Court allows forfeiture of earnest money

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Is a seller of an immovable property entitled to retain an earnest money deposit on the transaction if the buyer of the property fails to complete the transaction?

court-allows-forfeiture-of-earnest-moneyRuling in Satish Batra v Sudhir Rawal, the Supreme Court recently held that a seller is justified in retaining any advance paid as earnest money if the terms of the contract are “clear and explicit”. Clarifying that a payment cannot be forfeited if it is made as part payment of the purchase price and not intended as earnest money, the court stated that earnest money is paid as a guarantee for performance of the contract.

In November 2005, Batra agreed to sell a property to Rawal for a total consideration of ₹7 million (US$130,000) and Rawal paid 10% of it as earnest money. Rawal was to pay the remaining 90% of the consideration by March 2006 but failed to do so and as a result the sale deed was not executed. This prompted Batra to retain the earnest money. Rawal filed for its recovery in the district court, but was unsuccessful. On appeal Delhi High Court held that that Batra was entitled to retain only a nominal amount of ₹50,000. An appeal to the Supreme Court followed.

Allowing the appeal the court relied on an earlier judgment in which it set out the following principles in relation to earnest money: (i) it must be given at the moment at which the contract is concluded; (ii) it represents a guarantee that the contract will be fulfilled; (iii) it is part of the purchase price when the transaction is carried out; (iv) it is forfeited when the transaction falls through by reason of the default or failure of the purchaser; (v) unless there is anything to the contrary in the contract, the seller is entitled to retain the earnest money if the buyer defaults.

The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at [email protected] or [email protected] Readers should not act on the basis of this information without seeking professional legal advice.