Purchase & Sale  ·  October 22, 2026

Buyer Backed Out? Can a California Seller Keep the Deposit?

The short answer

A buyer who walks away from a California purchase after the contingencies are gone has usually breached the contract. That does not mean the seller gets to keep the deposit.

The seller keeps the deposit as liquidated damages only if the contract contains a liquidated damages provision that meets the Civil Code's requirements (sections 1675 through 1678 for a dwelling of one to four units the buyer meant to live in; sections 1676, 1677 and 1671(b) for other property), and even then only up to the limits the statute sets. For the one-to-four-unit home, an amount up to 3 percent of the price is presumed valid; above 3 percent, the seller has to prove the amount is reasonable. If there is no valid clause, the seller is left to prove actual damages under Civil Code section 3307, and in a market where the property is worth at least the contract price when the buyer breaches, there may be no loss-of-bargain damages to recover at all.

Meanwhile the money sits in escrow, and the escrow holder generally will not release it without signed instructions from both sides, a court order, or an arbitration award. Civil Code section 1057.3 is what gives that standoff a deadline.

This article is the seller-side companion to our piece on the buyer's remedy, the seller backed out, can I force the sale?.

Can a seller keep the deposit if the buyer backs out?

First, did the buyer actually breach?

A buyer who cancels inside a contingency period, for a reason the contract allows, is usually entitled to the deposit back. Inspection, loan and appraisal contingencies exist precisely so the buyer can leave without forfeiting anything.

The question becomes a breach question once the buyer has removed contingencies, or the contract treats a contingency as removed, and then fails to close. Even then, the standard California Association of REALTORS purchase agreement generally requires the seller to deliver a Notice to Buyer to Perform before cancelling for the buyer's failure to remove a contingency or perform certain obligations, and it sets timing rules for that notice. A seller who cancels without following the contract's own procedure can turn a strong position into a weak one. Check the version of the form you signed; the paragraph numbers and some terms change between revisions.

Then, is there a valid liquidated damages clause?

Liquidated damages are an amount the parties agree, when they sign, will stand in for the seller's actual loss if the buyer defaults. For real property, the Legislature has written specific rules for when that agreement is enforceable.

Section 1677 sets the formal requirements. A provision liquidating the seller's damages "is invalid unless" (a) it "is separately signed or initialed by each party to the contract," and (b) if it appears in a printed contract, it "is set out either in at least 10-point bold type or in contrasting red print in at least eight-point bold type." The printed C.A.R. form is printed to meet the typeface requirement. The initials matter: if either party left the box blank, the clause fails.

Section 1675 then governs the amount for what the statute calls "residential property": real property "primarily consisting of a dwelling" that contains "not more than four residential units," where, at the time the contract is made, "the buyer intends to occupy the dwelling or one of its units as his or her residence." Both conditions must be met.

For that property:

• Up to 3 percent of the purchase price. Under subdivision (c), the provision "is valid to the extent that payment is actually made unless the buyer establishes that the amount is unreasonable as liquidated damages." The burden is on the buyer.
• More than 3 percent. Under subdivision (d), the provision "is invalid unless the party seeking to uphold the provision establishes that the amount actually paid is reasonable as liquidated damages." The burden shifts to the seller.

So the statute's 3 percent figure is a presumption, not an absolute cap. A contract can go further than the statute. The C.A.R. form's liquidated damages paragraph has itself limited what the seller keeps, for a dwelling of no more than four units that the buyer intended to occupy, to 3 percent of the price, with any excess returned to the buyer. Where the contract says that, the contract controls.

Subdivision (e) tells the court how to judge reasonableness: by "the circumstances existing at the time the contract was made," and by "the price and other terms and circumstances of any subsequent sale or contract to sell and purchase the same property if the sale or contract is made within six months of the buyer's default." A quick resale at a higher price may be evidence against a large retention.

Only money actually paid counts

Section 1675(b) makes a liquidated damages provision valid "to the extent that payment in the form of cash or check, including a postdated check, is actually made," and only if the provision also satisfies sections 1677 and 1678 and subdivision (c) or (d). A deposit the buyer promised but never funded is not something the seller can retain as liquidated damages.

Increased deposits need their own initials

Some contracts call for a second payment after contingencies come off. Section 1678 says any payment after the first counts as liquidated damages only if the total still satisfies section 1675 and "a separate liquidated damages provision satisfying the requirements of Section 1677 is separately signed or initialed by each party to the contract for each such subsequent payment." The C.A.R. system uses a separate form for this. If the increased deposit went into escrow without a separately initialed provision, it falls outside the liquidated damages clause.

Investors and five-plus units are treated differently

If the property has five or more units, or the buyer did not intend to live there, section 1675 does not apply. Section 1676 sends the clause to the general rule of Civil Code section 1671(b), which upholds a liquidated damages provision "unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made." The section 1677 initials and typeface rules still apply.

There is no 3 percent line in that analysis, and the burden is on the buyer. In Hong v. Somerset Associates (1984) 161 Cal.App.3d 111, a buyer of a 36-unit apartment complex challenged a separately initialed $25,000 liquidated damages clause, and the court enforced it, measuring reasonableness as of the time of contracting rather than by the damages the seller actually suffered.

What if the deposit was labeled "nonrefundable"?

A label does not create liquidated damages. Two published decisions make the point.

In Kuish v. Smith (2010) 181 Cal.App.4th 1419, the buyer of a $14 million Laguna Beach beachfront home made deposits described as "non-refundable," and the parties stipulated that their agreement did not contain a liquidated damages provision. The buyer cancelled; the seller resold for more than the contract price and kept most of the deposit. The Court of Appeal reversed. Because the property was worth more than the contract price, there were no loss-of-bargain damages under section 3307, and the seller's retention of the deposit was an invalid forfeiture. Treating the "non-refundable" language as liquidated damages would have created a liquidated damages provision that did not meet section 1677.

In Allen v. Smith (2002) 94 Cal.App.4th 1270, a $100,000 payment on a Rancho Santa Fe home was called "non refundable purchase option monies." The court held the deal was a purchase contract, not an option, and that labels are not dispositive. Because the $100,000 exceeded 3 percent of the price, the sellers had the burden under section 1675(d) of proving it reasonable, and they offered no evidence. The contract's own clause limited retention to 3 percent, and the buyer recovered the difference.

What can a seller recover without a valid clause?

Section 3307: the price-minus-value measure

Civil Code section 3307 defines the seller's damages: "the excess, if any, of the amount which would have been due to the seller under the contract over the value of the property to him or her, consequential damages according to proof, and interest."

In practice:

• Loss of bargain. If the buyer agreed to pay $1,500,000 and the property was worth $1,400,000 at the time of the breach, that $100,000 difference is recoverable. If it was worth $1,500,000 or more, this element is zero.
• Consequential damages, proved with evidence, such as carrying costs while the property is re-marketed.
• Interest.

A prompt resale can fix the value. In Smith v. Mady (1983) 146 Cal.App.3d 129, the sellers resold for $10,000 more than the defaulting buyers had agreed to pay, and the trial court awarded the sellers their carrying costs anyway. The Court of Appeal reversed. A resale made with reasonable diligence may set the property's value for section 3307 purposes, and the resale gain offset the carrying costs. The court relied on Civil Code section 3358, under which no one "can recover a greater amount in damages for the breach of an obligation, than he could have gained by the full performance thereof on both sides."

The forfeiture rule

A seller who simply keeps the deposit without a valid clause risks having to return everything above provable damages. In Freedman v. Rector, Wardens & Vestrymen of St. Matthias Parish (1951) 37 Cal.2d 16, the California Supreme Court held that even a buyer whose breach was willful may recover the part of a down payment that exceeds the seller's actual damages, because the law will not enforce a forfeiture as punishment. Civil Code section 3275 separately allows relief from forfeiture upon making full compensation to the other party, but not for a grossly negligent, willful or fraudulent breach of duty; Freedman reached the same result for a willful defaulter on other grounds.

A valid clause and actual damages

Whether a seller with a valid, initialed clause may set it aside and sue for larger actual damages depends on the wording of the contract. Read the clause. If it says the seller "shall retain" the deposit as liquidated damages, expect the buyer to argue that the seller agreed to that amount as the remedy. If the seller wants a different remedy, the time to negotiate it is before signing. Civil Code section 1680 separately provides that the liquidated damages statutes do not affect any right a party may have to specific performance.

The time limit

A claim on a written purchase agreement is governed by the four-year limit of Code of Civil Procedure section 337(a), which generally runs from the breach. Our statute of limitations guide covers the related deadlines.

Who gets the deposit while escrow is stuck?

The escrow holder needs both signatures

When a deal falls apart, the buyer wants the deposit back and the seller wants to keep it. Escrow is a stakeholder and generally will not pick a side. The C.A.R. form says release of funds requires mutual signed release instructions from buyer and seller, a judicial decision, or an arbitration award.

Section 1057.3 puts a price on stonewalling

Civil Code section 1057.3(a) makes it the obligation of both buyer and seller to ensure that escrow funds are returned "to the person who deposited the funds or who is otherwise entitled to the funds under the contract" if the purchase is not completed by the date set for closing or a duly executed extension.

Under subdivision (b), a buyer or seller who fails to sign the documents escrow needs to release the funds "within 30 days following a written demand for the return of funds deposited in escrow by the other party" is liable to the person who made the deposit for:

1. the amount of the funds "not held in good faith to resolve a good faith dispute";
2. damages of treble that amount, "but liability under this paragraph shall not be less than one hundred dollars ($100) or more than one thousand dollars ($1,000)"; and
3. reasonable attorney's fees in an action to enforce the section.

In practice that makes section 1057.3 a tool for the party whose money is in escrow, usually the buyer.

Three qualifiers matter.

• The clock starts with a written demand. Thirty days run from the other party's written demand, not from the failed closing date.
• Good faith is a complete defense. Under subdivision (c), there is no liability if the funds are withheld "in order to resolve a good faith dispute," and the party seeking the penalty must prove there was no good faith dispute. Subdivision (f)(2) defines a good faith dispute as one in which the party refusing "had a reasonable belief of his or her legal entitlement to withhold the deposited funds." A seller with a properly initialed clause and a buyer who defaulted after removing contingencies may have that belief as to the amount the clause allows the seller to keep. Holding back more than the contract permits, such as an amount above the 3 percent the C.A.R. form allows on a home the buyer intended to occupy, is harder to defend. So is holding back anything when the buyer cancelled within a contingency period.
• It reaches homes only. Subdivision (f)(3) limits "property" to real property containing one to four residential units, at least one of which is to be occupied by the buyer when the escrow is created.

The treble-damages piece is capped at $1,000, so section 1057.3 is a lever, not a windfall. Its real force is the attorney fee provision and the burden it places on a party with no good faith position.

Subdivision (e) adds that signing a release of funds, or accepting released funds, does not by itself cancel the contract unless cancellation is specifically stated.

Mediation and arbitration first

The C.A.R. form requires the parties to mediate before suing, and a party who sues first without mediating can lose the right to recover attorney fees. We discuss that rule, and Lange v. Schilling, in the specific performance article. If both parties initialed the form's arbitration clause, the deposit dispute is subject to arbitration.

What sellers and buyers should do now

If you are the seller:

1. Confirm the breach. Check every contingency, its deadline, and whether it was removed in writing or by the contract's terms. Follow the contract's notice procedure before cancelling.
2. Check the initials. On the liquidated damages clause and on any separate provision for an increased deposit. Missing initials mean actual damages, not the deposit.
3. Do the 3 percent arithmetic from the signed contract. If the deposit exceeds 3 percent on a home the buyer intended to occupy, know what the contract and section 1675(d) require before you insist on all of it.
4. Document the market. If the property is worth less than the contract price, gather the evidence for section 3307 damages. If you relist and resell, keep records of every cost and offer.
5. Answer a written demand promptly and in writing, stating the basis for your position. Where section 1057.3 applies, a party who does not sign the release within 30 days is exposed to its penalties unless there is a good faith dispute.

If you are the buyer:

1. Confirm whether you cancelled inside a contingency. If you did, your demand should say so and cite the contract.
2. Send a written demand for return of the deposit; it starts the section 1057.3 clock where that statute applies.
3. Check the amount and the initials. A deposit above 3 percent on a home you intended to occupy, an uninitialed clause, or an increased deposit without its own initialed provision may all be recoverable.
4. Mediate as the contract requires before filing anything.

Deposit disputes can travel with other claims: a disclosure fight that prompted the cancellation, a contract formed by text message that one side says never existed (see you said yes by text, you may not have a deal), or a buyer who wants specific performance instead. Our purchase and sale disputes practice handles both sides of these cases.

Common questions

This article is general information about California law, not legal advice, and reading it does not create an attorney-client relationship. Statutes and case law change, and how they apply depends on the specific facts. Attorney advertising. Prior results do not guarantee similar outcomes. Robert B. Mobasseri, State Bar No. 193193, ROMO Law Group, Encino, California.