The Buyer Walked Away. Earnest Money Disputes in Texas

Start with the reason the buyer left

Earnest money follows the contract, and the contract treats different exits differently. The first task is to place the buyer's departure in one of three categories.

• A permitted termination. The buyer gave timely notice during the feasibility, inspection or due-diligence period, or a stated condition failed: financing, zoning, a tenant estoppel, title objections the seller declined to cure. In these cases the contract almost always returns the deposit, sometimes less an independent consideration payment that the seller keeps.
• A default. The feasibility period ran, the deposit became non-refundable, and the buyer then failed to close, missed a required additional deposit, or sent a termination notice the contract no longer allowed. This is the forfeiture case.
• A disputed exit. The buyer says the seller breached first, or that a notice was timely, or that a condition failed; the seller disagrees. These are the cases that reach a courtroom.

Dates and delivery matter. A termination notice sent one day after the feasibility deadline, or to an address the contract does not list, can convert a permitted termination into a default. Keep every notice with proof of delivery.

What the remedies clause says

Commercial purchase agreements in Texas usually address a buyer default in one of three ways:

1. Earnest money as the seller's sole and exclusive remedy. The seller keeps the deposit and waives any other claim. This is the most common structure and the one buyers negotiate for.
2. An election. The seller may keep the deposit as liquidated damages or pursue actual damages, but not both.
3. Earnest money plus actual damages. Less common, and the most exposed to a penalty challenge because the deposit is not then a substitute for proof of loss.

Specific performance against a buyer is rarely sought; a seller's loss is money, and courts treat damages as adequate. Sellers who want more than the deposit must read their clause before sending a demand, because a demand for both the deposit and actual damages under a sole-remedy clause is itself a misstep.

The Texas test: liquidated damages or penalty

A forfeiture of earnest money is a liquidated damages provision, and Texas enforces it only if it passes the two-part test the Supreme Court stated in Phillips v. Phillips (1991) and reaffirmed in Atrium Medical Center v. Houston Red C (2020): the harm caused by the breach must have been incapable or difficult of estimation when the contract was made, and the amount must have been a reasonable forecast of just compensation. Courts judge both questions as of the time of contracting, and the party seeking to enforce the clause has the burden of showing it meets the test. A clause that fails is an unenforceable penalty, and the seller is left to prove actual damages.

A deposit of a few percent of the price on a commercial sale usually passes. The seller's harm from a failed closing, lost time on the market, carrying costs, a possible lower price, is hard to quantify in advance, and a modest deposit is a reasonable estimate. A deposit that is large relative to the price, or that increases sharply after a short period, invites a closer look. Texas courts have also recognized a second look at the moment of breach: if the actual damages turn out to be far smaller than the stipulated sum, a defendant may show that the clause operated as a penalty in that case, and the burden to prove that disproportion is on the party resisting the clause. How the test applies to contract clauses generally is covered in whether liquidated damages clauses are enforceable in Texas.

How escrow releases the money

The title company or escrow agent holds the deposit as a stakeholder and will not decide who is right. Under the typical escrow terms it releases funds only on written instructions signed by both parties or on a court order. When one side makes a demand and the other objects, the agent waits. If the dispute continues, the agent may file an interpleader, depositing the money into the court's registry and asking the court to decide who owns it, usually with its own fees paid from the fund. The party that forces a needless interpleader often ends up paying those fees under the contract. Many contract forms also provide that a party who wrongfully refuses to release earnest money is liable for the other side's attorney's fees and sometimes a stated additional amount; read the form you signed.

The buyer's defenses

A buyer told that its deposit is forfeited has a checklist of its own:

• The termination was permitted. The notice was timely and properly delivered, or the condition really failed. Keep the proof.
• The seller breached first. A seller that failed to deliver required documents, cure a title objection it agreed to cure, or maintain the property can excuse the buyer's performance under the material-breach rules.
• A condition to the deposit going hard never occurred. Some contracts make the deposit non-refundable only after the seller delivers specified items or after both sides sign an amendment.
• The clause is a penalty. The deposit was out of proportion to any plausible harm, or the seller resold quickly at a higher price and suffered no loss.
• The seller induced the contract by misrepresentation. Business and Commerce Code § 27.01 makes a false representation of a material fact in a real estate transaction actionable for actual damages, exemplary damages where the speaker knew it was false, and attorney's fees. A buyer who walked because the rent roll or environmental condition was misrepresented may have a claim rather than a liability.

The seller's checklist

• Confirm the feasibility and other termination periods have expired and the deposit is non-refundable by the contract's own terms.
• Confirm the seller performed every delivery and cure obligation that preceded closing.
• Send the demand for release to the escrow agent and the buyer exactly as the contract's notice clause requires, electing the remedy the contract allows.
• Document the harm: carrying costs, the re-marketing period, and the terms of any resale. Even under a liquidated damages clause, this record defends against a penalty argument.
• If the buyer objects, decide early whether the deposit justifies a suit or whether a split is the better business outcome.

Example

Suppose a Richardson office owner contracts to sell a $4.5 million building with $100,000 in earnest money, a 30-day feasibility period, and a clause making the deposit the seller's sole remedy for buyer default. On day 29 the buyer emails the seller's broker saying it needs two more weeks. No amendment is signed. On day 38 the buyer sends a termination notice citing the feasibility clause. The seller demands the deposit. The buyer argues the broker's reply ("let me check with the owner") extended the period. The contract requires amendments in writing signed by both parties and names the title company as the only address for notices. The termination was late, the deposit is hard, and $100,000 on a $4.5 million sale is a reasonable forecast of the harm from a lost closing. The title company interpleads the funds after the buyer objects; the court awards the deposit to the seller, less the title company's fees, and awards the seller its attorney's fees under the contract's prevailing-party clause. Had the buyer obtained a one-line signed extension on day 29, the result would have been reversed.

When the dispute is worth a lawsuit

Earnest money disputes are decided in county court at law or district court depending on the amount, and the contract's attorney's fee clause often decides whether a suit makes sense. A seller with a clean record and a sole-remedy clause usually wins quickly; a seller who missed its own deadlines or demands more than the clause allows does not. The broader set of remedies when a purchase contract fails is in what a buyer can do when a seller backs out, and the writing requirements for the contract itself are in the statute of frauds for Texas real estate. Tina Wysk represents buyers and sellers in earnest money and failed-closing disputes in Dallas-Fort Worth; the firm's real estate litigation practice handles the escrow demand, the interpleader and any damages claim together.