Supreme Court Limits Forfeiture in Real Estate Contracts, Declares 20% BSP Deduction Excessive—”Unfair and One-Sided Agreements Cannot Disadvantage Homebuyers”

Court’s Decision

The Supreme Court of India partially upheld the decision of the National Consumer Disputes Redressal Commission (NCDRC), ruling that forfeiture of 20% of the Basic Sale Price (BSP) as earnest money was excessive and unenforceable. The Court limited the forfeiture to 10% of BSP while setting aside the NCDRC’s order directing the developer to pay interest on the refunded amount. The developer was instructed to refund the remaining amount within six weeks.

This ruling reinforces the principles of fairness and consumer protection, ensuring that one-sided clauses in real estate agreements do not unfairly disadvantage homebuyers.

Facts of the Case

1. Booking of Apartment:
   • On January 10, 2014, the complainants booked an apartment in the Godrej Summit project located in Gurgaon, Haryana.
   • They paid an application money of ₹10,00,000 and later entered into an Apartment Buyer Agreement (ABA) on June 20, 2014.
   • The Basic Sale Price (BSP) of the apartment was ₹1,70,81,400.
2. Possession Offer by the Developer:
   • On June 20, 2017, the developer obtained an Occupation Certificate from the Haryana authorities.
   • On June 28, 2017, the developer issued a possession notice to the buyers, instructing them to take possession.
   • The buyers, however, refused to take possession, citing concerns about market conditions and requested a full refund of their payments.
3. Buyers’ Demand for Refund:
   • On September 29, 2017, the complainants sent a legal notice demanding a refund of ₹51,12,310, the total amount they had paid so far.
   • On November 14, 2017, they filed Consumer Complaint No. 262 of 2018 before the NCDRC, seeking:
     • A full refund of ₹51,12,310.
     • 18% interest per annum on the refunded amount from the date of payment.
     • Compensation for mental agony.
4. NCDRC Ruling (October 25, 2022):
   • The NCDRC partially allowed the complaint, ruling that:
     • The developer could only forfeit 10% of the BSP (₹17,08,140).
     • The remaining amount of ₹34,04,170 must be refunded.
     • The developer must pay 6% interest per annum on the refunded amount.
5. Appeal to the Supreme Court:
   • The developer challenged the NCDRC ruling before the Supreme Court, arguing that the Apartment Buyer Agreement permitted forfeiture of 20% of BSP.
   • On April 24, 2023, the Supreme Court stayed the NCDRC’s order, subject to the developer refunding the amount after deducting 20% of BSP with 6% interest.

Issues Before the Court

1. Is forfeiture of 20% of the Basic Sale Price (BSP) legally enforceable?
2. Did the NCDRC have the authority to interfere with a contractual clause?
3. Should the buyers receive interest on the refundable amount?
4. Was the Apartment Buyer Agreement one-sided and unfair?
5. How do consumer protection laws, such as the Consumer Protection Act, 2019, and RERA, impact the enforceability of the forfeiture clause?

Petitioner’s (Developer’s) Arguments

1. The contract explicitly allowed forfeiture of 20% of BSP:
   • The buyers had voluntarily agreed to the Apartment Buyer Agreement, which clearly stated that 20% of BSP would be forfeited upon cancellation.
2. The buyers canceled the booking for personal reasons:
   • The cancellation was not due to any fault of the developer but rather because the complainants felt that the market prices had fallen and they could get a better deal.
3. Legal Precedents Support Forfeiture Clauses:
   • Cited Satish Batra v. Sudhir Rawal (2013) 1 SCC 345 and Desh Raj v. Rohtash Singh (2023) 3 SCC 714, where the Supreme Court upheld forfeiture of earnest money.

Respondent’s (Buyers’) Arguments

1. The forfeiture clause was unfair and one-sided:
   • The developer’s agreement disproportionately favored the builder, penalizing buyers while providing developers broad exemptions from liability.
2. Consumer Protection Laws Prohibit Such Clauses:
   • Section 2(46) of the Consumer Protection Act, 2019, defines “unfair contracts” as those imposing excessive penalties on consumers.
   • The Haryana RERA Regulations, 2018, limit forfeiture to 10% of BSP, making the developer’s forfeiture clause unlawful.
3. Precedent Supports NCDRC’s Decision:
   • The NCDRC had previously ruled in favor of limiting forfeiture to 10% of BSP, including:
     • DLF Ltd. v. Bhagwanti Narula (2015 SCC OnLine NCDRC 1613)
     • Komal Aggarwal v. Godrej Projects Development Ltd. (2018)

Analysis of the Law

1. Indian Contract Act, 1872 (Section 74 – Liquidated Damages):
   • A penalty clause must be reasonable and proportionate to the actual loss suffered.
2. Consumer Protection Act, 2019 – Unfair Contract Terms:
   • Section 2(46) prohibits contracts that impose excessive penalties.
3. Real Estate (Regulation and Development) Act, 2016 (RERA):
   • RERA ensures fair builder-buyer agreements, and the Haryana RERA Regulations explicitly cap forfeiture at 10% of BSP.

Precedent Analysis

1. Pioneer Urban Land & Infrastructure Ltd. v. Govindan Raghavan (2019) 5 SCC 725:
   • Held that one-sided builder agreements were unfair and unenforceable.
2. Ireo Grace Realtech Pvt. Ltd. v. Abhishek Khanna (2021) 3 SCC 241:
   • Reaffirmed that homebuyers cannot be bound by oppressive contract terms.
3. Central Inland Water Transport Corporation v. Brojo Nath Ganguly (1986) 3 SCC 156:
   • Unfair and unreasonable contract terms violate Article 14 of the Constitution.

Court’s Reasoning

1. The Agreement Was Unfair and One-Sided:
   • The developer had broad exemptions from liability, while the buyers were heavily penalized.
2. Forfeiture of 20% BSP Was Unconscionable:
   • NCDRC correctly ruled that 20% forfeiture was excessive, and 10% was reasonable.
3. Buyers Were Not Entitled to Interest on Refund:
   • Since the buyers voluntarily canceled due to market price drops, they were not entitled to interest.

Conclusion

• Forfeiture limited to 10% of BSP (₹17,08,140).
• Developer must refund ₹34,04,170 to the buyers.
• No interest payable on the refund.
• Refund must be completed within six weeks.

Implications

1. Strengthens Consumer Rights in Real Estate:
   • Developers cannot impose excessive forfeiture penalties.
2. Ensures Fair Builder-Buyer Agreements:
   • Future contracts must comply with RERA and Consumer Protection Act provisions.

This judgment ensures fairness in real estate transactions and prevents exploitation of homebuyers by developers.

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