What if the seller backs out of the property sale: earnest money, damages, and buyer's rights

The purchase of real estate takes place in several steps – from oral agreement and pre-contract to the main contract, payment of the price, and registration of ownership. During this period, which can last weeks or months, it is not uncommon for one party to change their mind. For the buyer, the situation when the seller withdraws is particularly problematic: they might have already paid a deposit (earnest money), paid a lawyer or a public notary, initiated a credit procedure, and tied their plans to a specific property.

The reason for the seller's withdrawal is often financial – during a period of price growth, the seller sometimes concludes that they can now get more for the same property, so they seek to exit an already agreed deal. Regardless of the reason, the answer to what the buyer can then demand almost always depends on the document the parties signed and how the earnest money, deadlines, and consequences of withdrawal are regulated. The focus of this guide is precisely the situation where the seller, after a signed pre-contract and given earnest money, withdraws from the sale or begins to procrastinate.

Contents

• What is earnest money and what is its purpose
• Earnest money is not the same as an advance payment
• What happens when the seller withdraws
• Double the amount of earnest money and when it is reduced
• Buyer's right to contract fulfillment
• Deadlines and "essential element" of the contract
• Compensation for damages beyond the earnest money
• The role of the pre-contract and its registration in the land registry
• When the seller procrastinates instead of openly withdrawing
• Tax implications of a failed deal
• How the buyer can protect themselves
• How Regent real estate agency can help you
• Frequently asked questions (FAQ)
• Recommended

What is earnest money and what is its purpose

Earnest money is a sum of money that one party gives to another upon concluding a contract, as a sign that the contract has been concluded and as a means to ensure its fulfillment. In Croatian law, it is a legally regulated institute from the Law on Obligation Relations. In real estate sales, earnest money is typically given by the buyer to the seller upon signing the pre-contract.

Earnest money has two main functions: it confirms the seriousness of intent and acts as leverage against easy withdrawal, as both parties know that withdrawal carries a financial consequence. When the deal is properly completed, the earnest money is usually included in the purchase price, so it is not an additional cost but a part of the price paid in advance.

Professional advice: Explicitly state in the contract that the given amount represents earnest money and how it is treated if either party withdraws. Unclear wording later opens up disputes about whether it was earnest money or a simple advance payment at all.

Earnest money is not the same as an advance payment

In everyday language, earnest money and advance payment are often equated, but legally they are different institutes with significantly different consequences. An advance payment is a part of the price paid in advance, but without the function of securing the contract. If the deal fails, the advance payment is usually returned to the payer, without increase or loss.

For the buyer, it is therefore crucial to know whether the amount given was agreed upon as earnest money or as an advance payment, because this directly determines whether, in the event of the seller's withdrawal, they can demand more than a mere refund. The same sum of money can have a completely different legal effect depending on how it is named and regulated in the contract.

Professional advice: If you want stronger protection in case the seller withdraws, insist that the given amount be explicitly agreed upon as earnest money, not as an advance payment.

What happens when the seller withdraws

When a seller who has received earnest money withdraws from the sale, the buyer generally has two main courses of action. The first is to seek consequences related to the earnest money, i.e., a refund, most often in an increased amount. The second is to insist that the contract still be fulfilled and that the sale proceed under the already agreed terms.

Which direction the buyer chooses depends on their goal. If they care specifically about that property due to location, price, or personal reasons, it is logical to consider contract fulfillment. If they have since lost interest or found another property, the financial consequence of withdrawal may be a more realistic path.

Double the amount of earnest money and when it is reduced

The rule that most interests the buyer is the one about the double amount: when the party who received the earnest money withdraws from the contract, they are generally obliged to return double the amount of the received earnest money. Conversely, if the buyer who gave the earnest money withdraws, they generally lose the given amount. For example, if you gave earnest money of 10,000 euros, and the seller withdraws without a valid reason, the starting rule means they should return 20,000 euros to you.

It is important to know that earnest money can also be agreed upon in practice as a cancellation fee. In that case, it is agreed that the loss of earnest money or its return in double the amount represents a predetermined consequence of withdrawal and that no additional compensation for damages is sought beyond that. However, the rule of double earnest money should be understood as a starting point, not as a mathematical certainty in every situation, as a court in exceptional circumstances can mitigate the consequences, especially if the earnest money is clearly disproportionate or the contract has been partially fulfilled.

Professional advice: Before signing, check if the contract clearly states the rule about returning double the amount in case of seller's withdrawal and whether the earnest money is agreed upon as ordinary earnest money or as a cancellation fee.

Buyer's right to contract fulfillment

The return or loss of earnest money is not the only option. When a seller withdraws, the buyer can, in certain cases, demand that the contract still be fulfilled, instead of merely settling for the consequences related to the earnest money. This is especially important for real estate because every property is unique – a specific location, floor, orientation, or view cannot simply be replaced by another property.

A request for fulfillment means that the buyer seeks the execution of the sale under the already agreed terms, rather than accepting that the deal falls through. The possibility and manner of exercising this right depend on the content of the pre-contract or contract, whether the property has since been sold to a third party, and the specific circumstances.

Professional advice: If you really care about that specific property, do not automatically agree only to the return of earnest money. First, check if there is a realistic basis to demand contract fulfillment.

Deadlines and "essential element" of the contract

Deadlines in a pre-contract are not a mere formality. A pre-contract usually sets a deadline by which the parties must conclude the main contract. The legal effect of the expiration of the deadline depends on whether the deadline was agreed upon as decisive for the survival of the contract or merely as indicative, which is interpreted according to the general rules of the Law on Obligation Relations regarding delay and essential elements of the contract.

An essential element of a contract is an element without which the contract makes no sense for the contracting party – for example, the deadline by which the buyer must conclude the main contract due to bank loan approval, or the price of the property itself. If the deadline was crucial, its expiration may mean that the contract ceases to exist on its own. If it was not crucial, the expiration of the deadline does not necessarily extinguish the contract, but rather raises the question of liability for delay.

Professional advice: When agreeing on a deadline for concluding the main contract, request that it explicitly states what follows if the deadline expires – this way you avoid disputes about whether the contract is still in force.

Compensation for damages beyond the earnest money

Earnest money covers the basic consequence of withdrawal, but sometimes the buyer incurs concrete, provable damages that exceed its amount. These can include notary fees, valuation costs, credit processing and approval, legal consulting, and other genuinely incurred expenses related to the preparation of the purchase. These could be, for example, the costs of appraising the apartment for a loan, the solemnization of the pre-contract with a public notary, or bank loan processing.

The realization of this right requires the buyer to prove the damage with invoices, contracts, and other documentation of genuinely incurred costs. The mere assertion that a cost was incurred is not sufficient; it is necessary to show concrete, documented expenses directly related to the failed deal.

Professional advice: Keep all invoices and receipts for costs incurred in preparing the purchase. Without proper documentation of actual damage, it is difficult to claim anything beyond the earnest money amount.

The role of the pre-contract and its registration in the land registry

A pre-contract is a legally binding document by which the parties undertake to conclude a main sales contract in the future. It must contain the essential elements of the future contract, particularly information about the parties, an accurate description of the property, the purchase price, the deadline for concluding the main contract, and provisions regarding earnest money or an advance payment. This is precisely why the pre-contract is the central document when the question of what happens if the seller withdraws arises.

A particularly important tool for buyer protection can be the registration of the pre-contract in the land registry. This makes it visible in public records that there is an obligatory legal relationship related to a specific property, which strengthens the buyer's position against third parties and makes it difficult for the seller to sell the same property to someone else without hindrance. Without registration, the buyer relies solely on the relationship with the seller; with registration, their protection is broader.

Professional advice: For higher-value purchases, consider registering the pre-contract in the land registry. This is one of the most effective protections if there is a risk that the seller might change their mind later.

When the seller procrastinates instead of openly withdrawing

Withdrawal is not always openly stated. In practice, the seller sometimes does not say they are withdrawing, but rather procrastinates – they do not respond, postpone notary appointments, demand new conditions, or invent obstacles, hoping that the buyer will withdraw themselves or agree to less favorable terms. If the seller permanently avoids concluding the main contract and fails to fulfill their contractual obligations within a reasonable timeframe, such behavior can, in practice, be considered a breach of contract, rather than a neutral delay.

In such circumstances, it benefits the buyer to document their readiness to fulfill their obligations – through written invitations to conclude the main contract within the agreed timeframe, by preserving communication, and, if necessary, by a formal invitation through a lawyer or public notary. This way, if a dispute arises, it can be clearly demonstrated that the buyer was ready to perform their part, and that it was the seller who thwarted the deal.

Professional advice: If the seller starts to procrastinate, do not wait passively – invite them in writing to conclude the main contract and preserve all communication as proof of your readiness to fulfill the agreement.

Tax implications of a failed deal

The question of what tax consequences arise when a deal falls through is often asked. Real estate transfer tax in Croatia is paid at a rate of 3% on the market value of the property at the time of acquisition. If the actual transfer of ownership does not occur because the deal fell through, there is no real estate transfer tax on that basis.

Separately, there is the question of the tax treatment of any amount the buyer may receive beyond what they paid, for example, when earnest money is returned in an increased amount. This is precisely why it is not advisable to rely on assumptions here. In a standard purchase, real estate transfer tax is reported to the Tax Administration within 30 days of acquisition and paid within 15 days of receiving the decision; if no acquisition occurs at all because the contract fell through, these deadlines do not start.

Professional advice: Check the tax implications of a failed or altered deal directly with the Tax Administration or a tax advisor. A wrong assumption about tax can become a problem only after the deal has already fallen apart.

How the buyer can protect themselves

The best protection is preventive and lies in the document being signed and the steps taken before giving earnest money. The buyer should insist that the amount be explicitly agreed upon as earnest money, that the consequences of withdrawal are clearly stated for both parties, that the deadlines for concluding the main contract are precise, and that it is clear what follows if the deadline expires. Before giving earnest money, it is necessary to check who the actual owner of the property is and if there are any encumbrances in the land registry.

For purchases of apartments in Zagreb, Split, or Rijeka, where earnest money and total prices often reach high amounts, such preparation is even more important. For larger amounts, registering the pre-contract should also be considered. The combination of these measures significantly changes the buyer's position because, instead of relying on meager provisions, it provides concrete levers for the protection of rights.

Professional advice: Before giving earnest money, check the ownership and land registry status of the property. Earnest money given for a property with unresolved ownership or encumbrances is often difficult and slow to recover later.

Frequently asked questions (FAQ)

1. What happens to the earnest money if the seller withdraws from the sale?
If the seller who received the earnest money withdraws from the sale, they are generally obliged to return double the amount of the received earnest money to the buyer. In certain cases, the buyer may also request that the contract still be fulfilled. If the sale is properly carried out, the earnest money is usually included in the purchase price.

2. What is the difference between earnest money and an advance payment?
Earnest money secures the fulfillment of the contract and carries consequences upon withdrawal – a loss for the party responsible for non-fulfillment or a return in double the amount when the receiving party withdraws. An advance payment is merely a part of the price paid in advance, and if the deal falls through, it is usually simply returned, without increase.

3. Can I, as a buyer, demand that the sale still proceed?
In certain cases, yes. Instead of merely settling for the consequences related to earnest money, the buyer can demand contract fulfillment, especially if they are particularly interested in that specific property. The possibility depends on the content of the pre-contract, the circumstances, and whether the property has since been sold to another party.

4. Can I claim damages greater than the earnest money?
In certain circumstances, the buyer can claim compensation for actual, provable damages that exceed the earnest money amount, for example, costs of appraisal, notary fees, lawyer fees, or loan processing fees. For this, it is necessary to prove the damage with invoices and other documentation.

5. What if the seller doesn't say they are withdrawing, but merely procrastinates?
In that case, it is in the buyer's interest to document their readiness for fulfillment through a written invitation to conclude the main contract, by preserving communication, and, if necessary, by a formal invitation through a lawyer or public notary. This way, it can later be shown that it was the seller who thwarted the deal.

6. Why is the pre-contract so important in this situation?
Because the pre-contract is a legally binding document in which earnest money, deadlines, and consequences of withdrawal are most often agreed upon. Its provisions define the rights and obligations of each party, and the registration of the pre-contract in the land registry can further strengthen buyer protection.

Recommended

• Pre-contract for real estate in Croatia: A guide to safe buying
• What is a real estate pre-contract and when is it used
• How the real estate purchase process works in Croatia – step by step
• Registration of real estate in Croatia: what it is, how it works, and what you need to know