Introduction
The recent judgment in K.R. Suresh v. R. Poornima & Ors., Civil Appeal No. 5822 of 2025 (arising from SLP (C) No. 5630 of 2023), delivered on 2nd May 2025, provides significant jurisprudence on the forfeiture of earnest money in sale transactions and the buyer’s readiness and willingness in specific performance suits. This article analyzes the factual background, legal issues, arguments presented, judicial reasoning, and the law applied by the court.
Factual Background
The dispute revolved around an Advance Sale Agreement (ATS) dated 25.07.2007 between K.R. Suresh (plaintiff) and R. Poornima (defendant no. 1) and her family (defendants nos. 2–4) for a residential site in Kengeri, Bengaluru. The total sale consideration was ₹55,50,000, of which ₹20,00,000 was paid upfront by two cheques. The agreement required the plaintiff to pay the remaining ₹35,50,000 within four months.
The plaintiff later claimed that the defendants failed to furnish a probate certificate necessary for availing a bank loan, which hindered his ability to proceed. Meanwhile, defendants sold the property to subsequent purchasers (defendants nos. 5–7), leading the plaintiff to file a suit for specific performance and possession.
Issues
- Whether time was the essence of the contract under the ATS.
- Whether the plaintiff demonstrated readiness and willingness to perform his obligations.
- Whether the forfeiture of the advance amount of ₹20,00,000 was lawful.
- Whether the plaintiff could seek a refund of the earnest money under Section 22 of the Specific Relief Act, 1963.
Arguments
Appellant (K.R. Suresh)
- Claimed he was willing to complete the transaction but was obstructed by the defendant’s failure to obtain a probate certificate.
- Argued that despite the delay, he was prepared to pay, evidenced by his offer to increase the consideration.
- Cited Desh Raj v. Rohtash Singh and Kamal Kumar v. Premlata Joshi to support refund of advance money under a general prayer.
Respondents (Original Owners and Purchasers)
- Argued time was essential due to an urgent financial obligation (One-Time Settlement with a bank).
- Highlighted that the plaintiff had not demonstrated financial capability or taken timely steps.
- Claimed the forfeiture clause was mutual and enforceable and that they suffered financial loss due to non-performance.
- Cited Pydi Ramana v. Davarasety Manmadha Rao and Satish Batra v. Sudhir Rawal to justify forfeiture.
Judicial Analysis
1. Essence of Time in Contracts
Relying on Chand Rani v. Kamal Rani and Welspun Specialty Solutions v. ONGC, the Court affirmed that time was indeed the essence given the urgent financial commitments of the sellers.
2. Nature of the Advance Payment
Distinguishing between earnest and advance money, the Court observed that though the agreement termed it “advance”, its character was that of “earnest money” as it was paid upfront and acted as a security for contract performance.
The Court leaned on Shree Hanuman Cotton Mills v. Tata Aircraft Ltd. and Videocon Properties Ltd. v. Bhalchandra Laboratories to hold that forfeiture of such earnest money was permissible upon the purchaser’s default.
3. Applicability of Section 74 of the Indian Contract Act
The Court noted that Section 74 does not apply to earnest money forfeiture as clarified in Fateh Chand v. Balkishan Dass and Maula Bux v. Union of India. Even if Section 74 were to apply, the defendants had suffered demonstrable financial loss, justifying the forfeiture.
4. Alternative Relief for Refund
Citing Sukhwinder Singh v. Pushpinder Kaur, the Court highlighted that under Section 22(2) of the Specific Relief Act, refund of earnest money must be specifically pleaded. Since the plaintiff did not raise such a prayer, relief could not be granted.
Conclusion
The Supreme Court dismissed the appeal, upholding the findings of both the Trial and High Courts. It affirmed the lawful forfeiture of ₹20,00,000 as earnest money due to the plaintiff’s breach and emphasized the necessity of clearly pleading for alternative relief under Section 22 of the Specific Relief Act.
The judgment reaffirms critical contractual principles relating to time-bound obligations, the dual role of earnest money, and the rigorous standards for claiming specific performance or refunds.
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.
Stay informed with insights that matter. Follow us for more updates on key legal developments.
Disclaimer
The content provided here is for general information only; it does not constitute legal advice. Reading them does not create a lawyer-client relationship, and Mahendra Bhavsar & Co. disclaims all liability for actions taken or omitted based on this content. Always obtain advice from qualified counsel for your specific circumstances. © Mahendra Bhavsar & Co.
The post Understanding Earnest Money Forfeiture in Property Sale Disputes first appeared on Mahendra Bhavsar & Co. | Law Firm – Since 1982.