💵 What Is an Earnest Money Release Clause in Real Estate?

An earnest money release clause is a provision in a real estate contract that explains how and when earnest money is released from escrow. It outlines who must authorize the release, the required documentation, and what happens if the buyer and seller disagree about who should receive the funds.

How an Earnest Money Release Clause Works

Earnest money is held in escrow until the contract either closes or is terminated. The release clause governs the process for instructing the escrow holder to distribute the funds.

Key components of an earnest money release clause:

  • Who must sign the release (usually both buyer and seller)
  • Deadlines for giving release instructions
  • Whether release is automatic after certain contingencies expire
  • Escrow agent authority in disputes or delays
  • What happens to earnest money if the contract is canceled

If both parties agree, they sign a release form and escrow distributes the money. If they disagree, escrow may hold the funds—or file an interpleader action—until a resolution is reached.

Why an Earnest Money Release Clause Matters

For Buyers:

  • Explains how to recover earnest money after a valid cancellation.
  • Protects against improper release of funds to the seller.
  • Clarifies documentation needed for refunds.

For Sellers:

  • Provides a path to receive earnest money if the buyer defaults.
  • Reduces disputes by clarifying expectations upfront.
  • Helps enforce deadlines tied to contingency removal.

For FSBO Sellers:

  • Essential for protecting your rights without a listing agent.
  • Ensures earnest money is not released without your written approval.
  • Prevents escrow disputes when selling via Flat Fee MLS.

Examples of Earnest Money Release

Example 1: Buyer Cancellation Under Contingency

  • Buyer cancels after inspection reveals major issues.
  • Both parties sign a release; escrow refunds buyer’s deposit.

Example 2: Buyer Default

  • Buyer misses financing deadlines without notice.
  • Seller requests earnest money per the default terms.

Example 3: Earnest Money Dispute

  • Buyer and seller disagree about who should receive funds.
  • Escrow holds the money until a mutual release or court order.