Earnest Money Disputes in Colorado

Earnest money disputes happen when a real estate deal falls through, and both the buyer and seller think that they should be the ones to get the earnest money deposit. In Colorado, the outcome of these disputes often depends on the contract deadlines, contingency terms, and how each side handled the termination or breach. 

These aren’t solely transactional issues. When a sale falls through, the funds are typically placed in escrow, requiring legal intervention to resolve. Understanding how earnest money disputes work in Colorado can help buyers and sellers recognize when they need a more formal legal solution to resolve the dispute for good.

• Earnest money disputes happen when the buyer and seller from a failed real estate transaction disagree about who the deposit belongs to.

• In Colorado, earnest money is usually held in escrow by a neutral third party and cannot be released without mutual agreement between the buyer and seller, a court order, or to the buyer if no one sues within 120 days of the holder's notice.

• Missed deadlines, failed contingencies, and alleged contract breaches are the most common causes of disputes.

• When resolution efforts fail, earnest money disputes may escalate into mediation, arbitration, or real estate litigation.

• When an earnest money dispute cannot be resolved informally, working with a real estate litigation attorney in Colorado can help you weigh your options and consider next steps.

Earnest money is a good-faith deposit a buyer gives a seller when entering into a real estate purchase agreement. These deposits show that the buyer is serious about moving forward with the transaction and are usually applied toward the purchase price or closing costs if the sale goes through. When the sale proceeds to closing, Colorado statutes dictate that closing funds must be available for immediate withdrawal, and govern escrow agents holding funds for ongoing property tax obligations.

Disputes arise when the sale doesn’t close, and the parties disagree over what the contract says should happen to the deposit. Common causes include:

• Disagreement over whether a buyer properly terminated under a contract contingency

• Missed contract deadlines or improper notice

• Claims that one party breached the purchase agreement

• Refusal by one party to release the funds

In most earnest money disputes, both parties believe they have a contractual right to the deposit. The issue is not whether earnest money exists, but whether the contract terms support one party’s position over the other.

In Colorado, a title company or brokerage acts as a neutral escrow holder, safeguarding earnest money without taking sides in a dispute. Under Colorado law, brokers must promptly deposit these funds into an insured escrow account and may hold them until the matter is officially resolved.

The escrow holder generally can’t release the funds unless: 

• Both parties provide mutual written instructions agreeing to the release 

• A court issues an order directing how the funds should be distributed

• No lawsuit is filed within 120 days of the holder's notice, per CBS1 § 23

This is because the funds are strictly controlled by the purchase contract and written escrow instructions. If either party refuses to sign a release, the earnest money may remain in escrow until the dispute is resolved through an established legal means. 

This is one of the most frustrating aspects of earnest money deposit disputes in Colorado, and a common reason parties seek legal counsel.

Most earnest money disputes in Colorado stem from contract contingencies. These provisions allow either party to terminate the transaction under specific conditions, provided all contract terms are met. 

Inspection-related disputes are incredibly common. They often arise when:

• The buyer raises inspection objections, but deadlines are missed

• The parties fail to reach a written resolution

• One party believes the buyer’s termination was not properly executed

If the inspection contingency is not exercised correctly, a buyer may lose contractual protection and risk being found in breach. Colorado courts have consistently upheld the need to strictly adhere to contractual deadlines for inspection objections and resolutions.

Financing disputes often occur when a buyer is unable to secure loan approval. Disagreements can involve:

• Whether the buyer made a good-faith effort to obtain financing

• Whether notice was provided on time

• Whether the financing contingency was still active

These situations often lead to earnest money deposit disputes when sellers allege the buyer didn’t comply with the contract terms.

If the property appraises below the purchase price, disputes can arise over whether the buyer had the right to terminate or was required to proceed. As with other contingencies, timing and written notice are essential to securing a desired outcome.

• Title defects or unresolved title issues

• Homeowners Association (HOA) document review disputes

• Delays or disagreements related to the closing date

In each case, the dispute usually focuses on whether the contract permitted termination and if all obligations were fulfilled.

Missed deadlines are one of the most common causes of earnest money disputes. Colorado real estate contracts depend on strict timelines, and parties may believe they have complied with them, only to discover that a notice was late or improperly delivered. Common issues include:

• Failure to provide written notice by the deadline

• Using the wrong method of delivery

• Assuming silence or informal communication was sufficient

Legally, a missed deadline can turn a valid termination into a contract breach, exposing either party to claims for liquidated damages, provided the deadline is a material term of the agreement. 

Whether a buyer or seller breached the contract significantly affects how an earnest money dispute is resolved. 

If a buyer fails to comply with the purchase agreement, the seller may recover the earnest money as liquidated damages, provided the contract contains an enforceable provision and the prerequisites for that remedy are met. Buyers can dispute this claim, but the seller’s claim usually depends on whether the buyer missed contract terms or deadlines.

If a seller withdraws from the transaction without contractual justification, the buyer may seek return of the earnest money and, in some cases, pursue additional remedies. Seller breach disputes often involve more than just the deposit and can escalate quickly.

For more context on seller breach issues, see guidance on what happens when a seller cancels a real estate contract.

Earnest money dispute resolution usually follows a progression, depending on the contract and the parties’ actions.

The first step is often a written demand requesting the release of the earnest money. If both parties agree, they can sign a mutual release authorizing the escrow holder to distribute the funds.

Many Colorado real estate contracts require mediation before legal action can continue. Under Colorado law, mediation is a non-binding process in which a neutral mediator trained to help parties reach a solution facilitates a discussion. While it can resolve disputes, outcomes aren’t guaranteed. The contract should indicate whether mediation is mandatory.

Some contracts include arbitration clauses that may be binding and limit a party’s ability to pursue court action. Whether arbitration applies and is binding will depend on the contract’s language. 

If resolution efforts fail, the dispute may go to court. The escrow holder can file an interpleader action, depositing the earnest money with the court and asking a judge to determine entitlement.  

Interpleader actions are typically used when the escrow holder is a neutral party facing competing claims. When this happens, the dispute may broaden into wider contract litigation. 

Many earnest money disputes won’t require a lawsuit. However, certain red flags suggest legal guidance is appropriate:

• One party refuses to sign a release without explanation

• Accusations of breach, bad faith, or fraud

• A significant earnest money deposit is at stake

• Risk of damages beyond the deposit

• Concerns about how the escrow holder or brokerage handled the funds

At this stage, the dispute extends beyond the release of funds and becomes a legal matter involving contractual rights, liabilities, and risks. 

Earnest money disputes in Colorado are fact-specific and contract-driven legal conflicts that benefit from attorney oversight. Our Real Estate Litigation Team protects buyers and sellers from financial losses by prioritizing:

• Contractual analysis - Conducting deep reviews of purchase agreements to evaluate entitlement based on inspection, financing, and appraisal contingencies.

• Liability mitigation - Advising clients on interpleader actions and the Colorado Real Estate Commission’s standards to break the deadlock when a party refuses to sign a mutual release. 

• Wholistic solutions - Representing your interests in all forums, from mandatory mediation and binding arbitration to formal court proceedings for breach of contract and liquidated damages.

Protect your real estate investment. Call 303-688-0944 or book a consultation to discuss your situation with a member of my team.