Clarification on conditions of sale of property

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The question as to what would constitute earnest money which the seller of the property is entitled to forfeit, came up before this Commission in DLF Ltd. Vs. Bhagwanti Narula, Revision Petition No. 3860 of 2014, decided on 06.01.2015 and the following view was taken:- It would thus be seen that only a ‘reasonable amount’ can be forfeited as earnest money in the event of default on the part of the purchaser and it is not permissible in law to forfeit any amount beyond a reasonable amount, unless it is shown that the person forfeiting the said amount had actually suffered loss to the extent of the amount forfeited by him. In our opinion, 20% of the sale price cannot be said to be a reasonable amount which the Petitioner Company could have forfeited on account of default on the part of the complainant unless it can show it had only suffered loss to the extent the amount was forfeited by it. In our opinion, in absence of evidence of actual loss, forfeiture of any amount exceeding 10% of the sale price cannot be said to be a reasonable amount. It was contended by the learned Counsel for the Petitioner Company that since the complainant had specifically agreed to treat 20% of the sale price as earnest money, the forfeiture to the extent of 20% of the sale price cannot be said to be unreasonable, the same being inconsonance with the terms agreed between the parties. This was also his contention that so long as the Petitioner Company was acting as per the terms and conditions agreed between the parties, it cannot be said to be deficient in rendering services to the complainant. We, however, find ourselves unable to accept the aforesaid contention, since, in our view, forfeiture of the amount which cannot be shown to be a reasonable amount would be contrary to the very concept of forfeiture of the earnest money. If we accept the aforesaid contention, an unreasonable person, in a given case may insert a clause in Buyers Agreement whereby say 50% or even 75% of the sale price is to be treated as earnest money and in the event of default on the part of the Buyer; he may seek to forfeit 50% of the sale price as earnest money. An Agreement for forfeiting more than 10% of the sale price, in our view, would be invalid since it would be contrary to the established legal principle that only a reasonable amount can be forfeited in the event of default on the part of the Buyer. For the reasons stated herein above, we hold that
(i) an amount exceeding 10% of the total price cannot be forfeited by the seller, since forfeiture beyond 10% of the sale price would be unreasonable and
(ii) only the amount, which is paid at the time of concluding the contract can be said to be the earnest money.”

Advocate Siddhant Sharma LawRato