.
Attorney fees
The standard contract provides that in arbitration or litigation relating to the contract, the prevailing party is entitled to its reasonable costs and attorney fees. That can cut both ways. A party who pursues a weak claim to earnest money risks paying the other side's legal fees.
Small claims court and other options
Colorado small claims court can hear many claims of $7,500 or less, not counting interest and costs. That limit may cover some earnest money disputes. Small claims court cannot hear cases involving title to real property, and a claim for specific performance or damages beyond the deposit would need a different court. Many disputes over larger deposits end up in county or district court, or are resolved at or after mediation.
Hypothetical example: A buyer signs the standard contract with $15,000 in earnest money and does not terminate before the New Loan Availability Deadline. Two weeks later, the lender withdraws its approval and the buyer cannot close. The seller claims the $15,000. The buyer argues the loan failure was not their fault. Under the contract's terms, the buyer's financing-based termination right has expired and the earnest money is described as nonrefundable, so the contract language favors the seller. Specific facts could change the analysis, such as a seller default, an amendment extending the deadline, or a dispute over whether a termination notice was received in time. The holder will likely wait for mutual instructions, interplead the funds, or send the 120-day notice.
Practical steps
For buyers:
Know every termination deadline and deliver notices in writing, on time, and in the manner the contract requires.
If financing looks uncertain, raise it before the New Loan Availability Deadline, not after.
If you believe you are entitled to a refund, send the Earnest Money Release form promptly and keep proof of delivery.
For sellers:
Before claiming the deposit, confirm the buyer had no valid termination right and that you performed your own obligations.
If the holder sends a 120-day notice, calendar it immediately.
Weigh the amount at stake against mediation, litigation costs, and the attorney-fee provision.
For brokers:
Hold and release earnest money only as the contract and Commission rules provide, and don't decide the dispute for the parties.
The bottom line
In Colorado, who gets the earnest money usually depends on three things: whether the buyer had and properly exercised a termination right, which remedy option the contract selected, and whether either party was in default. The holder will not resolve the dispute for the parties. Knowing the contract's release procedure, the 120-day notice option, and the mediation requirement helps both sides decide whether the amount is worth contesting.
This article provides general information about Colorado law and the Colorado Real Estate Commission's standard residential contract. It is not legal advice, and reading it does not create an attorney-client relationship with Proper Tea Law. Laws and Commission forms change, and every earnest money dispute turns on its own contract and facts. For advice about your situation, consult an attorney licensed in Colorado.