Buyers: Developers cannot forfeit capital paid by you in case of withdrawal

With regards to builder-buyer contracts, there are provisions which detail the consequences of non-honouring of that contract. This article delves into that aspect with regards to cases of withdrawal.

It is not an uncommon scenario in our country where innocent individual flat buyers are being harassed and ripped off their money by behemoth builders in several ways. One of the most common ones includes forfeiture of the funds paid by the buyer to the builder on the slightest of dispute or protest by the buyer against the builder.

People booking their flat in under-construction projects have to pay a certain amount as an ‘initial deposit’ exhibiting an initial commitment. After that, a builder-buyer agreement is entered into laying out the payment schedule linked with the construction progress. All these agreements also provide that if the buyers choose to withdraw from the project or if they default in payments, the builder will have the right to forfeit a certain amount and refund you the balance. This forfeiture amount can vary from 10 percent of the sale consideration and go as high as 40 percent.

The National Consumer Disputes Redressal Commission (NCDRC) vide their order dated June 29, 2020, in the case of Ramesh Malhotra and Ors. Vs Emaar MGF Land Limited and Ors. has held that only the earnest money/initial deposit paid by the buyer can be forfeited by the builder in case the buyer does not want to continue in the project due to any default of the builder.

Facts/dispute

The buyers in the said case had deposited a sum of Rs 10 lakh at the time of booking the flat. After that, a provisional allotment letter was provided, and the agreement was executed. The total consideration for the flat was agreed at Rs 1,68,19,512. The builder then failed to deliver the possession as per the schedule provided in the agreement due to delay in construction. When the flat was finally offered for possession (after a delay of one year and two months) the buyers refused to take possession of the flats and sought for a refund of the amount paid by them to the builder along with interest and compensation.

As per the terms of the agreement, the builder was under an obligation to refund the monies paid by the buyers but was entitled to forfeit the earnest money paid by them, and the refund was to take place after the builder was able to sell the allotted flat to someone else. However, the term ‘Earnest Money’ was defined to mean ‘20 percent of the sale price’ of the flat. The builder, in this case, refused to refund the sale consideration paid by the buyers.

Issue

One of the main issues which came up for consideration before the court was that “what would constitute as earnest money and up to what extent the amounts are forfeitable by the builder?”

Held (Unquoted)

• The court observed that the forfeiture clause in the agreement allowing for forfeiture of 20 percent of the entire sale consideration has to be treated as void ab initio since the same constitutes as ‘unfair trade practice’ on the part of the builder.

• Further, while relying upon Pioneer Urban Land and Infrastructure Ltd. Vs. Govindan Raghavan, the court also said that even if the terms of the agreement allow for such higher sum of money to be forfeited by the builder, the same will be of no consequence since they are totally ‘one-sided terms of contract’ drafted by the builders whereby the buyers usually have no other option but to sign on the dotted line since they have already paid huge sums of money as ‘initial deposit’ as a compulsory measure even before entering into the agreement.

The court also went on to rely upon Maula Bux Vs. Union of India in which it was held that forfeiture of a reasonable amount paid as earnest money does not amount to imposing a penalty. But if forfeiture is of the nature of the penalty, Section 74 of the Indian Contract Act, that requires actual damage or loss to be proved, applies. It was ruled:

• That only a ‘reasonable amount’ can be forfeited as earnest money in the event of default on the part of the purchaser, and it is not permissible in law to forfeit any amount beyond a reasonable amount unless it is shown that the person forfeiting the said amount had suffered a loss to the extent of the amount forfeited by him. Hence, the court, in this case, said that the builder would have to prove actual damages or loss suffered by the builder up to the extent of forfeiture that the builder is claiming.

• Thus, the court while also relying upon an earlier decision of NCDRC V. Siva Kumar Vs. M/s M3M India Private Limited and Anr. held that only the earnest money, i.e. Rs 10 lakh, that was paid at the time of booking of the flat by the buyers, can be forfeited by the builder and the rest of the consideration paid by the buyers till date have to be returned along with interest at 10 percent per annum.

Conclusion

This order passed by NCDRC (as well as the SC decisions referred) is sure to send huge sighs of relief for flat buyers across the nation empowering the consumer courts to strike down an unfair provision in the contract and protecting the interests of flat buyers against their helplessness in signing on the dotted line in the agreements which are always drafted to immensely favour the builder in every aspect of the transaction. This power has now also been encoded into the newly introduced Consumer Protection Act, 2019.

Care also needs to be taken of the law point laid down by the Supreme Court of India in Satish Batra Vs. Sudhir Rawal wherein it was laid down by the court that the earnest money can only be forfeited if it is proved by the builder that there was a clear-cut default by the buyer in his performance of the contract due to no fault of the builder. Hence the builder cannot dispense with proving such default on the part of the buyer to forfeit the deposit.

India still needs to go a long way whereby the Supreme Court of India settles the law position with regards to many other unfair/one-sided terms of contract between builders and buyers which are being included in every such agreement as a matter of routine and cause grave harm and prejudice to the flat buyers of the nation.