Ask for a refund
Parties making a property transaction have to understand when the earnest money can be rightfully forfeited
Ear nest money i s t he deposit paid by a buyer at the time of entering into a contract for purchase of property, indicating his seriousness in making the transaction. It essentially represents a guarantee that the buyer will fulfill his obligations laid down in the contract. Thus, giving earnest money serves two key purposes – one, it acts as partpayment of the purchase money and two, it is security for the performance of the contract.
In real estate transactions, generally 10-15% of the consideration is treated as ‘earnest money’ which the seller has the right to forfeit in case of non performance/breach of payment terms by the purchaser. In under-construction projects also, the booking amount paid by the allottees/buyers is treated as earnest money. The builder retains the right to forfeit the earnest money in case of nonpayment by allottees as per the installment plan or demand.
In Haryana Urban Development Authority and another v. Kewal Krishan Goel (1996) case, the Supreme Court addressed the issue of forfeiture of earnest money by the seller/ builder. It clarified that earnest money is a part of the purchase price when the transaction gets through.
Conversely, the same is forfeited when the transaction falls through by reason of a default or failure on the part of the buyer. In case of default by the buyer, the seller is entitled to forfeit the earnest money. For example, if an allotee accepts the allotment and after making additional deposits on an installment basis intimates the seller/builder that he will not be in a position to pay up the balance amount, his request for a refund will not be justified. This is because according to the payment plan, his failure to pay the rest of the installments is nothing but a default. Therefore, the seller/ builder would be justified in forfeiting the earnest money.
Further, in the matter of Satish Batra v. Sudhir Rawal (2012), the question again surfaced as to whether a seller is entitled to forfeit the earnest money in case the sale of an i mmoveable property f alls through due to the fault or failure of the buyer. This case also examined the technical difference between the terms earnest money and part- payment or 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 hence is liable to be forfeited by the seller) the mere description of words used in the agreement is 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.
It has often been alleged that the builders misuse the leverage they have over a consumer and wrongfully forfeit amounts. Because of the growing number of such instances, cases where earnest money has been rightfully forfeited have also come under the purview of litigation. Needless to say this is causing unnecessary trouble to both the parties involved.
Therefore, it is imperative that both parties understand the true concept of earnest money and the instances when it can be rightfully forfeited. The courts have suitably clarified the concept of earnest money and situations when it can be rightfully forfeited.