In any case, we agreed to break the lease in exchange for forfeiting the security deposit.

Maybe it means you offer them a contract written such that a sizable earnest deposit is forfeited if you fall through.

It's mindboggling that a seller would forfeit any amount of money held from the sale, rather than move on

It is also just an addition to the security deposit with no mention due to the dog so it can be used for other things and my lease states if you break the lease early you forfeit the deposit.  

Your contract dictates when and if it is forfeited, but you might have some issues if your contract didn't reveal you were not the current title holder.

If they haven't, just sign releases, maybe have them agree to forfeit the deposit as a cancellation fee first, and find someone else.

At a minimum, I would request the security deposit deposit which will further secure the tenant & the rental with the first months rent payable on or before the agreed upon move in date.I would also put a clause on the receipt stating something along the lines of" If tenant fails to move in within (certain amount of time-7 days of agreed moved in date, due to no fault of the landlord/owner/management, ( a percentage, 1/2) of deposit will be forfeited "This way, if for any reason if the tenants doesn't move in, you don't lose time/money and you get compensated for the time the property wasn't on the market.

Do I forfeit my deposit based on the clause?

Also, buyers that do this will do it again at the walk through.I generally ask that they escrow the cost of any major repairs with an increase in their earnest money deposit and that if they fail to purchase the house, for any reason, including financing, that they forfeit the cost I made to repairs at their request in an addendum to the contract. 

You may even be able to name your landlord as a co-defendant in the suit against the upstairs tenant.There's no reason to tolerate your situation, but you may need to stretch your comfort zone just to stand up for yourself and your family.My $0.02 ...