Summary
A security deposit in real estate purchases does not have the same legal effect as an earnest money deposit. An earnest money deposit is an amount given as a sign that the contract has been concluded, and for it, the Law of Obligations prescribes specific consequences: whoever is responsible for non-performance, loses it or returns it twofold. A security deposit, as a specific legal institution, exists primarily in enforcement sales, where it is a condition for participation in an electronic public auction, whereas in an ordinary contract, its effect depends on what has been agreed upon. Therefore, before making a payment, check how the amount is named in the contract and what it says about its return, crediting, and withdrawal.
In negotiations for buying an apartment, the words security deposit, earnest money, advance payment, and deposit are often used as if they mean the same thing. For the buyer and seller, the difference only becomes important when the deal gets stuck: will the paid money be returned, returned double, or kept by the other party. The answer does not depend on how the amount was called in conversation, but on how it is arranged in the contract and which legal rules cover it.
This guide explains where a security deposit in real estate purchase is legally regulated, how it differs from earnest money, withdrawal fees, and advance payments, and how to record it in a contract. What a buyer can do when a seller withdraws after receiving earnest money is described in a separate text about earnest money and buyer's rights.
Security Deposit in Real Estate Purchase: The Name Is Not Enough
The Obligations Act (NN 35/05, 41/08, 125/11, 78/15, 29/18, 126/21, 114/22, 156/22, 155/23, 69/26) provides for two specific legal institutes for payments upon contract conclusion: earnest money and withdrawal fee. It does not regulate a security deposit as a separate institute of a sales contract.
This does not mean that a security deposit in a contract is meaningless. The parties can agree that the buyer pays an amount as security, but then its effect is only what they themselves have stipulated: when the amount is returned, when it is accounted for in the price, and what happens to it if one party withdraws. If the contract does not state this, it will be interpreted in a dispute what the parties intended, and that is precisely what the buyer and seller want to avoid.
The term "security deposit" gains legal weight in enforcement sales, where it is prescribed as a condition for participation in an auction. More on this in the fifth section.
The most important practical conclusion is simple. If the amount is intended as earnest money, let it be called so and let it be clear that it is given as a sign of contract conclusion. If it is intended as something else, the contract must explicitly regulate its return and accounting.
Professional advice: Before making a payment, read the payment clause in the preliminary contract and underline three things: what the amount is called, when it is returned, and what happens if one party withdraws; if any of this is missing, request an amendment before signing.
Earnest Money: A Sign That the Contract Is Concluded
The Obligations Act defines earnest money as an amount of money or quantity of other fungible things that one party gives to the other upon concluding a contract as a sign that the contract has been concluded. Unless otherwise agreed, the contract is considered concluded when the earnest money is given.
When the contract is duly fulfilled, the earnest money is returned or accounted for in the fulfillment of the obligation, in the case of a purchase, it is applied to the price. If the contract is not fulfilled, the consequences depend on who is responsible. If the buyer who gave the earnest money is responsible, the seller may demand fulfillment if still possible, demand compensation for damages, or be satisfied with the received earnest money. If the seller who received the earnest money is responsible, the buyer may demand fulfillment, compensation for damages along with the return of the earnest money, or the return of double the earnest money.
The Act also contains two protective provisions that are often overlooked. Unless otherwise agreed, the party who gave the earnest money cannot withdraw from the contract simply by leaving it to the other party, nor can the other party withdraw by returning double the earnest money. The court may, at the request of the interested party, reduce an excessively large earnest money amount.
If the contract is partially fulfilled, for example, if the buyer has paid part of the price, the creditor cannot retain the earnest money, but it is accounted for in the compensation for damages.
Professional advice: If you are paying earnest money, ensure that the preliminary contract contains all essential elements of the sale, because by paying earnest money you confirm that the contract is concluded and cannot simply be withdrawn from later.
Withdrawal Fee and Earnest Money as the Price of Withdrawal
A withdrawal fee is a different institute. By agreement, one or each party may be authorized to withdraw from the contract by paying a withdrawal fee. The withdrawing party is obliged to pay the withdrawal fee simultaneously with the statement of withdrawal, and once they declare they will pay it, they can no longer demand fulfillment of the contract.
If the contract does not specify a deadline for withdrawal, the authorized party may withdraw until the deadline for fulfilling its obligation expires. The right to withdraw also ceases when the party in whose favor it was agreed begins to fulfill its obligations or receives fulfillment from the other party. Earnest money and a withdrawal fee can be combined. If the right to withdraw from the contract is agreed upon in addition to earnest money, the earnest money is considered a withdrawal fee, and each party can withdraw. A buyer who withdraws then loses the earnest money, and a seller who withdraws returns it in double the amount.
This difference is important in practice. Earnest money without an agreed right to withdraw keeps the parties bound to the contract, while earnest money with the right to withdraw gives each party an exit at a known cost.
Professional advice: If you want to retain the possibility of withdrawal, ensure the preliminary contract explicitly states that the right to withdraw is agreed upon in addition to the earnest money and until what date it is valid.
Advance Payment and Refund upon Contract Termination
In conversation, an advance payment most often means a part of the price paid in advance. The law links the rules on earnest money to an amount given as a sign that the contract has been concluded, so a payment not defined as such by the contract does not carry the consequences of earnest money: it is not lost and is not returned double, but is governed by the contract and general rules.
If the contract is terminated, the Obligations Act stipulates that both parties are released from their obligations, except for the obligation to compensate for damages. The party that has completely or partially fulfilled the contract has the right to the return of what it gave. The party returning the money is obliged to pay default interest from the day it received the payment.
For the buyer, this means that an advance payment is generally refundable, but its return depends on whether the seller will be able and willing to return it. If the seller spends the money or encumbers the property in the meantime, the buyer has a claim but not the property. Therefore, checking for encumbrances before payment is as important as the amount itself; we write about how to protect a purchase with a preliminary contract in the guide on preliminary contracts for real estate.
Professional advice: If you are paying a larger advance payment before the main contract, agree on the deadline and method of refund in case the purchase does not occur, and do not make the payment before checking the land registry extract.
Security Deposit at Electronic Public Auction
The security deposit as a legal institute in real estate purchase is most clearly seen in enforcement sales. According to the Enforcement Act (NN 112/12, 25/13, 93/14, 55/16 — Decision of the Constitutional Court of the Republic of Croatia, 73/17, 131/20, 114/22, 6/24 — Decision of the Constitutional Court of the Republic of Croatia), only persons who have previously paid a security deposit and submitted an application for participation can participate as bidders in an electronic public auction. The security deposit is paid into a special account, and the amount, method of payment, and return are prescribed by the regulation of the minister responsible for justice.
For bidders whose offer is not accepted, the security deposit is returned based on a court order. For the buyer whose offer is accepted, another rule is important: if they do not pay the purchase price within the period specified in the conclusion of sale, the court declares the sale invalid and orders a new one, and the costs of the new sale and the difference between the price achieved in the previous and the new sale are covered from the deposited security deposit. The deadline for paying the purchase price cannot be longer than three months from the date of sale.
Here, the security deposit has a real security function. It does not confirm that the contract has been concluded, like earnest money, but guarantees that the bidder is participating seriously and covers damages if they fail to pay. We write about other risks of purchasing in enforcement proceedings in the guide on purchasing real estate in enforcement.
Professional advice: Before paying the security deposit for the auction, secure financing for the entire purchase price within the deadline specified in the sales conditions, as a delay in payment may cost you the security deposit.
How to Record the Payment in the Contract
Regardless of what the amount is called, five things must be clear in the preliminary contract or contract: the amount and payment deadline, the legal nature of the payment (earnest money, earnest money with the right of withdrawal, withdrawal fee, or part of the price), whether the amount is included in the price, what happens if the buyer withdraws, and what if the seller withdraws. If the amount is called a security deposit, the contract should explicitly state what it secures and in what case it is retained. For example, it can be agreed that the security deposit secures the buyer's obligation to obtain a loan within a certain period and pay the remainder of the price, with a refund if the loan is not approved for reasons stated in the contract.
It is also good to agree in advance where the money will be held until the completion of the purchase, and who and when gives the order for its transfer or return. A public notary or lawyer who drafts the contract can explain which solutions are available in a specific case.
We write about how to negotiate price and terms before signing in the guide on negotiating price and purchase terms.
Professional advice: If the seller requests payment before signing any written contract, do not pay; even the smallest amount should be given with a signed document that regulates its return.
How Regent Can Help You
Regent mediates in the purchase, sale, and rental of residential and commercial properties, as well as new builds, throughout Croatia and works with foreign buyers. We help you find a property that suits your needs and verify its legal status, including land registry records and encumbrances, before any payment. For drafting preliminary contracts and contracts, and for legal questions about earnest money and security deposits, we refer you to a lawyer or public notary. Contact us or view properties on offer.
Frequently Asked Questions (FAQ)
Is a security deposit the same as earnest money?
No. Earnest money is an amount given as a sign that the contract has been concluded, and the law prescribes the consequences of non-fulfillment for it, while the effect of a security deposit in an ordinary contract depends on what the parties have agreed upon.
Can I withdraw from the purchase and simply leave the earnest money to the seller?
You cannot, unless otherwise agreed. The law permits this only when the right of withdrawal is agreed upon in addition to the earnest money; then a buyer who withdraws loses the earnest money, and a seller who withdraws returns it double.
What if the seller withdraws after receiving earnest money?
You can demand fulfillment of the contract if still possible, compensation for damages along with the return of the earnest money, or the return of double the earnest money. The choice is yours.
Is an advance payment returned if the contract is terminated?
It is returned. In case of termination, the party that partially fulfilled the contract has the right to the return of what it gave, and the party returning the money pays default interest from the day it received it.
What happens to the security deposit at an enforcement auction if I do not pay the purchase price?
It is used to cover the costs of the new sale and the price difference. The court declares the sale invalid and orders a new one, and the security deposit serves to cover the damages caused by the omission.
Can the court reduce earnest money?
Yes. At the request of the interested party, the court may reduce an excessively large earnest money amount.
Recommended
- What if the seller withdraws from the real estate sale: earnest money, damages, and buyer's rights
- Preliminary contract for real estate: a guide for secure purchase
- Purchasing real estate in enforcement: risks, procedure, and buyer's rights
- What to pay attention to when negotiating the price and terms of real estate purchase
