Buyer entitled to interest on earnest money

The Supreme Court has set aside a ruling of the Bombay High Court and declared that a proposed buyer of property was entitled to claim interest on the amount of earnest money that was refunded by the seller.

The apex court said the high court's interpretation on the scope of Section 55(6) of the Transfer of Property Act was wrong and it needed to be corrected to prevent "serious repercussion that may follow generally as a principle of law."

These observations were made in the Videocon Properties Ltd vs Bhalchandra Laboratories case.

In this case, the builders paid Rs 38 lakh as deposit or earnest money to the property owner on the execution of the sale agreement. It was stipulated in the contract that if the seller failed to fulfill his obligation, he shall return to the buyer the earnest money with interest at the rate of 21 per cent.

As it happened, the seller did not perform his side of the contract despite repeated requests from the buyer. Ultimately, he confessed his inability to do so.

The buyer then demanded his amount with interest. The seller returned only the earnest money and denied any obligation to pay interest on it. This led to a petition in the high court by the buyer for the interest.

The single-judge Bench asked the seller to pay interest. But on appeal, the Division Bench denied payment of interest. The buyer moved the Supreme Court. It decreed in favour of the buyer.

Videocon Properties argued that under Section 55(6)(b) of the Transfer of Property Act, interest should be paid on the earnest money deposit also.

It was also contended by it that though the provision might not specifically deal with the interest part of the deal, it only indicated that discretion was given to the courts in the matter of rate of interest permissible on the earnest money deposit and not to deny it once and for all. It also pointed out that in this case, the agreement specified the rate of interest on the earnest money returned.

The apex court Bench comprising Justice Doraiswamy Raju and Justice Arijit Pasayat accepted this viewpoint while allowing its appeal. They said the buyer's charge, according to Section 55(6)(b) of the Transfer of Property Act, would extend to the interest on purchase money.

This is a statutory charge in favour of the buyer and is different from contractual charge under the contract of sale. The buyer is entitled to enforce the charge against the property even if it passes to the hands of third parties, or even when the property is converted into another form.

The buyer would lose this charge only if he defaults, for instance, by improper refusal to accept delivery of the property, the Supreme Court explained.