Understanding the Legal Aspects of Earnest Money Forfeiture in Real Estate
The practice of forfeiting earnest money in real estate transactions is a critical legal aspect that both buyers and sellers need to comprehend. This earnest money, typically a deposit made by the buyer to demonstrate their commitment to the purchase, can become a subject of contention and legal scrutiny if the deal doesn’t proceed as planned. In this article, we will delve into the intricacies of the law surrounding the forfeiture of earnest money in real estate, shedding light on the regulations, rights, and responsibilities governing this aspect of property transactions through some cases. Whether you are a buyer, seller, or simply an individual interested in the intricacies of real estate transactions, this discussion will provide valuable insights into the legal framework that governs earnest money in the real estate sector.
Dr Prem Lata, Legal Head VOICE
Legal issue: What is a reasonable and justifiable amount to deduct if a home buyer cancels their booking?
- Case- Goutam Roy V/S Avalon Projects
- CC No 1941 of 2018, Decided on 24.01.2023 (NC)
A landmark judgement by the National Commission (NCDRC)
- The builder and the home buyer have a signed agreement that includes a forfeiture clause. If the home buyer cancels their booking, 20% of the total basic sale price will be forfeited.
- The question before the National Commission was as to how much deduction is reasonable and justifiable.
The National Commission, when addressing the number of Supreme Court cases on this matter, relied on Section 74 of the 1872 Contract Act. According to this section, in cases of breach of contract, actual damages must be proven to penalize the other party. In situations where a buyer cancels their booking for a flat or property, it’s noted that the property remains solely with the builder, and there is minimal loss to the builder. In light of this, the National Commission ordered a forfeiture of 10% of the total sale cost of the property.
- Maula Bux vs Union of India 1970 SC
- Sirdar K B Ramachandra Raj URS vs SC 2015
Legal issue: Whether there can be any forfeiture of earnest money or any money?
- Case-Amit Gupta & Anr. Versus. M/S. Vatika Limited (National Commission)
- Consumer Case No. 425 Of 2018
A landmark judgement National Commission (NCDRC)
The complainants received the draft of the Builder Buyer Agreement on 16th April 2015. Upon reviewing the agreement, they found certain terms and conditions to be unacceptable. Consequently, they conveyed their concerns via an email dated 26th August 2015 in response to the draft agreement, which had been initially sent to them in a letter dated 16th July 2015. Among the objections raised by the complainants were the following:
- Section A suggests that the entire land required for the housing colony has not been acquired as of now. Additionally, as per Section B, License No. 22 of 2011, which was referred to, expired in March 2015. This information was verified by checking the DTCP website on August 21, 2015. It’s apparent that there has been a breach of the promise regarding my application.
- Clause F mention about several exceptions including ‘specification and location’ of the flat. This has not been communicated to me before (at the time of book and thereafter) and this is the first time it is being mentioned.
- In Clause 2, it is the first instance where Vatika mentions earnest money (EM) along with its definition. Up until this point, neither Vatika nor the involved broker had provided me with the definition of EM. The definition of EM as outlined in the Builder Buyer Agreement (BBA) is not agreeable to me; it cannot exceed 10% of the booking amount paid with an Expression of Interest.
Since the issues raised by the complainants were not addressed, they via email dated 06.12.2017 sought refund of the amount which they had paid to the OP along with interest. Rejecting the contentions advanced by the OP and allowing the consumer complaint, the Commission directed refund of the entire amount of Rs.37,05,892 which the said complainant had paid to the OP, along with interest on that amount @ 9% per annum.
Legal Issue: Unfair clauses in the buyer builder agreement
- Case-Pioneer Urban Land & Infrastructure Ltd. vs Govindan Raghavan
- Decided on 02.04.19
Such wholly one-sided agreements were termed as unfair and were not approved by the Hon’ble Supreme Court in Pioneer Urban Land & Infrastructure Ltd. Vs. Govindan Raghavan (2019) 5 SCC 725, decided on 2nd April 2019 which to the extent it is relevant reads as under:
“Incorporation of one-sided clauses in an agreement constitutes an unfair trade practice as per section 2®of consumer protection act.”
Quoted law-Section 2 (r) of the Consumer Protection Act, 1986 defines ‘unfair trade practices’ in the following words:
“‘Unfair trade practice’ means a trade practice which, for the purpose of promoting the sale, use or supply of any goods or for the provision of any service, adopts any unfair method or unfair or deceptive practice …”, and includes any of the practices enumerated therein. The provision is illustrative, and not exhaustive.
Legal issue:Equality before the law
This court’s ruling states that our judges are duty-bound by their oath to uphold the Constitution and the law. The Constitution was established to ensure social and economic justice for all citizens of the country. Article 14 of the Constitution ensures that all individuals are entitled to equality before the law and equal protection of the laws. This principle dictates that the courts will not enforce, and will instead invalidate, when necessary, an unfair and unreasonable contract or any unfair and unreasonable clause within a contract. This holds particularly true when such contracts are entered into by parties who do not possess equal bargaining power.
Legal Issue: Forfeiture of earnest money
- Case– Amit Kansal vs M/s. Vatika Limited CC No. 1244 of 2015
- Decided on 30.10.2019
The counsel representing the complainant also cited a decision of this Commission from the date 23.10.2017 in the case of Amit Kansal Vs. M/s. Vatika Limited CC No. 1244 of 2015. This case is related to an allotment made in the same project, ‘Tranquil Heights’. In the Amit Kansal case, the terms of the builder-buyer agreement sent to the complainants were not acceptable to him, and as a result, he requested modifications to the agreement, which the builder did not agree to. Consequently, he ceased making further payments and approached this Commission through a consumer complaint, seeking a refund of the amount paid to the builder along with interest, among other claims. The builder opposed the complaint, alleging, among other things, that the complainant was a speculator aiming for quick profits and had an obligation to sign the standard builder-buyer agreement sent by the builder for signatures.
Allowing the consumer complaint, this Commission directed refund of the entire amount which the said complainant had paid to the OP, along with interest on that amount @ 9% per annum.
Legal Issue: Forfeiture of earnest money
- Case-Mr Dinesh R Humane & Mrs Ranjana D. humane vs Piramal Estate Pvt. Ltd
- Decided on 16.03.21
The RERA Estate Appellate Tribunal in Maharashtra ruled that when a sale and purchase transaction of a flat is cancelled at the initial stage, with the allottee merely booking the flat and making an initial payment on a printed form, and no further progress occurs in the transaction, where the parties never reach the point of executing a sale agreement, in such a unique situation, it is essential to consider the core objective of RERA, which is to safeguard the interests of consumers. Therefore, any amount paid by the home buyer to the promoter should be refunded to the allottee if they decide to withdraw from the project.