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FORFIETURE OF EARNEST MONEY DEPOSIT/SECURITY DEPOSIT/ADVANCE PAID FOR THE PURCHASE OF PROPERTY


Advance/ Security Deposit/Earnest money is paid or given at the time when the contract is entered into and, as a pledge for its due performance by the depositor to be forfeited in case of non-performance, by the depositor.

It (Advance/earnest money deposit/security deposit)represents the guarantee that the contract (clauses in the sale agreement) would be fulfilled by both the parties.  In other words, ‘earnest’ is given to bind the contract, which is a part of the purchase price when the transaction is carried out and it will be forfeited when the transaction falls through by reason of the default or failure of the purchase.

To justify the forfeiture of advance money being part of ‘earnest money’/ `security deposit` the terms of the contract must be clear and explicit.

If the seller fails to perform the contract the purchaser can also get the double the amount/whatever the amount stated in the agreement, if it is so stipulated.

In case if the payment made is that of part payment of purchase price/consideration, then, it cannot be forfeited unless it is a guarantee for the due performance of the contract.

If the payment is made only towards part payment of consideration and not intended as earnest money then the forfeiture clause will not apply.