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Earnest money and Security deposit

In some cases, under a contract, one party is required to deposit some security with the other party so as to ensure his seriousness to perform the contract. The security may either be in the form of security deposit or earnest money.
 
Earnest money is a part of the purchase price and is paid when the contract is entered into. After the contract is completed, it is adjusted towards the purchase price. If the party paying the earnest money fails to perform the contract, the other party can cancel the contract and retain the earnest money. It is forfeited when the contract is broken by the fault of the promisor.
 
Security deposit is to ensure the performance of the contract. After the contract is completed, the security deposit is not adjusted towards the purchase price. If the party fails to perform the contract, it cannot be forfeited as its forfeiture will amount to a penalty. It is kept as a security, so as to ensure his seriousness to perform the contract.




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