Ask for a re­fund

Par­ties mak­ing a prop­erty trans­ac­tion have to un­der­stand when the earnest money can be right­fully for­feited

HT Estates - - HTESTATES - Su­nil Tyagi

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.

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