A buyer agreed to purchase a site in Kengeri Satellite Town for 55.5 lakh rupees, paid 20 lakh as advance in two cheques, and promised the balance within four months. Then a bank loan document and a probate issue slowed him down, the four months lapsed, and the sellers cancelled, kept the 20 lakh, and sold to someone else. He went to court to get his money back. After that dispute reached the Supreme Court, every Bengaluru buyer has a sharper answer to an old question: when can a seller keep your advance?

The short answer. It turns on whether the money is advance or earnest money, and on exactly what your agreement says. The Supreme Court, in K.R. Suresh v. R. Poornima, held that a plain advance or part payment of the price cannot be forfeited unless the contract explicitly stipulates it is a guarantee for due performance, while earnest money, a deposit pledging that you will complete the deal, can be forfeited on your default when the terms are clear. The trade-off for a buyer is real: the same rupees can be safe or lost depending on a single clause. Read the forfeiture and refund terms before you pay a token, because that wording, not fairness, decides who keeps the money.

What is the difference between advance and earnest money?

The label decides the outcome, so it is worth getting right. An advance, or part payment, is simply money paid toward the total price before the deal closes. Earnest money is different: it is a deposit that pledges your serious intent and guarantees you will perform the contract, effectively a security for completion. The distinction is not academic. As the analysis of the Supreme Court ruling by Argus Partners explains, earnest money is subject to forfeiture on buyer default, while an ordinary advance functions as part payment and cannot be forfeited unless the contract explicitly provides otherwise. So two buyers can hand over identical sums, and one may lose it while the other reclaims it, purely because of how the payment was characterised in writing. This is why the token you pay should never be a casual, undocumented gesture.

What did the Supreme Court actually decide?

The ruling gives buyers unusually concrete guidance because it turned on a real Bengaluru deal. As reported by 24 Law, the buyer agreed to purchase Site No. 307 in Kengeri Satellite Town Layout for 55,50,000 rupees, paid 20,00,000 as advance through two cheques, and owed the remaining 35,50,000 within four months, under an agreement whose clause forfeited the advance if he failed to pay in time. When he delayed, the sellers cancelled and forfeited. The Supreme Court held that the 20 lakh functioned as earnest money, a pledge guaranteeing performance, and upheld the forfeiture. Crucially, it laid down the general rule that an amount in the nature of an advance or part payment cannot be forfeited unless it is a guarantee for due performance. The forfeiture stood because the contract, the timing, and the conduct all pointed to earnest money, not a bare advance. For buyers, the value of the ruling is not that it favoured the seller, but that it made the deciding factors visible: the words used, the moment of payment, and whether a real deadline was tied to a clear consequence.

When can a seller legally forfeit your money?

Only when the money is genuinely earnest money and the contract says so clearly. Argus Partners distils the holding to a clean test: forfeiture is justified only if the terms of the contract are clear and explicit that the amount is a guarantee for due performance. In the Bengaluru case, the court read the 20 lakh as earnest money because it was paid at the time the agreement was executed, was explicitly adjusted against the total consideration, and sat alongside clear forfeiture language tied to a performance deadline. Note also, as 24 Law reports, that Section 74 of the Contract Act does not apply to earnest money deposits unless the forfeiture is in the nature of a penalty, and a deterrent forfeiture clause is not treated as penal. The takeaway for buyers is that a well drafted earnest money clause is enforceable, so you should assume any deposit described that way is genuinely at risk if you default.

When is a buyer entitled to a refund?

When the money is a plain advance without a clear forfeiture clause, or when the seller is the one who fails. If a payment is merely part of the price and the agreement does not explicitly designate it as earnest money or a security for performance, it cannot simply be pocketed on cancellation. Equally, token money is generally refundable where the seller fails to honour the agreement, or where the written conditions provide for a refund. There is a procedural sting worth knowing: in the Bengaluru case, the court noted the buyer had not specifically sought a refund under Section 22 of the Specific Relief Act, and that the responsibility to make that claim lay with him. The lesson is that rights on paper are not self executing. If you believe you are owed a refund, you must claim it correctly, which is another reason to have the agreement, and ideally a lawyer, on your side from the start.

How should a buyer protect the token they pay?

Protection is almost entirely about the contract. Before you part with any token, insist that the agreement to sell, or even the initial memorandum, spells out a clear termination clause and a matching refund clause: the exact conditions under which either side can walk away, and what happens to the money in each case. Specify the penalty if the seller defaults, not just the buyer, so the risk is not one sided. Be deliberate about whether the payment is described as an advance or as earnest money, because that word choice is the whole game. Pay by traceable means, keep receipts, and never rely on a verbal assurance that you will get your money back. This is the same discipline that our guide to the sale agreement and stamp duty adjustment in Karnataka brings to the next stage of the deal.

The table frames the practical difference for a buyer. The wording of your specific contract governs, so treat this as a guide to what to negotiate, not a substitute for reading the clause, because a single sentence in the agreement can move your deposit from the safe column to the forfeitable one.

What should your token money checklist cover?

1. Decide and document whether the payment is an advance or earnest money before you pay.
2. Insist on a written termination clause covering both buyer and seller default.
3. Add a refund clause stating exactly what happens to the money in each scenario.
4. Specify a monetary penalty if the seller defaults, not only if the buyer does.
5. Pay by traceable means and keep receipts for every rupee handed over.
6. Read any forfeiture clause closely and assume earnest money is genuinely at risk.
7. If a refund is due, claim it correctly, seeking legal advice on the right provision.

Should the risk of forfeiture change how you buy?

It should change how carefully you commit, not whether you buy. Paying a token is a normal, reasonable step that signals serious intent and holds a property while you complete your checks, and sellers are right to want some security that you will follow through. The danger is not the token itself but paying it blindly, into an agreement whose forfeiture and refund terms you never read, on a timeline you cannot actually meet. The Bengaluru case is a clean illustration: the buyer's own delay, against a clear four month deadline and an enforceable clause, cost him 20 lakh rupees. The honest framing is that your protection is written before you pay, not argued after you default. Match your commitment to what you can genuinely deliver, get the terms in writing, and the token becomes what it should be, a step toward ownership rather than a sum at risk. The same care applies to insisting on a proper registered deed, as our guide to power of attorney sale risks explains, and it is worth applying when you evaluate any project, such as ARATT Cityscapes.

Can a seller keep my token money if I cancel the deal?

It depends on the contract. If the money is earnest money and the agreement clearly allows forfeiture on your default, the seller can keep it, as the Supreme Court upheld in the Bengaluru Kengeri case. If it is a plain advance with no clear forfeiture clause, it generally cannot be forfeited. Read the wording before you pay.

What is the difference between advance and earnest money?

An advance is part payment of the price, while earnest money is a deposit pledging that you will complete the contract. The Supreme Court held that an advance cannot be forfeited unless the contract explicitly makes it a guarantee for due performance, whereas earnest money can be forfeited on buyer default when the terms are clear and explicit.

Is token money refundable if the seller backs out?

Generally yes. Token money is usually refundable where the seller fails to honour the agreement, or where the written conditions provide for a refund. To rely on this, your agreement should state the seller's default consequences clearly, and if a refund is due you may need to claim it under the correct legal provision rather than assuming it is automatic.

How do I protect my advance when buying in Bengaluru?

Put everything in writing before paying. Include a termination clause and a refund clause covering both buyer and seller default, specify penalties for the seller too, and be deliberate about whether the payment is an advance or earnest money. Pay by traceable means, keep receipts, and take legal advice on the agreement, since the wording decides who keeps the money.

Last updated 2026-07-11. PropNewz Team.