Token Money: Meaning, Importance and Key Considerations for Paying it

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Token amount means an advance amount or part of a sale consideration amount given to the vendor by the buyer, as an assurance for the transaction. This can be recorded in the Sale Agreement Deed.

Token money has not been made mandatory by law, but it is often demanded by the seller; being a buyer one needs to consider certain factors while paying the token money, or else if something were to go wrong, there is a risk of losing money.

For any reason, if the buyer fails to complete the transaction, the seller would forfeit the token money, unless the parties have made a notarised agreement stating otherwise. The token amount is usually paid by the buyer to the seller, directly after a verbal commitment

Points to be consider while paying the Token money:

(a) Payment Receipt: This is the most common way of paying the token money. As the token money is paid at a very short notice, there isn’t much time to close the legal documentation. There is hesitance in the mind of both parties about the other party backing out from the deal. Token money is paid/received as an assurance to close the deal. A payment receipt can be printed on a 2 Rs. stamp paper or a 10 Rs stamp paper (depending from state to state). The seller can sign on the Revenue Stamp, to acknowledge the receipt of payment.

(b) MOU (Memorandum of Understanding): Both the buyer and seller may enter into a Memorandum of Understanding. It is not a legal document and is generally mistaken as a Sale Agreement. It is basically an agreement, which expresses intent / desire / will of all the parties to mutually agree upon a common line of action i.e. to close the property transaction in this case. It does not provide any legal rights but only captures the intent of all the parties. In short, it does not grant substantial rights till a legal agreement is executed. It cannot be legally enforced in the court of law. Any party can back out from the same, but it does not mean that the token money paid under the MOU is not safe. If the seller backs out, then he has to refund the advance and penalty (if any). As the name suggests, it’s only an understanding between the parties. Though it is not legally binding, but since a property transaction consists of an exchange of money, the MOU is binding for both the parties. Besides token money, a Memorandum of Understanding is useful if the final deal is subject to certain terms and conditions. For example, the seller has bought another house but he will shift only after 6 months, or the buyer needs time to arrange funds.

(c) Notarised Agreement / MOU: Though it is not necessary to notarise the MOU or agreement at the time of the payment of Token money, it is advisable. A notary only certifies that all parties have signed in front of him. It safeguards the interest of a buyer, to avoid any legal dispute. In short, an MOU signed between the parties can be notarised to make it more secure and binding in the true sense.

(d) Sale Agreement: A Sale Agreement is a legally enforceable, definitive legal document. It is legally binding for all the parties and grants substantial rights to the parties. If any party breaches the terms and conditions of the Sale Agreement, then it is legally termed as a Breach of Contract. In many cases, Token money is paid at the time of execution of the Sale Agreement. Based on the same, the buyer applies for a Home Loan. Usually a Sale Agreement is executed on stamp papers equivalent to 0.1% of a Sale Agreement Value. It is advisable to register the Sale Agreement.

Details to safeguard the interest of a buyer:

(a) Details of the Buyer and Seller: Include the complete name, father’s name, current address and details of any one of the government issued ID proofs, preferably a PAN Card of both the buyer and seller

(b) Property details: Mention complete property details

(c) Payment details: Mention the mutually agreed upon consideration value and when will it be due from the buyer to the seller. For example, Rs 2 lakh paid as token money, Rs 10 lakh due at the time of the Sale Agreement and the balance Rs 68 lakh to be paid at the time of the Sale Deed

(d) Time line / Validity: Assuming you are signing an MOU, please mention the validity of the same. Also mention the timeline for the payment schedule and other terms and conditions (if required). For e.g. in one case, the buyer does not register the property even after 3 years of signing the Sale Agreement. Reason being, that there is no such timeline in the Sale Agreement to close the deal

(e) Mention Sale Agreement / Sale Deed to be executed later: After issuing a payment receipt or executing the MOU, please mention that at present you are only paying a token amount. An agreement will be signed later and also mention the timeline for the execution of the Sale Agreement / Sale Deed

(f) Termination Clause: The Termination Clause is a very critical clause, especially in the MOU. A buyer should mention and specify conditions under which the agreement can be terminated and the corresponding Refund Clause. Also, if the agreement is terminated by the seller then details about the monetary penalty and vice versa needs to be mentioned. In case of a legal defect in the property or if a Home Loan is rejected on similar grounds, the seller will refund the token money to the buyer

(g) The seller cannot sell the property till the MOU / Agreement is in place: The probability of a fraud is high when the seller accepts token money from Party A and sells the property to Party B. This clause is important, especially if you are signing the MOU, as it is not legally enforceable. You should mention a clause that the seller cannot sell the property, till the MOU is in force

(h) Death of a Buyer / Seller: Due to unforeseen circumstances, if something happens to the buyer or seller before the closure of the property deal, legal heirs of the buyer and seller should have the same rights as that of a buyer or seller. Either the token money will be refunded or the deal will be closed by the legal heirs. This clause is important if the time gap between signing the MOU and the Sale Deed is more than 1 month

(i) Witnesses: It is critical to get the signature of at least 2 witnesses on the Payment Receipt / MOU. In many cases, a buyer and seller sign the agreement mutually, without any witnesses. In case of a dispute, it is difficult to prove the authenticity of the MOU

(j) Cash Component: Last but not the least, the token money should never be paid in cash, as it’s a crime. We never suggest or recommend cash for the same

Conclusion: Token money should be paid by the buyer once he has clarity on how he will arrange funds for the transaction. If the buyer fails to arrange the funds, then he stands to lose the entire token money. Payment of the token money is important because the seller will not share the copy of documents for the Home Loan processing, till the buyer pays the token money. For the buyer it’s a catch 22 situation, because most of the time the token money is paid without any legal formalities.

Terms and Conditions apply.

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