Introduction:
Earnest Money can also be called as Good Faith Money. The money paid in advance by the buyer to the seller in order to show his good faith and genuine interest in the purchase is called the Earnest Money. It is very common in the real estate transactions[1].
However, this Earnest Money is not paid by the buyer directly to the seller. In order to ensure smooth distribution of all the funds, an escrow account is created by a third party broker. The signing of the purchase agreement begins the process of the earnest money which results in a legal binding contract between the buyer and the seller. As soon as the provisions of the sale transaction, as decided by both the parties, are satisfied, the Earnest Money is paid to the seller[2]. For example: Mr. X wishes to buy a new house in Bandra worth rupees 2 Cr. For the purpose of a smooth transaction, the broker asks Mr. X to pay one percent of the amount in a escrow account which shall be a proof of his genuine interest in the property. This money the buyer has to pay is the Earnest Money.
Forfeiture means to lose something as a penalty because of a wrongdoing in contractual obligations[3]. Earnest Money is a part of the purchase price of the buyer, so any fault or failure on part of the buyer will result in the forfeiture of the Earnest Money[4].
Concept under HRERA, Gurugram:
The Haryana Real Estate Regulatory Authority, Gurugram notification on forfeiture of earnest money clearly lays down that the agreement between the builder and buyer has one of the most important clauses which are the clause that relates to the Forfeiture of Earnest Money when there is a case of cancellation of the agreed property by the buyer. In many cases, this clause is framed in a manner to deceive the buyers as it provides for unreasonable forfeiture of funds as earnest money.
The Haryana Real estate Regulatory Authority had passed an order by way of notification that the amount of money that is forfeited from the Earnest Money cannot exceed 10 percent of the consideration amount in all the cases of cancellation of the agreement by the builder or withdrawal from the agreement by the buyer. There is also a clear mention on the point that any clause of the agreement which does not comply with any of the stated rules and regulations by the Authority shall be void and in no way be binding on the buyer[5].
Relevant Judgments on the Forfeiture of Earnest Money:
In the case of Maula Bux Vs Union of India[6], the Supreme Court had held that the builder buyer contracts with any unjust or one sided clauses can be held as an unconscionable contract.
The case of M/s DLF Ltd Vs Bhagwati Narula[7], decided by the National Consumer Disputes Redressal Commission, had a clear mention of the fact that only a reasonable amount could be forfeited as earnest money if there is any default on the part of the buyer. The seller is permitted only the lawful amount until and unless he has a poof of the fact that he has actually suffered some losses due to the fault of the seller.
In Shakti Singh Vs M/s Bestech India Pvt. Limited, the complainant had already paid a booking amount of Rupees 20 Lakhs which was 14.173% of the total sale price of the building. Therefore, it had been pronounced by the Court that this booking money should be treated as the Earnest Money paid by the Buyer. So, it can be clearly gaged from this judgment is that booking money is a part of the Earnest Money. This similar view had also been stated in the case of Balmer Lawrie and Co. Limited and ors Vs Partha Sarathi Sen Roy and ors by the Supreme Court of India.
Conclusion:
Before the implementation of the above stated act, there were numerous frauds taking place in regard to the forfeiture of the earnest money. Therefore, in light of the above frauds and taking into consideration all the judgments that have been passed by the Supreme Court or the National Consumer Redressal Commission, the Authority has passed this order by way of notification in order to ensure a smooth distribution of funds without the buyers being deceived.
[1]James Chen, Earnest Money Definition, Investopedia, https://www.investopedia.com/terms/e/earnest-money.asp, (last visited 10th September, 2021, 8:56pm).
[2]Earnest Money, Bank Rate, https://www.bankrate.com/glossary/e/earnest-money/, (last visited 10th September, 2021, 9:45pm).
[3]Will Kenton, Forfeiture Definition, Investopedia, https://www.investopedia.com/terms/f/forfeiture.asp, (last visited 10th September, 2021, 10:35pm).
[4] Supra Note 2.
[5]Forfeiture of Earnest Money by the Builder Gurugram Regulations 2018, The Haryana Real Estate Regulatory Authority, https://haryanarera.gov.in/regulations/Forfeiture_of_earnest_money_by_the_builderGURUGRAMRegulations2018.pdf, (last visited 11th September, 2021, 4:45pm).
[6] Maula Bux Vs Union of India 1970 AIR 1955.
[7] M/s DLF Ltd Vs Bhagwati Narula 2015 (16) RCR (Civil) 72.
References:
- Earnest Money Definition, Investopedia, https://www.investopedia.com/terms/e/earnest-money.asp.
- Earnest Money, Bank Rate, https://www.bankrate.com/glossary/e/earnest-money/.
- Forfeiture Definition, Investopedia, https://www.investopedia.com/terms/f/forfeiture.asp.
- Forfeiture of Earnest Money by the Builder Gurugram Regulations 2018, The Haryana Real Estate Regulatory Authority, https://haryanarera.gov.in/regulations/Forfeiture_of_earnest_money_by_the_builderGURUGRAMRegulations2018.pdf,
- Maula Bux Vs Union of India 1970 AIR 1955.
- M/s DLF Ltd Vs Bhagwati Narula 2015 (16) RCR (Civil) 72.
- Shakti Singh Vs M/s Bestech India Pvt. Limited.
- Balmer Lawrie and Co. Limited and ors Vs Partha Sarathi Sen Roy and ors.
Article Written By: Drishti Rathi
University: CHRIST (deemed to be University).