No, not automatically. The Supreme Court has held that forfeiting earnest money is only enforceable if the amount is reasonable, generally treated as around 10% of the base sale price; anything beyond that is treated as a penalty and can be challenged. If you've cancelled a flat booking and a builder is withholding more than that, you likely have grounds to recover the excess.
What does the law actually say about forfeiting earnest money?
Under Section 74 of the Indian Contract Act, 1872, forfeiture of a reasonable amount of earnest money is permissible and isn't treated as a penalty. But forfeiture of an excessive amount is penal in nature and falls foul of Section 74, making it unenforceable beyond what's reasonable. Courts have consistently treated around 10% of the base sale price as the reasonable benchmark.
Is all the money I paid automatically "earnest money"?
Not necessarily. Earnest money is specifically a deposit paid to secure your performance of the contract, forfeitable on default if the agreement clearly says so. If what you paid is really just a part-payment toward the total price rather than earnest money specifically, forfeiture clauses generally don't apply to it in the same way, the distinction matters.
What does the agreement need to say for forfeiture to actually apply?
The contract terms need to clearly and explicitly identify the payment as earnest money and set out the forfeiture terms. Vague, ambiguous, or one-sided language about what happens to your payment on cancellation works against whoever is trying to enforce the forfeiture, not in their favour.
What can you do if a builder has forfeited more than a reasonable amount?
Challenge the excess as an unenforceable penalty under Section 74, and pursue recovery of whatever was forfeited beyond a reasonable sum. This can be raised before RERA, the Consumer Court, or through a civil suit depending on your specific facts; see our guide on RERA vs Consumer Court remedies for choosing between them.
Does this apply beyond builder-buyer agreements?
The reasonableness principle applies to earnest money forfeiture in property transactions generally, not just builder-buyer bookings, though the roughly 10% benchmark has been most consistently discussed and applied in that specific context.
Disclaimer: This article is for general information only and is not legal advice. What counts as "reasonable" depends on the specific facts; consult a qualified advocate.
Frequently asked questions
Can a builder forfeit my entire token or advance payment if I cancel?
Not automatically. Forfeiture of a reasonable amount of earnest money is permissible and doesn't count as a penalty under Section 74 of the Indian Contract Act, 1872, but forfeiture of an excessive amount is treated as penal and can be struck down. Courts have generally treated around 10% of the base sale price as a reasonable amount that can be forfeited.
What's the difference between 'earnest money' and a regular 'advance payment'?
Earnest money is specifically a deposit paid to secure performance of the contract, forfeitable if the buyer defaults, provided the agreement clearly states this. If the payment is really just a part-payment toward the total price, rather than earnest money specifically, forfeiture clauses generally don't apply to it the same way.
What does the agreement need to say for forfeiture to apply?
The contract terms must clearly and explicitly identify the payment as earnest money and set out the forfeiture terms. Vague or ambiguous language about what happens to your payment on cancellation works against the party trying to forfeit it, not for them.
What can I do if a builder has already forfeited more than 10% of the price?
You can challenge the excess as an unenforceable penalty under Section 74, and pursue recovery of the amount forfeited beyond a reasonable sum. This can be raised before RERA, the Consumer Court, or through a civil suit, depending on your situation; see our guide on RERA vs Consumer Court remedies for choosing between them.
Does this rule apply to all property transactions, or just builder-buyer agreements?
The reasonableness principle under Section 74 applies broadly to earnest money forfeiture in property transactions generally, not only builder-buyer agreements, though the 10% benchmark has been most consistently applied and discussed in the builder-buyer context.