How to Pay Token Money?

How to Pay Token Money is most frequently asked question from my clients. As i keep highlighting that token money should paid by buyer once he has clarity how he will arrange funds for the transaction. If buyer fail to arrange the funds then stands to lose the entire token money. Payment of Token Money is imp because seller will not share copy of documents for Home Loan processing till buyer pay token money. For buyer its a catch 22 situation because most of the time Token Money is paid without any legal formalities. As i mentioned, buyer carries the risk of losing money if something goes wrong. It is imp from buyers perspective to take care of all the critical points. Lets check all the imp aspects of token money through this post

How to Pay Token Money?

Token Money can be paid against either of the following instruments/documents

(a) Payment Receipt: This is most common way of paying Token Money. As token money is paid at very short notice therefore there is not much time to close the legal documentation. There is a fear in the mind of both the parties that other party should not back out from the deal. Token Money is paid/received as an assurance to close the deal. A payment receipt can be printed on 2 Rs stamp paper or 10 Rs Stamp Paper (depending on state to state). Seller can sign on Revenue Stamp to acknowledge the receipt of payment.

(b) MOU (Memorandum of Understanding): Both buyer and seller may enter into Memorandum of Understanding. It is not a legal document and is generally mistaken as sale agreement. It is basically an agreement which expresses intent / desire / will of all the parties to mutually agreed upon common line of action i.e. to close 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 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 token money paid under MOU is not safe. If seller back out then he has to refund the advance and penalty (if any). As the name suggest, its only an understanding between the parties. Though it is not legally binding but since in property transaction there is an exchange of money therefore MOU is binding on both the parties.

Besides token money, Memorandum of Understanding is useful if the final deal is subject to certain terms and conditions. For example, seller has bought another house but he will shift only after 6 months or buyer need time to arrange funds.

(c) Notarized Agreement / MOU: Though it is not necessary to Notarize MOU or agreement at the time of payment of token money but in my opinion it is advisable. Notary only certify that all parties have signed in front of him. It safeguard the interest of a buyer to avoid any legal dispute. In short, an MOU signed between the parties can be notarized to make it more secure and binding in true sense.

(d) Sale Agreement: A Sale Agreement is legally enforceable definitive legal document. It is legally binding on 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 Breach of Contract. In many cases, token money is paid at the time of execution of sale agreement. Based on same, buyer apply for Home Loan. Usually sale agreement is executed on stamp papers equivalent to 0.1% of Sale Agreement Value. In few cases i advised my clients to register the sale agreement similar to sale deed specially in case of risky transactions. Any stamp duty paid in registrar office to register sale agreement is adjusted at the time of execution of sale deed.

To summarize, my order of preference is Sale Agreement << Notarized Agreement << MOU (Memorandum of Understanding) << Payment Receipt

10 Imp Points to be included in Token Money Instrument

Depending on your requirement, you may select any of the above mentioned instrument/document to be executed at the time of Token Money payment. Irrespective of document type, it is imp to include following clauses to safeguard your interest as a buyer

(a) Details of Buyer and Seller: Include complete name, father’s name, current address and details of one of the govt issued id proof preferably PAN of both buyer and the seller

(b) Property Details: Mention complete property details

(c) Payment Details: Mention mutually agreed upon consideration value and when it will be due from buyer to seller. For example, 2 lakh paid as a token money, 10 lakh due at the time of sale agreement and balance 68 lakh to be paid at the time of sale deed.

(d) Time line / Validity: Assuming you are signing a MOU then kindly mention the validity of same. Also mention timeline for payment schedule and other terms & condition (if required) of MOU. In one of my clients case who is seller, the buyer is not registering the property even after 3 years of signing the sale agreement. Reason being there is no such timeline in sale agreement to close the deal.

(e) Mention Sale Agreement / Sale Deed to be executed later: If you are issuing payment receipt or executing MOU, do mention that at present you are only paying a token money. An agreement will be signed later and do mention the timeline for execution of sale agreement / sale deed as i mentioned in previous point.

(f) Termination clause: Very critical clause specially in MOU. A buyer should mention and specify conditions under which agreement can be terminated and corresponding refund clause. Also if the agreement is terminated by seller then what will be monetary penalty and vice versa. In case of legal defect in property or home loan is rejected on similar ground, seller will refund the token money to buyer.

(g) Seller cannot Sell property till MOU / Agreement is in place: The probability of fraud is high when seller accept token money from part A and sell property to party B. This clause is imp specially if you are signing MOU as it is not legally enforceable. You should mention a clause that seller cannot sell property till MOU is in force.

(h) Death of a Buyer / Seller: If god forbids and something happen to buyer or seller before closure of property deal. In this case, legal heirs of buyer and seller should have same rights as that of a buyer or seller. Either token money will be refunded or deal will be closed by legal heirs. This clause is imp if time gap between signing of MOU and sale deed is more than 1 month.

(i) Witnesses: It is critical to get signature of atleast 2 witnesses on Payment Receipt / MOU. In many cases, a buyer and seller sign agreement mutually without any witnesses. In case of 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 its a crime. It is suicidal even if the seller is known person. I never suggest or recommend any cash dealing in property transaction.

Ideal Token Money Amount

Million dollar question and there is no correct answer to this question. Its a catch 22 situation for me while answering this question. I always link Token Money to the risk involved in property transaction. Higher the Risk, Lower the Token Money and vice versa. The risk component vary from client to client and there is no mathematical formula to calculate the same. In this post, if we assume that only risk is the nature of document/instrument being signed for token money then in my opinion ideal token money amount is as follows

(a) Payment Receipt: Rs 50000 – Rs 100,000 or 2% of Property value, Whichever is lower

(b) MOU: Upto Rs 200000 or 2% of Property Value, Whichever is lower

(c) Notarized Agreement: Upto Rs 300000 or 4% of Property Value, Whichever is lower

(c) Sale Agreement: Upto Rs 1000000 or 10% of Property Value, Whichever is lower

Again it is very subjective and vary from case to case basis. There is no hard and fast rule regarding the same and depend on mutual understanding between the buyer and the seller. The above figs are indicative and based on my experience.

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