Builders Cannot Deduct More Than 10% of Base Price in Case of Cancellation by Homebuyers: Supreme Court

NEW DELHI: In a landmark decision, the Supreme Court has ruled that real estate developers cannot enforce one-sided agreements that unfairly favor them, particularly in cases where homebuyers seek to cancel their bookings.

The court made it clear that developers cannot deduct unreasonable amounts upon cancellation and that forfeiture should not exceed 10% of the basic sale price (BSP). This decision serves as a significant step toward protecting homebuyers from arbitrary financial deductions imposed by builders.

A bench of Justices B.R. Gavai and S.V.N. Bhatt emphasized that contractual terms that are excessively one-sided, unfair, and unreasonable amount to unfair trade practices.

The court’s ruling came in response to a plea filed by Godrej Projects Development Ltd., which argued that it should be allowed to forfeit 20% of the BSP from a homebuyer who had sought cancellation.

The company maintained that this percentage was stipulated in its agreement with the buyer and should therefore be enforceable. However, the Supreme Court rejected this argument, stating that any forfeiture beyond 10% would be excessive and legally unjustifiable.

The court, while referring to past verdicts, reiterated that while the forfeiture of earnest money is permitted if it is reasonable, it should not be used as a means of imposing a penalty.

The bench cited Section 74 of the Indian Contract Act, of 1872, stating that if the forfeiture is excessive and punitive in nature, it falls under the category of a penalty and is therefore legally unenforceable.

The judgment made it clear that a party in breach of contract cannot be forced to forfeit an excessive sum of money just because it was mentioned in the agreement, as such terms would be considered unfair and punitive rather than a fair contractual obligation.

The case reached the Supreme Court after Godrej Projects Development Ltd. challenged an order passed by the National Consumer Disputes Redressal Commission (NCDRC), which had ruled that the company could not deduct more than 10% of the BSP in case of cancellation.

The developer contended that the forfeiture of 20% was agreed upon contractually and should therefore be enforced without question. However, the Supreme Court upheld the NCDRC’s ruling, highlighting that both the apex court and the NCDRC have consistently ruled that a deduction of more than 10% of the BSP is excessive and cannot be permitted.

The bench referenced the 2015 case of DLF Ltd. v. Bhagwanti Narula, where the NCDRC had first established that forfeiture of 10% of the BSP is reasonable and should be the maximum limit.

The court noted that this principle has been followed in multiple judgments over the years, reinforcing consumer rights and ensuring that developers cannot misuse forfeiture clauses to impose heavy financial burdens on buyers.

The bench categorically stated that there was no reason to overturn the NCDRC’s long-standing view, which is backed by legal precedents and aligns with the Supreme Court’s observations in previous cases.

However, while upholding the NCDRC’s ruling on the forfeiture limit, the Supreme Court disagreed with one aspect of the consumer commission’s order. It set aside the NCDRC’s directive that required the builder to pay interest on the refund amount, stating that such an order was not justified in the given circumstances.

The dispute arose when a homebuyer, who had booked a flat in the Godrej Summit project in Sector 104, Gurgaon, Haryana, sought a refund after possession of the unit was offered.

The NCDRC ruled that the builder could deduct only 10% of the BSP, which amounted to ₹17.08 lakh, and must refund the remaining balance to the buyer.

The Supreme Court upheld this decision and reinforced that deductions beyond 10% would be unreasonable and in violation of consumer protection laws.

This ruling is expected to have far-reaching implications for homebuyers across India, as it establishes a clear precedent that real estate developers cannot impose excessive penalties under the guise of forfeiture clauses.

By reaffirming the principle of fairness in real estate transactions, the Supreme Court has strengthened consumer protection laws and ensured that builders cannot take undue advantage of one-sided agreements.

Developers must now ensure that their contractual terms align with fair trade practices and do not place an unfair financial burden on homebuyers who seek to cancel their bookings.