Introduction
In a significant 2025 decision (K.R. Suresh v. R. Poornima & Ors., 2025 INSC 617), the court dealt with a recurring issue in property sale disputes—can advance money be refunded when a buyer fails to perform their part of the contract? The judgment delivered on 2nd May 2025 provides valuable clarity on the distinction between “advance” and “earnest money,” the enforceability of forfeiture clauses, and the application of Section 22 of the Specific Relief Act, 1963.
Factual Background
K.R. Suresh (plaintiff) entered into an Agreement to Sell (ATS) dated 25.07.2007 with R. Poornima (defendant no. 1) and her family for the purchase of a site in Kengeri Satellite Town, Bengaluru, for ₹55.5 lakhs. An amount of ₹20 lakhs was paid in advance. The sale was to be completed within four months, failing which the ATS allowed forfeiture of the advance.
Suresh later claimed the sellers failed to produce a probate certificate for title verification, which delayed the sale. He issued a legal notice in February 2008 and filed a suit for specific performance after learning the property was sold to bona fide third parties (defendants 5-7) for ₹38.4 lakhs.
Legal Issues
- Was the forfeiture of the ₹20 lakh advance money lawful?
- Was Suresh entitled to a refund of the advance under Section 22 of the Specific Relief Act?
- Does the difference between “advance money” and “earnest money” impact enforceability?
Arguments and Analysis
Plaintiff’s Stand (Appellant)
- Suresh argued he was ready and willing to perform the contract but was awaiting the sellers’ probate certificate.
- He claimed the forfeiture was unjust and cited judgments like:
- Desh Raj v. Rohtash Singh, (2023) 3 SCC 714
- Kamal Kumar v. Premlata Joshi, (2019) 3 SCC 704
- Desh Raj v. Rohtash Singh, (2023) 3 SCC 714
He alternatively sought a refund of the ₹20 lakhs under general relief provisions of the plaint.
Respondents’ Stand
- The sellers contended time was of the essence due to an urgent business need (OTS scheme).
- They denied any obligation to obtain a probate and asserted that the plaintiff lacked funds or documents to prove readiness.
- The subsequent buyers (defendants 5-7) claimed they were bona fide purchasers without notice of the prior ATS and opposed refund liability.
Court’s Reasoning
1. Distinction Between Earnest and Advance Money
The court clarified:
- “Advance” is part-payment of consideration.
- “Earnest money” is a pledge for contract performance and may be forfeited upon default.
Though termed “advance” in the ATS, the amount had features of earnest money: paid at execution, to be adjusted at sale, and subject to forfeiture on default.
Key precedents:
- Shree Hanuman Cotton Mills v. Tata Air Craft Ltd., (1969) 3 SCC 522
- Satish Batra v. Sudhir Rawal, (2013) 1 SCC 345
- Videocon Properties Ltd. v. Bhalchandra Labs, (2004) 3 SCC 711
2. Was Forfeiture Valid?
Yes. The court held:
- Time was the essence of the contract due to seller’s urgency (OTS scheme).
- Plaintiff failed to perform within time and showed no evidence of financial readiness.
- The ATS had a balanced forfeiture clause, obliging sellers to return double the amount if they defaulted.
Even under Section 74 of the Indian Contract Act, the forfeiture was reasonable as sellers had actual loss, proven at trial.
3. Relief Under Section 22 of the Specific Relief Act
The court held:
- No specific relief for refund was claimed in the plaint.
- Under Section 22(2), such claims must be explicitly pleaded.
- The prayer for “any other relief” was insufficient to grant refund.
Final Conclusion
The Court dismissed the appeal and upheld the forfeiture of ₹20 lakhs, reasoning that:
- The amount was earnest money, lawfully forfeited.
- Plaintiff breached the contract by failing to pay the balance within the agreed timeframe.
- No alternate relief for refund was legally tenable.
FAQs:
1. What’s the difference between “advance money” and “earnest money” in a property agreement?
Though often used interchangeably, “advance money” generally refers to a part-payment of the total sale price made before the deal is finalized. “Earnest money,” on the other hand, is a sum paid to show serious intent to complete the contract and acts as a security deposit. If the buyer defaults, earnest money is typically forfeited. If the deal goes through, it’s usually adjusted towards the purchase price. Courts will look at the parties’ intention and surrounding circumstances, not just the words used in the agreement, to determine the true nature of the payment.
2. Can a seller keep the token or advance money if the buyer fails to complete a property purchase?
Yes, if the money paid by the buyer is characterized as “earnest money” (a deposit to secure performance of the contract), the seller is generally entitled to forfeit it if the buyer defaults on the agreement, provided the contract clearly allows for this. The agreement should explicitly state the terms for forfeiture. If the payment is merely an “advance” or part-payment of the price and not intended as a guarantee for performance, it cannot be forfeited unless it is specifically designated as earnest money or a security deposit.
3. Does a seller need to prove they suffered an actual financial loss to keep the buyer’s earnest money if the deal falls through?
Generally, when it comes to forfeiting “earnest money” (which acts as a security deposit), the seller doesn’t necessarily have to prove actual loss if the amount is reasonable and the contract allows forfeiture upon the buyer’s default. The forfeiture of a reasonable amount of earnest money is not typically considered a penalty requiring proof of loss under Section 74 of the Indian Contract Act, 1872. However, if the forfeiture clause is deemed to be a penalty, or if the amount is not true earnest money but a significant part-payment disguised as such, then proof of reasonable loss might be required. Some court views suggest Section 74 (requiring proof of loss for compensation) can apply to earnest money forfeitures as well, meaning only reasonable compensation for loss can be retained.
4. If I sue a seller to force them to sell me a property (specific performance), can I also ask for my advance/earnest money back if the court refuses to order the sale?
Yes, under Section 22 of the Specific Relief Act, 1963, when you sue for specific performance of a contract for property transfer, you can also ask for other reliefs, including the refund of any earnest money or deposit you paid, in case your main claim for specific performance is refused by the court. However, it’s crucial that you specifically claim this refund in your lawsuit (plaint). The court cannot grant this relief on its own if you haven’t asked for it.
5. What if I filed a lawsuit for specific performance of a property sale but forgot to ask for my advance money back? Can I add this claim later?
Yes, the law is quite flexible on this. According to the proviso to Section 22(2) of the Specific Relief Act, 1963, if you haven’t claimed an alternative relief like the refund of earnest money in your initial plaint, the court “shall” allow you to amend your plaint to include such a claim “at any stage of the proceeding”. This includes even during the appeal process. The purpose is to avoid multiple lawsuits. However, you must actively seek this amendment; the court won’t grant the refund automatically without a specific claim.
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