Forfeiture only if buyer defaults

Builders have a clause in the booking application form as well as in the agreement which permits them to forfeit either the entire amount, or a portion of the amount, in case of cancellation of the booking. Let us examine if such a clause is valid, the circumstances in which it would be valid, and the extent of the amount that can be forfeited.

Rakesh Anand and his wife Rashmi had booked a 3-BHK flat with a covered area of 1,495 sq ft to be constructed by Royal Empires for a total agreed consideration of ~4.5 million. Of this, a booking deposit of ~860,000 was paid on May 27, 2011. The builder then issued an allotment letter dated May 29, 2011, allotting flat 503 in A Block. An agreement to sell was executed, which stated that possession would be given within 21-24 months.

However, despite repeated requests, the builder failed to commence construction, so possession could not be given within the stipulated period or even after that. A police complaint was lodged, due to which a compromise was recorded before the police. The builder gave an undertaking to refund the amount within seven months. As he failed to abide by the undertaking, a legal notice was sent, but it did not yield any result. Anand filed a complaint before the Punjab State Commission.

The builder admitted receiving a booking deposit of ~860,000, but contended that several persons who had booked flats, including Anand, had not paid the subsequent instalments due to a fall in realty prices. It resulted in a financial crunch due to which the project could not be constructed in time. He claimed that since there had been a default in payment, he had a right to forfeit the deposit amount.

The State Commission upheld the builder's contention and dismissed Anand's complaint on the ground that he had failed to pay instalments on time. Anand appealed against this order. He explained that he had raised a bank loan and had made arrangements for payment, but had deliberately withheld payments as construction had not commenced.

The National Commission issued a notice to the builder who did not appear. The Commission observed that the builder had admittedly failed to carry out construction according to the agreement. Hence, the Commission concluded that Anand was justified in withholding payment.

The National Commission concluded that the State Commission had acted mechanically and passed a perverse judgement by faulting Anand for non payment and dismissing the complaint, overlooking the fact that the refusal to make payment was due to the builder's default in commencing construction work. It further observed that the builder has the right to forfeit a certain amount only when the flat purchaser is at fault. However, even in such a situation, the forfeiture cannot exceed 10 per cent of the earnest money.

Accordingly, by its order of April 9, 2018, delivered by B C Gupta for the Bench along with S M Kantikar, the National Commission allowed Anand's appeal and held the builder liable to refund the entire ~860,000 along with 18 per cent interest a year from the date of payment till refund.

A builder cannot capitalise on his own default. Forfeiture is permissible only when the flat purchaser defaults, and even then the amount can only be 10 per cent of the earnest money. Any clause in the agreement contrary to these principles will not be binding.

Forfeiture is allowed when buyers default, and even then the amount can only be 10 per cent of the earnest money