As with most things, this should have been spelled out in the holding agreement as far as what the conditions are--if any--that the tenant can back out and receive a full refund. If there is nothing, then odds are it would be in your best interest to return the money and re-rent quickly. If you're feeling confident, you could try a negotiation; maybe offer to return all but 1 weeks' worth of rent. See what they say. Can't hurt to suggest something.
"Mrs. Tenant, how can I let you have this all back when we already discussed that the expiration was non-negotiable and me holding this property vacant for you has made us lose money from other renters who were okay with our terms?"
Follow up with, "We want to be fair to each other, right?" Get her to walk in your shoes for a few minutes.
Regardless, this has exposed a weakness in your policies and procedures. Use the lesson we learn here and type up a "Holding Agreement" that spells out what has to happen, when, where, etc. and what happens if the tenant breaches the reservation period.
My Holding FEE agreement says that if they back out for ANY reason, or if I find out later after approval that they falsified information (i.e. current LL gives great reference to get rid of a bad tenant, but then files eviction for non-payment the day after I approve their application; I actually had this happen once) that the entire Holding Fee is forfeit as liquid damages. My holding fee is $400, which is roughly equal to 2 weeks of rent. I recently changed my policy and will not hold longer than 7 days. Used to be 14. But rentals are flying off the market now. There's no reason to wait longer.
Get your Holding Fee agreement typed up today while you're making up your mind on the current situation. This scenario must never happen again without you having a detailed plan on what happens.
--107.216.xxx.xxx