Buying a house? Know how to safely pay advance, token money for property, clauses to include in 'agreement to sell' (2024)

Homebuyers who decide on a property have to pay a certain amount of money to book the house. This payment is called token money, earnest money or advance payment, among others.

While making such a payment is normally unavoidable, it is important to ensure that the payment is acknowledged. There should also be proof of token money being paid. This ensures the safety of the money if the house owner later refuses to sell the property.

Here are some things you should keep in mind while paying token money to a seller.

Make payment electronically, keep amount low

Meghna Mishra, Partner, Karanjawala & Co, says, "Token money is typically paid to show an intent or commitment to purchase the property. If such payment is made without any formal agreement or document being executed, then it is advisable to pay this amount via a cheque, bank transfer or any other online method to ensure that there's a clear paper trail and a receipt is issued to acknowledge the payment."

Apart from using normal banking channels, one can also use an escrow account to pay token money.

Anand Moorthy, Co-Founder & CBO-Asset Management Services & Data Intelligence, Square Yards - a real estate company, says, "Homebuyers can transfer the token money into a digital escrow account as it provides a secure means of completing the transaction. This process helps in minimising the risk of fraud and ensures that both parties are protected. Additionally, it's prudent to keep the token money amount as low as possible, given that this payment can be non-refundable. In the unfortunate event of a deal cancellation, the entire amount becomes non-recoverable."

Agreement to sell

At the time of making the token payment, the buyer and seller must get an "agreement to sell" drafted. Mani Gupta, Partner, Sarthak Advocates & Solicitor, says, "It is usual for both buyer and seller to enter into an agreement to sell. The agreement to sell outlines the key terms and conditions of the sale, including the price, possession date and other relevant details. It should be on stamp paper of appropriate value, the rate of which will vary from state to state. Often people sign the agreement on Rs. 50/100 stamp paper with the understanding that even if it is insufficiently stamped, they will eventually pay the differential amount when the agreement is registered. The details of the token money paid and the mode of making the payment should also be included. It is a legally binding document. The buyer should always retain a copy of such an agreement."

Mishra says 10-15 % of the sale transaction is usually required to be paid in advance (token money) when an agreement to sell is executed.

In the case of under-construction properties, a builder-buyer agreement is executed. Gupta says, "This document specifies sale terms, payment schedule and construction milestones."

Clauses that must be added in agreement to protect buyer's interest

As the token money is being paid by the buyer, certain clauses must be added to the 'Agreement to sell' to protect the buyer's interest. Some of these are as follows:

Earnest Money Clause: Gupta says the agreement must have a clause on refunding the token or earnest money and other payments if the sale transaction fails due to no fault of the buyer.

Indemnity Clause: The agreement must also add a clause holding the seller accountable for misrepresentation or false information regarding the property's title or condition. Moorthy says, "The indemnity clause is of paramount importance. It serves to safeguard the buyer against any financial losses or damages resulting from defects in the property's title or inaction on the part of the seller."

Description of Property: The agreement must provide a description of the property, including boundaries, dimensions and common areas. It should also define the property's condition at the time of the handover and if there are any repair and maintenance responsibilities of the seller.

Price and Payment Terms: The agreement must specify the purchase price, payment schedule, token money and down payment details along with the way the payments will be made, says Gupta.

Possession Date: The agreement must mention the possession date i.e., the date on which the seller will hand over/give possession of the property to the buyer. Gupta says it should also define what will happen if the handover does not happen on that date.

Exclusivity Clause: The agreement must mention that the seller cannot sell the property to a third party as long as the agreement is valid/in force.

Right to Withdraw or Call off: Gupta says the buyer must have the option to withdraw from the deal without penalties if he or she is unsatisfied or if the seller fails to meet the obligations.

"This clause empowers the buyer to terminate the deal under specific circ*mstances without incurring financial penalties," adds Moorthy.

Property Tax and Other Outstanding Dues: The agreement must clarify as to who - buyer or seller- would be responsible for property taxes, maintenance charges and arrears relating to the property. Gupta says, "To ensure parity between the buyer and the seller, the agreement must clearly specify that the seller must clear all property-related dues before ownership transfer. Further, the agreement must clearly state the post-possession responsibilities like payment of electricity bills, other utility bills and society memberships, etc." If the property is part of a housing society, the buyer must get confirmation from the society that there are no dues and duties against the property. This must be stated in the agreement as well.

Moorthy says, "The 'free from encumbrance' clause is crucial to ensure that the seller clears any outstanding dues or encumbrances associated with the property before the registration process is initiated."

Legal and Tax Liabilities: The agreement must allocate legal and tax responsibilities, such as stamp duty and registration charges.

Force Majeure Clause: To address any unforeseen events' impact on the sale transaction, such as natural disasters or regulatory changes, this clause must be added. Gupta says, "The force majeure clause must be added to the agreement in case the buyer fails to meet the obligation to buy the property in case of any unforeseen event .This clause will protect the buyer in case they are unable to meet the obligation to buy the property."

Builder's Warranty (for under-construction properties): The agreement must specify terms related to damages for construction quality and failing to meet completion timelines.

Penalties for Breach of Contract: The agreement must define penalties for breaches by either party. Moorthy says, "This clause establishes an agreement between the buyer and seller, stipulating that if either party withdraws from the deal for any reason, a predetermined penalty amount will be applicable."
To protect his/her rights, a seller can also add a default and penalty clause in the agreement. Gupta says this will cover the consequences of defaults, such as delay in payment by the buyer's side.

Moorthy says, "When drafting the home-buying agreement, it is highly advisable to incorporate a special clause tailored to your property and unique circ*mstances. This clause can address potential legal disputes that may arise following the execution of the sale deed, offering additional protection and clarity for both the buyer and the seller."

Mishra suggests that both parties consult a legal professional to ensure that the contract includes all necessary protective clauses and complies with the local laws.

Other things to keep in mind

Experts agree that a buyer should do research before making an offer for a property. Mishra says, "Conduct a thorough due diligence check on the property's legal status, obtain a clear title report, perform a physical inspection, engage a legal expert to review all documents and verify the legitimacy of the seller."

It is important to ensure the seller has clear ownership and is not involved in any financial disputes or litigation related to the property, says Gupta. If you are buying an under-construction property, ensure that the project and the developer are registered under the Real Estate (Regulation and Development) Act (RERA). "It may be useful to check if the company selling the property is under the corporate insolvency resolution process of the Insolvency and Bankruptcy Code, 2016. This can be done on the website of the IBBI (Insolvency and Bankruptcy Board of India)."

Moorthy points out that it is crucial to exercise caution by thoroughly assessing the builder's credibility through various online forums and investigating the builder's record. Apart from builder verification, meticulously examine all essential documents, including the title deed, encumbrance certificate, layout plans and the purchase agreement. "This diligent scrutiny serves as a protective measure to ensure that your property remains free from potential legal disputes and litigation in the future," he adds.

It's also crucial to adhere to the relevant local regulations and legal requirements to safeguard the investment. "The agreement to sell or sale deed related to the property must specifically mention the events of default, forfeiture of amounts, and limitation of liability clause for each of the parties," adds Mishra of Karanjawala & Co.