California Earnest Money Deposit Demand Letter Guide

📋 What is an Earnest Money Deposit?

An earnest money deposit (also called a "good faith deposit") is money a buyer provides when making an offer on a property to demonstrate serious intent to purchase. In California, these deposits are typically 1-3% of the purchase price and are held in escrow. When a transaction fails to close, disputes often arise over who is entitled to keep the deposit.

When to Use This Guide

Use this guide if you are a buyer seeking return of your earnest money deposit because:

🚫 Seller Breached Contract

Seller failed to perform obligations under the purchase agreement

✅ Contingency Not Satisfied

Inspection, financing, appraisal, or other contingency was not met

🔄 Mutual Cancellation Dispute

Both parties agreed to cancel but disagree on deposit allocation

🔒 Escrow Holding Funds

Escrow company refuses to release funds without both signatures

👍 What You Can Recover

Full deposit amount - The earnest money you deposited in escrow
Interest earned - Interest accrued on the deposit while in escrow
Attorney fees - If your purchase agreement contains an attorney fee provision
Consequential damages - Additional costs caused by the breach (in some cases)

Common Earnest Money Dispute Scenarios

🚫 Seller Breach of Contract

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When the seller fails to perform their obligations under the purchase agreement - such as failing to make agreed repairs, refusing to provide required disclosures, or simply refusing to close - the buyer is typically entitled to a full refund of the earnest money deposit plus any additional damages.

🔍 Failed Inspection Contingency

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If the buyer properly exercises their inspection contingency rights within the contractual timeframe, they are entitled to cancel the transaction and receive a full refund. The key is providing timely written notice and following the contract's cancellation procedures exactly.

💰 Failed Financing Contingency

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When a buyer cannot obtain financing despite good faith efforts, and they have a valid financing contingency, they should receive their deposit back. Buyers must document their loan application efforts and provide timely notice of loan denial.

📈 Failed Appraisal Contingency

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If the property appraises for less than the purchase price and there is an appraisal contingency, the buyer can typically cancel and receive their deposit back - unless they agreed to make up the difference or waived the contingency.

🔄 Mutual Cancellation Disputes

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When both parties agree to cancel but cannot agree on who gets the deposit, the funds remain in escrow. California law provides a specific procedure for releasing disputed deposits under Civil Code 1057.3.

⚠ Time is Critical

California has a 4-year statute of limitations for written contract claims (Code of Civil Procedure 337). However, acting quickly is essential - witnesses forget, documents get lost, and some purchase agreements have shorter contractual deadlines. Start the demand process immediately.

⚖ Legal Basis

California provides specific protections for earnest money deposits in real estate transactions. These statutes and legal principles support your claim for deposit return.

Key California Statutes

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California Civil Code 1057.3

Governs the release of earnest money deposits held in escrow. Requires escrow holders to follow specific procedures when releasing disputed funds, including providing written notice and waiting periods before releasing deposits to either party.

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California Civil Code 1057

Defines escrow and establishes the duties of escrow holders. Escrow agents act as neutral third parties and must follow the written instructions of both parties or court orders when disputes arise.

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California Civil Code 1717

Provides for recovery of attorney fees when a contract contains an attorney fee provision. Most California residential purchase agreements (including C.A.R. forms) contain mutual attorney fee clauses, making the prevailing party in a dispute entitled to recover their legal costs.

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Code of Civil Procedure 337

Establishes a 4-year statute of limitations for actions based on written contracts. Your purchase agreement is a written contract, so you have 4 years from the breach to file a lawsuit - but acting sooner is always better.

Elements You Must Prove

Valid purchase agreement - You had a binding contract with the seller
Deposit made - You deposited earnest money into escrow as agreed
Right to refund - You are entitled to the deposit (contingency exercised, seller breach, etc.)
Proper notice - You followed the contract's cancellation and notice procedures
Demand made - You requested return of the deposit

💡 The C.A.R. Forms Matter

Most California residential transactions use California Association of Realtors (C.A.R.) forms. These forms have specific provisions for cancellation, contingency removal, and deposit release. Carefully review your Residential Purchase Agreement (RPA), any addenda, and the cancellation instructions to ensure you followed proper procedures.

Escrow Holder Obligations Under Civil Code 1057.3

When there is a dispute over the earnest money deposit, the escrow holder must follow these procedures:

Written demand received - Either party submits written demand for the deposit
30-day notice period - Escrow holder sends written notice to the other party
Response deadline - Other party has 30 days to object in writing
Release or interpleader - If no objection, funds are released; if objection, escrow may interplead the funds into court

✅ Evidence Checklist

Gather these documents before sending your demand letter. Click to check off items as you collect them.

📄 Contract Documents

✓ Residential Purchase Agreement (RPA) with all signatures
✓ All counter-offers and addenda
✓ Contingency removal forms (if any were signed)
✓ Cancellation of Contract form

💰 Deposit Evidence

✓ Escrow deposit receipt showing amount deposited
✓ Bank statements or canceled checks proving payment
✓ Wire transfer confirmation (if applicable)
✓ Escrow instructions and escrow number

📩 Cancellation Evidence

✓ Written cancellation notice with date/time proof
✓ Contingency-related documents (inspection reports, loan denial letter, appraisal)
✓ Email/text correspondence about cancellation
✓ Agent communications regarding deposit release

🔍 Seller Breach Evidence

✓ Documentation of seller's failure to perform
✓ Missing or false disclosures
✓ Evidence of title defects or encumbrances
✓ Written demands sent to seller/seller's agent

🔒 Preserve All Evidence

Keep originals of all documents. Screenshot text messages and save emails. Document all phone calls with follow-up written confirmation. Your paper trail proves your right to the deposit and when you properly cancelled.

💰 Calculate Your Damages

In earnest money disputes, you may be entitled to more than just the deposit itself. Here is what you may recover.

Category	Description
Earnest Money Deposit	The full amount you deposited into escrow
Interest Earned	Any interest that accrued on the deposit while held in escrow
Attorney Fees	If your purchase agreement has an attorney fee clause (most C.A.R. forms do)
Costs of Suit	Filing fees, service costs, and other litigation expenses
Consequential Damages	Additional losses caused by the breach (inspection costs, appraisal fees, etc.)

💰 Attorney Fee Recovery - A California Advantage

Under California Civil Code 1717, if your purchase agreement contains an attorney fee provision (which most do), the prevailing party in a dispute can recover their attorney fees. This makes it financially viable to pursue even smaller deposit amounts.

📊 Sample Damages Calculation

Example: Seller Breach with $25,000 Deposit

Earnest money deposit $25,000

Interest earned in escrow (6 months) $375

Inspection costs (non-refundable) $650

Appraisal fee (if seller breach) $550

Attorney fees (estimated if litigation needed) $5,000

POTENTIAL TOTAL RECOVERY $31,575

💡 Liquidated Damages Clauses

Be aware that California purchase agreements typically contain a liquidated damages provision that limits the seller's damages to 3% of the purchase price if the BUYER breaches. However, this does NOT limit what a buyer can recover if the SELLER breaches. If the seller breached, you may be entitled to actual damages beyond just the deposit.

📝 Sample Language

Copy and customize these paragraphs for your demand letter.

Opening Paragraph - Contingency Cancellation

I am writing to formally demand the immediate release of my earnest money deposit in the amount of $[DEPOSIT AMOUNT] currently held in escrow at [ESCROW COMPANY NAME], Escrow Number [ESCROW NUMBER]. As documented below, I properly cancelled the purchase agreement for [PROPERTY ADDRESS] within the contingency period, and I am entitled to a full refund of my deposit.

Opening Paragraph - Seller Breach

I am writing to formally demand the immediate release of my earnest money deposit in the amount of $[DEPOSIT AMOUNT] plus all accrued interest and additional damages resulting from your breach of the Residential Purchase Agreement dated [CONTRACT DATE] for the property located at [PROPERTY ADDRESS]. Your failure to [DESCRIBE SELLER'S BREACH] constitutes a material breach entitling me to cancel the transaction and recover my deposit.

Contingency Exercise Documentation

Pursuant to the Residential Purchase Agreement, I was provided until [CONTINGENCY DEADLINE] to complete my [INSPECTION/FINANCING/APPRAISAL] contingency. On [CANCELLATION DATE], prior to the contingency deadline, I delivered written notice of cancellation to [SELLER/SELLER'S AGENT] via [EMAIL/FAX/HAND DELIVERY]. The cancellation was timely, properly delivered, and I am entitled to a full refund of my earnest money deposit under the terms of the contract.

Legal Basis - Civil Code 1057.3

California Civil Code Section 1057.3 governs the release of disputed earnest money deposits. If you fail to execute release instructions or continue to wrongfully claim entitlement to my deposit, I will exercise my rights under this statute. Pursuant to Civil Code 1057.3, I am submitting a written demand to the escrow holder for release of the deposit. You will have 30 days to object in writing; absent a valid objection, the escrow holder is required to release the funds to me. Additionally, under Civil Code 1717 and the attorney fee provision in our purchase agreement, I will seek recovery of all attorney fees and costs incurred in obtaining the return of my deposit.

Demand and Deadline

I hereby demand that you immediately execute the escrow cancellation instructions and authorize the release of my earnest money deposit in the amount of $[DEPOSIT AMOUNT] plus all accrued interest. Please execute and return the attached release authorization within [10/15] days of the date of this letter. If I do not receive the executed release authorization and my deposit is not returned by this deadline, I will pursue all available legal remedies, including filing a lawsuit seeking the deposit, interest, attorney fees, and any additional damages to which I am entitled.

🚀 Next Steps

What to do after sending your demand letter.

Expected Timeline

Days 1-5

Seller and escrow company receive your demand letter

Days 5-15

Seller/seller's agent review and respond or ignore demand

Days 15-30

If no signed release, begin Civil Code 1057.3 escrow demand process

If They Refuse to Release

Civil Code 1057.3 Demand to Escrow
Submit a written demand directly to the escrow holder for release of the deposit. Escrow must then notify the other party who has 30 days to object.
Small Claims Court (Up to $12,500)
For deposits under $12,500, small claims court is fast and inexpensive. No attorney needed. File in the county where the property is located.
Superior Court Lawsuit
For larger deposits or if you want attorney fee recovery, file in Superior Court. The attorney fee clause makes this financially viable.
Mediation/Arbitration
Many C.A.R. purchase agreements require mediation before arbitration or litigation. Check your contract's dispute resolution provisions.

Need Legal Help?

Earnest money disputes can be complex. Get a 30-minute strategy call with an attorney to evaluate your case and discuss next steps.

Book Consultation - $125

California Resources

CA Dept. of Real Estate: dre.ca.gov - File complaints against licensees
California Civil Code: leginfo.legislature.ca.gov - Full text of 1057.3
Small Claims Court: courts.ca.gov/selfhelp-smallclaims.htm
State Bar Lawyer Referral: calbar.ca.gov
C.A.R. Forms: car.org - Standard purchase agreement forms