Property Deal Fell Through? When You Get Your Token Money Back

Under an agreement to sell leasehold property in Delhi for ₹1,12,500, the buyer paid ₹1,000 as earnest money and a further ₹24,000 as advance part-payment upon delivery of possession. When the sale deed was not registered within the stipulated date, the seller sought to forfeit the entire ₹25,000 under a forfeiture clause in the agreement.

A five-judge Constitution Bench of the Supreme Court held that Section 74 of the Indian Contract Act cuts across all penalty stipulations, including clauses permitting forfeiture of part-payments paid under a contract of sale. While a nominal sum paid strictly as earnest money (₹1,000) could be forfeited upon buyer default, the seller had zero legal right to forfeit the ₹24,000 advance part-payment because the seller failed to prove any actual financial loss suffered from the breach.

The appellant deposited ₹78,00,000 as 25% earnest money for a commercial plot auction. After prolonged extensions and unilateral noncompliance by the authority, DDA cancelled the allotment and forfeited the entire ₹78 lakh earnest money, later re-auctioning the same property at more than triple the price.

The Supreme Court laid down comprehensive principles governing earnest money under Section 74 of the Contract Act: (1) Forfeiture of earnest money is not automatic—it is triggered only if the buyer commits a breach of contract; (2) All stipulations for forfeiture of earnest money are governed by Section 74; and (3) Where the seller suffers zero loss—or actually makes a windfall profit by reselling the property at a higher price—forfeiting the buyer's earnest money is arbitrary, unconscionable, and legally impermissible.

In an agreement to sell immovable property for ₹70,00,000, the purchaser paid ₹7,00,000 (10%) as earnest money. The agreement contained an explicit two-way clause: if the seller defaulted, he would pay double the earnest money (₹14,00,000); if the buyer failed to pay the balance ₹63,00,000 within 3 months, the 10% earnest money would stand forfeited. The buyer defaulted on balance payment without justification.

The Supreme Court clarified the dual nature of earnest money: it represents a guarantee of contract performance that becomes part of the purchase price if the transaction goes forward, and is forfeited only if the transaction falls through solely by reason of the fault or failure of the purchaser. However, the Court explicitly held that a mere part-payment or preliminary token deposit paid without an express forfeiture covenant in a concluded contract cannot be forfeited.

A property buyer paid earnest money and advance instalments under an agreement for sale. Due to the seller's failure to fulfil contractual obligations and convey clear title, the agreement was terminated, and the buyer demanded refund of the advance with interest, asserting a statutory charge over the landed property.

The Supreme Court held that under Section 55(6)(b) of the Transfer of Property Act, 1882, unless a buyer has improperly declined to accept delivery of the property, the buyer holds a statutory charge on the property itself for the entire amount of any purchase money properly paid in anticipation of the delivery, plus interest on such amount and earnest money. This statutory charge attaches from the moment the advance is paid and is enforceable against the seller and any subsequent purchaser with notice.