Earnest pro­tec­tion

An agree­ment to sell should lay down rules gov­ern­ing the pay­ment and for­fei­ture of earnest money in the in­ter­ests of both buy­ers and sellers

HT Estates - - Front Page - Su­nil Tyagi

In many trans­ac­tions of sale of im­mov­able prop­erty, par­ties ex­e­cute an agree­ment to sell (ATS) as a pre­cur­sor to the sale deed. Un­like a sale deed, ex­e­cu­tion of an ATS does not pass ti­tle of own­er­ship in favour of the buyer. In an ATS, par­ties set out terms such as ad­vance sale price, to­tal sale price, man­ner and time­lines of pay­ment and time pe­riod within which the sale deed is to be ex­e­cuted. Terms per­tain­ing to obli­ga­tions to be per­formed by the par­ties be­fore the sale can take place are also laid out. A nec­es­sary and im­por­tant clause is the con­tin­gency of buyer com­mit­ting a de­fault or breach of terms (of the ATS) mainly per­tain­ing to pay­ment and time­lines. In this re­spect, par­ties usu­ally pro­vide that if the buyer de­faults or breaches terms of the ATS, the trans­ac­tion stands can­celled and earnest money de­posited by the buyer is for­feited by the seller. Par­ties usu­ally also lay down a con­verse sit­u­a­tion that if the seller fails to per- form or breaches the ATS, the buyer shall be en­ti­tled to re­ceive twice the earnest money.

Earnest money is ba­si­cally the de­posit paid by a buyer at the time of en­ter­ing into a con­tract for pur­chase of prop­erty, show­ing the buyer’s faith in the trans­ac­tion. Earnest money es­sen­tially rep­re­sents a guar­an­tee that the buyer will ful­fil the obli­ga­tions laid down in the con­tract. Thus, giv­ing earnest money serves two key pur­poses – first, it acts as part-pay­ment of the pur­chase money and sec­ond, it acts as se­cu­rity for the per­for­mance of the con­tract. An im­por­tant ques­tion re­gard­ing earnest money re­cently came up be­fore the Hon’ble Supreme Court in the mat­ter of Satish Ba­tra v Sudhir Rawal (Oc­to­ber 2012).

In this case, the main ques­tion was whether a seller was en­ti­tled to for­feit the earnest money whereby the sale of an im­mov­able prop­erty fell through due to the buyer’s fault. Of­ten, what is called as only part-pay­ment/ad­vance money may ac­tu­ally be earnest money and what is termed as earnest money may only be ad­vance money. In this re­gard, the Hon’ble Supreme Court ob­served that in or­der to de­ter­mine whether the amount paid by a buyer can be treated as earnest money and is li­able to be for­feited by the seller, the mere de­scrip­tion of words used in the agree­ment are not suf­fi­cient. Rather, courts would take into ac­count the na­ture of the sum paid, the terms of the con­tract, in­ten­tion of the par­ties and sur­round­ing cir­cum­stances rel­e­vant to each case.

The Hon’ble Supreme Court held that in or­der to jus­tify for­fei­ture of earnest money, the terms of the con­tract should be clear and ex­plicit. Part pay­ment of pur­chase price (ie earnest money) can­not be for­feited by the seller un­less the amount has been given as a guar­an­tee for the due per­for­mance of the con­tract. In other words, if the pay­ment is made merely as ad­vance/part pay­ment of the to­tal sale price, then the seller is not en­ti­tled to for­feit such part pay­ment made by the buyer. How­ever, if the pay­ment is made as a guar­an­tee for per­for­mance of the con­tract, the seller is en­ti­tled to for­feit earnest money in the event of a de­fault by the buyer, if noth­ing con­trary has been agreed by the par­ties in the con­tract. This judg­ment has im­por­tant im­pli­ca­tions for both buy­ers and sellers in trans­ac­tions of sale of im­mov­able prop­erty. To pro­tect their rights and in­ter­ests, the terms of pay­ment and for­fei­ture of earnest money should be clearly set out in the ATS.


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