What Happens When Escrow Funds Are Disputed During a New Jersey Home Purchase

Understanding Your Rights When Buyer and Seller Cannot Agree on the Release of Escrow Deposits

You have been counting down the days to your closing. The home inspection is done, the mortgage commitment is in hand, and everything seems to be on track. Then something goes wrong. Maybe the seller failed to make agreed upon repairs, or the buyer got cold feet and wants out of the deal. Suddenly, neither side can agree on what should happen to the escrow deposit, and thousands of dollars are sitting in limbo. Escrow disputes are one of the most common sources of conflict in New Jersey residential real estate transactions, and they can delay or even derail a closing if not handled properly.

Whether you are a buyer trying to recover your deposit or a seller who believes you are entitled to keep it, understanding how escrow disputes work in New Jersey is critical to protecting your financial interests.

What Is an Escrow Deposit in a Real Estate Transaction?

In a typical New Jersey residential purchase, the buyer submits an earnest money deposit (often called the escrow deposit) shortly after the contract is signed. This deposit, which usually ranges from one to five percent of the purchase price, is held by a neutral third party, most commonly the seller’s attorney, in a trust or escrow account.

The escrow deposit serves two purposes. First, it demonstrates the buyer’s good faith commitment to proceed with the transaction. Second, it provides a source of funds that may be applied toward the purchase price at closing or, in the event of a dispute, potentially forfeited to the seller as liquidated damages.

Because the funds are held in trust, neither the buyer nor the seller can unilaterally withdraw them. Both parties must agree on how the deposit is released, or a court must decide.

Common Causes of Escrow Disputes

Escrow disputes typically arise when one party believes the other has breached the contract or failed to satisfy a contingency. Some of the most common scenarios we encounter in our Bergen County real estate practice include situations where (a) the buyer cancels outside the attorney review period and the seller claims the deposit should be forfeited; (b) the seller fails to make repairs that were negotiated during attorney review; (c) the home inspection reveals a material defect that the seller refuses to address; (d) the buyer cannot obtain mortgage financing and the seller disputes whether the mortgage contingency was properly invoked; (e) or title issues surface late in the process and neither party wants to absorb the cost of resolving them.

In each of these situations, the core question is the same: who is entitled to the escrow deposit, and under what terms?

What the Contract Says Matters Most

New Jersey courts look first to the language of the purchase contract when resolving escrow disputes. Most standard residential contracts in New Jersey (including the widely used New Jersey Association of Realtors form) contain specific provisions addressing the deposit, including what happens if the buyer defaults, what contingencies allow the buyer to cancel and recover the deposit, and whether the deposit serves as liquidated damages or whether the seller can pursue additional remedies.

During attorney review, the parties frequently negotiate modifications to these default provisions. These riders and addenda can significantly affect how an escrow dispute plays out. For example, a well drafted attorney review letter might specify that the buyer’s deposit is fully refundable if the home inspection reveals structural issues exceeding a stated dollar amount. Without that language, the buyer’s right to cancel and recover the deposit may be far less clear.

This is one of the reasons why having an experienced real estate attorney handle your transaction from the start is so important. The protections you negotiate during attorney review often determine the outcome of any dispute that arises later.

What Happens When Both Sides Claim the Deposit

When the buyer and seller cannot agree on who is entitled to the escrow deposit, the attorney or title company holding the funds is placed in a difficult position. As a fiduciary, the escrow holder cannot simply hand the money to one side over the other’s objection.

In practice, the escrow holder will typically send a letter to both parties (or their attorneys) requesting written consent to release the funds. If the parties cannot reach an agreement, the escrow holder has several options. The holder may continue to hold the funds until the parties resolve the dispute through negotiation or mediation.

Alternatively, the holder may file an interpleader action, which is a court proceeding where the escrow holder deposits the funds with the court and asks a judge to determine who is entitled to them. In an interpleader, the escrow holder is essentially saying to the court that both parties have a claim, and the holder needs judicial guidance on how to proceed.

Interpleader actions can be costly and time consuming, which is why most real estate attorneys in New Jersey try to resolve escrow disputes through negotiation first.

Protecting Yourself Before a Dispute Arises

The best way to handle an escrow dispute is to prevent one from happening in the first place. There are several practical steps buyers and sellers can take to reduce the risk of a deposit dispute. During attorney review, make sure the contract clearly defines the circumstances under which the deposit is refundable. Put all repair agreements, contingency deadlines, and cancellation terms in writing. Keep written records of all communications regarding the transaction, including emails and text messages. Respond promptly to any notices or requests from the other party. If you need to cancel the contract, follow the precise procedures outlined in the agreement.

For buyers, it is especially important to understand the deadlines associated with your contingencies. Missing a mortgage commitment deadline by even one day can give the seller grounds to claim your deposit. For sellers, documenting your compliance with all contractual obligations gives you the strongest position if the buyer attempts to walk away and recover the deposit.

When to Contact a Real Estate Attorney

If you are involved in a residential real estate transaction and a dispute over the escrow deposit has arisen (or appears likely), it is important to consult with a New Jersey real estate litigation attorney as soon as possible. Early legal guidance can often resolve the issue before it escalates to litigation or an interpleader action.

At the Law Offices of Peter J. Lamont, we represent buyers and sellers throughout Bergen County and across New Jersey in all aspects of residential real estate transactions, including escrow deposit disputes. We understand the stress and financial pressure that come with these situations, and we work to resolve them efficiently while protecting our clients’ rights.

If you are facing an escrow dispute or need legal guidance on a residential real estate transaction in New Jersey, we are here to help.

Contact us today to discuss your business or legal matter. Put our 20+ years of legal experience to work for you.

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For detailed insights and legal assistance on topics discussed in this post, including litigation, contact the Law Offices of Peter J. Lamont at our Bergen County Office. We're here to answer your questions and provide legal advice. Contact us at (201) 904-2211 or email us at  info@pjlesq.com.

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About Peter J. Lamont, Esq.

Peter J. Lamont is a nationally recognized attorney with significant experience in business, contract, litigation, and real estate law. With over two decades of legal practice, he has represented a wide array of businesses, including large international corporations. Peter is known for his practical legal and business advice, prioritizing efficient and cost-effective solutions for his clients.

Peter has an Avvo 10.0 Rating and has been acknowledged as one of America's Most Honored Lawyers since 2011. 201 Magazine and Lawyers of Distinction have also recognized him for being one of the top business and litigation attorneys in New Jersey. His commitment to his clients and the legal community is further evidenced by his active role as a speaker, lecturer, and published author in various legal and business publications.

As the founder of the Law Offices of Peter J. Lamont, Peter brings his Wall Street experience and client-focused approach to New Jersey, offering personalized legal services that align with each client's unique needs and goals​.

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