Everything buyers and sellers need to know about earnest money: terms, amounts and refunds

When buying real estate in Croatia, earnest money is usually around 10% of the purchase price, although the amount is not prescribed by law — it is agreed between the seller and the buyer. In practice, it is normally agreed that the earnest money forms part of the purchase price, so it is not an additional cost for the buyer. If the earnest money is expressly agreed as a cancellation fee, the party who paid it loses it if they withdraw, while the party who received it must return twice the amount if they withdraw. If no cancellation right has been agreed, neither party can simply walk away from the contract. Buyers financing their purchase with a mortgage should specifically agree that the earnest money will be refunded if the bank does not approve the loan, subject to a written decision from the bank.

How much is the earnest money, and when is it paid?

Short answer: It is usually around 10% of the purchase price, but it can be a different amount — the law does not prescribe it, so it is a matter of agreement between the seller and the buyer. It is paid when all contracting parties sign the relevant document: a reservation offer, a preliminary agreement or the purchase agreement itself, unless the parties agree otherwise.

Under the Croatian Obligations Act, earnest money is an amount one party gives to the other as evidence that the contract has been concluded. This has a legal consequence many buyers overlook: once earnest money is paid, the contract is considered concluded unless otherwise agreed — it is therefore not merely an expression of intent. The law sets neither a minimum nor a maximum amount, although in cases involving liability of the party who paid or received the earnest money, the court may, at the request of an interested party, reduce an excessively high amount. This is why 10% is an established practice rather than a rule: for lower-value properties a fixed amount is more common, while for higher-value properties the percentage may be lower.

The key point when asking “when” is the moment all contracting parties reach a written agreement and sign the document. Earnest money should not be paid based on a verbal agreement, after a viewing, or while even one co-owner’s signature is still missing. If, for example, a property has three co-owners, a document signed by only one of them will generally not bind the other two — while the money may already have changed hands. In our experience on this market, this causes problems more often than bad faith does.

Is the earnest money part of the total purchase price or a separate cost?

Short answer: In practice, earnest money is usually agreed as part of the purchase price rather than as a separate cost, unless the parties agree otherwise — because once the contract is performed, the earnest money must either be returned or counted towards fulfilment of the obligation. The buyer then pays only the difference between the amount already paid as earnest money and the agreed purchase price, within the deadline set out in the main agreement.

In practical terms, if a property is sold for €200,000 and the earnest money amounts to €20,000, the buyer pays the remaining €180,000 within the agreed period. Earnest money is not an agency commission, a fee or a reservation charge. Separate costs, which should not be confused with earnest money, may include the agency fee, notary costs for signature certification, land-registry registration costs, drafting of the agreement, property valuation or translation costs, as well as any other expressly agreed expenses.

As far as taxation is concerned, under the Croatian Real Estate Transfer Tax Act, the tax base is the market value of the property at the time the tax liability arises. The liability generally arises when the contract or other legal transaction through which the property is acquired is concluded. An exception applies to a foreign individual or legal entity that requires the consent of the minister responsible for judicial affairs in order to acquire real estate in Croatia — in that case, the tax liability arises when that consent is obtained. Since the earnest money forms part of the agreed purchase price, paying it does not in itself change the tax base.

For foreign buyers from the EU, misunderstandings often arise at precisely this point, because in some markets the word “deposit” refers to a non-refundable fee paid to an agency. This is why we begin these conversations by clearly separating the purchase price, the tax, the agency fee and other transaction costs.

What is the procedure and deadline for refunding earnest money if someone withdraws?

Short answer: There is no statutory deadline for refunding earnest money — the deadline and the conditions are agreed in the same document under which the earnest money is paid. That document should clearly state when and under what circumstances the money will be refunded, as agreed between the parties.

The refund conditions are established when the document is signed, not afterwards — unless the parties subsequently agree otherwise in writing. Whether you are signing a reservation offer, a preliminary agreement or the main contract, the same document should define the amount of earnest money, the deadline for concluding the main agreement, the circumstances in which the earnest money is returned to the buyer or retained by the seller, whether it also serves as a cancellation fee, and all other relevant legal consequences. For example, if a contract is terminated due to non-performance, the law provides that both parties are released from their obligations, except for any obligation to compensate damages.

Conditions most commonly agreed in practice include: the buyer obtaining bank financing by a specific date, with the payment deadline aligned accordingly; a clear land-registry title without encumbrances; a possible termination condition; obtaining an energy performance certificate; completed condominium subdivision; or the absence of a statutory right of first refusal. This list is not exhaustive — each transaction should reflect what is relevant to the parties involved.

In practice, it comes down to one rule: until the money has been paid, the buyer can negotiate the refund conditions. Once payment has been made, any amendment to the agreed terms or consensual termination depends on the other party’s willingness to agree. This is why the conditions for refunding earnest money, just like all other relevant circumstances, should be defined clearly before payment rather than afterwards. The legal consequences should always be assessed individually, taking into account the parties’ written agreement, their conduct after signing and the applicable law.

What happens to the earnest money if the bank does not approve my mortgage?

Short answer: If the preliminary agreement does not expressly state that the earnest money will be refunded if financing is rejected, refusal of the loan will generally be treated as a circumstance on the buyer’s side — meaning the buyer risks losing the earnest money. This is why the clause should be agreed in advance, with a clear deadline and an obligation to provide the bank’s written decision.

The Croatian Obligations Act allows contracts to be concluded subject to a condition, which means mortgage approval can be expressly included as such a condition: if the bank does not approve the buyer’s loan by a specified date, the preliminary agreement terminates and the earnest money is refunded to the buyer in full, without further consequences for either party. The clause should include three elements: the deadline by which the bank’s decision is expected, the buyer’s obligation to submit a complete application on time, and the obligation to provide the other party with written evidence of the bank’s decision within the agreed period. The law also protects against abuse — if the fulfilment of a condition is prevented or caused, contrary to the principle of good faith and fair dealing, by the party who stands to benefit from it, the condition is assessed as if the opposite had occurred. In other words, a buyer cannot rely on rejection of a loan application if they never submitted one.

Experience also gives us a warning that is even more valuable than the clause itself: verbal approval is not approval. We have repeatedly seen situations where a bank branch verbally tells the buyer that everything is in order, only for the application to be rejected later by a higher-level authority or the bank’s credit committee. If the clause is poorly drafted and linked to “information from the bank” or to pre-approval, the buyer may be left without a solid argument. This is why the condition should always be tied exclusively to the bank’s written decision, and the deadline should be realistic — in practice, usually 30 to 45 days from signing the preliminary agreement, depending on the documentation and whether a property valuation is required.

This clause protects the seller as well as the buyer. It gives the seller a clear date by which they know where they stand, rather than keeping the property off the market for months without certainty. And if the earnest money is held in an escrow account, a refund following a rejected loan can be handled administratively, according to the scenario agreed in advance and upon presentation of the required evidence — without further negotiation or court proceedings.

Why is it not advisable to pay the earnest money directly to the seller?

Short answer: Because in practice the problem is rarely the legal entitlement — it is collecting the money. If the seller receives the earnest money and spends it, a buyer who has an entirely clear right to a refund may still have to go to court — and that takes time.

The Croatian court system is slow, and this is something that should be taken into account beforehand rather than afterwards. Imagine a buyer paying earnest money directly to the seller, the transaction falling through for reasons attributable to the seller, and the buyer having an unquestionable right to a refund. Having the right is one thing; recovering the money is another. If the money has already been spent, the buyer may eventually obtain a judgment — only for enforcement proceedings to begin afterwards. Years can pass, while the money itself may no longer be there.

For this reason, at Maris we recommend that earnest money, particularly when the parties are not proceeding immediately to the main purchase agreement — such as with a reservation offer or preliminary agreement — be paid into the intermediary’s escrow account as a neutral third party. This is a secure, temporary and separate third-party account: the funds are kept beyond the reach of both buyer and seller, while the agency controls when the amount is released to the seller, returned to the buyer or retained in part or in full to settle agreed obligations. This is done exclusively in accordance with the seller’s and buyer’s prior written agreement and upon presentation of evidence that the agreed conditions have been fulfilled.

An escrow account can also be administered by a notary public, which is an equally valid solution, although this service is charged separately.

Can a preliminary agreement containing an earnest-money clause be concluded before the main purchase agreement?

Short answer: Yes — and this is common practice. The preliminary agreement sets out in advance what happens if either party fails to follow through on what has been agreed.

The Croatian Obligations Act defines a preliminary agreement as a contract under which the parties undertake to conclude the main contract at a later date. It is binding if it contains the essential elements of the main contract and is concluded in the required written form, which is mandatory in real-estate transactions. For a property, the essential elements include an unambiguous identification of the property — cadastral parcel, cadastral municipality, land-registry folio number, description, surface area, and, for apartments, the condominium unit and other land-registry details — together with the agreed purchase price, deadline for signing the main contract, payment schedule, handover deadline and any other relevant circumstances. Conclusion of the main contract may be demanded within six months from the expiry of the deadline set for its conclusion.

The purpose of an earnest-money clause is not formality, but predictability. If the consequences of non-performance by either side are agreed in writing in advance, nobody has to negotiate under pressure later. Notarial certification of signatures is not a formal requirement for the validity of a preliminary agreement, but we recommend it because it gives the document stronger evidentiary value.

In practice, we often use an additional, simpler step before the preliminary agreement — an accepted reservation offer accompanied by payment of a deposit into an escrow account, after which the property is removed from the market while the main contract is prepared and subsequently certified by a notary. It is important to understand that signing an offer, as a proposal to conclude a contract, and having it accepted can already produce legal consequences if all essential elements of the future contract have been agreed. A reservation offer, in other words, is not a non-binding piece of paper.

What happens legally and financially to the earnest money if the buyer or seller withdraws?

Short answer: It depends on whether the earnest money has also been agreed as a cancellation fee. If it has, the party who paid it loses it upon withdrawal, while the party who received it must return twice the amount if they withdraw. If no cancellation right has been agreed, neither party can simply withdraw from the contract.

If no cancellation right has been agreed

If, when concluding the contract, one party gives the other a sum of money as evidence that the contract has been concluded, the contract is considered concluded when the earnest money is paid, unless otherwise agreed. Once the contract is performed, the earnest money must be returned or credited towards fulfilment of the obligation. This is where another provision that surprises many people comes into play: unless otherwise agreed, the party who paid the earnest money cannot withdraw simply by leaving it to the other party, nor can the receiving party withdraw simply by returning twice the amount.

If the earnest money has been agreed as a cancellation fee

The parties may agree in writing that either of them has the right to withdraw from the contract without having to state a reason to the other party. In that case, if the buyer, as the party who paid the earnest money, withdraws, they lose it. If the seller, as the party who received it, withdraws, they must return twice the amount. The parties are not required to make the earnest money function as a cancellation fee — but if they want it to, this must be stated in writing.

If the contract is not performed

The Croatian Obligations Act provides for the following consequences. If the party who paid the earnest money is responsible for non-performance, the other party may choose to demand performance of the contract where this is still possible, claim damages with the earnest money either credited towards those damages or returned, or simply retain the earnest money received. If the party who received the earnest money is responsible for non-performance, the other party may choose to demand performance where this is still possible, claim damages together with return of the earnest money, or demand twice the amount of the earnest money. In such cases, the court may, at the request of an interested party, reduce an excessively high amount. A party demanding performance also has the right to compensation for damage caused by delay.

If the contract has only been partially performed

The creditor may not retain the earnest money. Instead, they may demand performance of the remaining obligation together with damages for delay, or claim damages for incomplete performance — in both cases, the earnest money is credited towards the compensation. If the creditor terminates the contract and returns what was received as partial performance, they may choose between the remedies available when the other party is responsible for non-performance.

What this means in practice

The point buyers most often miss is that a right to withdraw without giving the other party a reason exists only if the earnest money has been agreed as a cancellation fee.

Real-life situations are rarely so clear-cut. If a buyer withdraws because they subsequently discover circumstances material to the transaction that the seller failed to disclose and which could not reasonably have been discovered through a careful review of publicly available information and the documentation provided, or because one of the co-owners later refuses to sign the agreement despite having previously undertaken in writing to do so, such situations must be assessed individually on the basis of the parties’ written agreement, supporting documentation and applicable law.

For that reason, in our practice we recommend that the parties agree in advance that the earnest money will also serve as a cancellation fee, or otherwise define in writing the legal consequences of such situations, including whether costs incurred by the buyer and the agency are to be borne by the seller. Relationships can also be regulated in greater detail where there are several participants on either side — several sellers or several buyers.

Conclusion

Earnest money is the least expensive form of protection in the entire transaction — but only if the document and the account holding the funds are set up properly. A condition that has not been clearly written down will usually cost more than the earnest money itself.

Before paying any amount, check three things: whether the land-registry status is in order and whether there are any legal obstacles to completing the transaction, whether all co-owners have signed the document, and exactly where the money will be held until the main purchase agreement is concluded.

If you are buying or selling property in Pula and the surrounding area (Pula, Fažana, Vodnjan, Medulin, Ližnjan), feel free to contact us. We provide support throughout the real-estate transaction, as well as access to our authorised legal associates.

Maris Nekretnine
Marijanijeva ulica 11, Pula
+385 98 190 0688
maris.hr

Note: This text is for informational purposes only and does not constitute legal advice. Always have the specific preliminary agreement, purchase agreement and any other relevant documents reviewed by an authorised professional, such as a lawyer or notary public, and obtain appropriate legal advice