Property Buyer Can Lose Earnest Money: Supreme Court

Earnest money paid by a buyer (purchaser) of an immovable property can be forfeited by the seller if the former fails to pay the remaining sum, the Supreme Court has held.

A bench of justices Mr.K. S. Radhakrishnan and Mr.Dipak Misra said the earnest money is given to bind the contract & the seller is entitled to forfeit it if the sale of an immovable property falls through due to the fault of the purchaser.

The bench strongly said "Earnest money is paid or / given at the time when the contract is entered into & as a pledge for its due performance by the depositor and it is to be forfeited in case of non-performance by the depositor," .

The bench gave the ruling setting aside a Delhi High Court order which had held that the seller is entitled to forfeit only a nominal amount and not the entire sum.

The bench said irrespective of the amount, the purchaser is entitled to forfeit the entire money.

"There can be converse situation also that if the seller fails to perform the contract, the purchaser can also get the double the amount, if it is so stipulated.

"It is also the law that part payment of purchase price can not 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 & not intended as earnest money, then the forfeiture clause will not apply," the bench said.

The court passed the order on a man's plea against the high court's order directing him to forfeit only a nominal amount of Rs .50,000 out of Rs. 7 lakh earnest money paid by a purchaser (buyer) after he failed to pay the rest of Rs. 63 lakh to get the property.

"We are of the view that the high court has completely misunderstood the dictum laid down in earlier apex court judgements & came to a wrong conclusion of law for more than one reason, which will be more evident when we scan through the subsequent judgements of this court," the Supreme Court bench said.

"We are, therefore, of the view that the seller was justified in forfeiting the amount of Rs. 7 lakh as per the relevant clause, 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 bench said.

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