The Supreme Court has held that earnest money paid by a buyer for an immovable property could be forfeited in case of default in payment of the remaining amount, provided it was explicitly mentioned in the terms of contract.
“Law is, therefore, clear that to justify the forfeiture of advance money being part of ‘earnest money’ the terms of the contract should be clear and explicit. Earnest money is paid or given at the time when the contract is entered into and, as a pledge for its due performance by the depositor to be forfeited in case of non-performance, by the depositor,” a Bench of Justices K S Radhakrishnan and Dipak Misra said.
Purchaser can get double
The court said that if it was stipulated in the contract then there could be a converse situation as well that if the seller fails to perform the contract, the purchaser can also get double the amount. “It is also the law that part payment of purchase price cannot be forfeited unless it is a guarantee for the due performance of the contract. In other words, if the payment is made only towards part payment of consideration and not intended as earnest money, then the forfeiture clause will not apply,” the Bench added.
The court made the legal position clear on a petition filed by a man challenging the Delhi High Court’s order which had directed him to forfeit just a nominal amount of Rs 50,000 out of Rs seven lakh earnest money paid by a purchaser. The buyer had failed to pay the remaining Rs 63 lakh for the property. “We are, therefore, of the view that the seller was justified in forfeiting the amount of Rs seven lakh as per the relevant clause (of the contract), since the earnest money was primarily a security for due performance of the agreement and, consequently, the seller is entitled to forfeit the entire deposit. The High Court has, therefore, committed an error in reversing the judgment of the trial court,” the Bench said.