Booking cancellation – can the builder forfeit Earnest Money?

In the excitement of  booking a property, most of us forget to read the fine print of the booking form itself. There may be a situation where you may want to walk out of deal at some stage. However, it may not be easy for you to surrender your apartment without losses. In the event of buyer initiated cancellation of property, the developer shall forfeit the earnest money, commonly referred as booking amount.

Earnest Money

A deposit made to a seller showing the buyer’s good faith in a transaction. Often used in real estate transactions, earnest money allows the buyer additional time when seeking financing. Basically, at the time of property (home, commercial etc) booking, buyers are required to pay upfront, the agreed booking amount. This booking amount is usually 10% of the property value.

There is no standard norm that define the amount of earnest money. While some builders deduct 10 per cent of the booking amount, others quote the same figure on the ‘cost of property’. Others deduct up to 20 per cent, whereas smaller developers may forfeit the entire booking amount. To get the fair idea of the earnest money, one should carefully read the booking form and other agreements. It is advised to clarify with the developer if same is missing from the documents. Here is what the booking form of some of the developers say:-

[su_quote]In case, at any stage, the intending allottee seeks cancellation of allotment and refund of the amount deposited by him, the company may, at its discretion, forfeit the booking/registration amount, or earnest money, as the case may be. [/su_quote]

[su_quote]A request for cancellation can be made at any time after allotment. It may, however, be noted that the earnest money (10 per cent of the total consideration) will be forfeited, as the same is non-refundable. [/su_quote]

 

Can the Developer legally forfeit such amounts

There is no guideline for refunds and most developers insist that once you have signed the sale agreement, you are legally bound to follow it. As per courts, in some of the cases developer are right in deducting the booking amount in the event of cancellation. Legal standing on forfeiture of Earnest Money varies from case to case and here are some examples.

1) No Earnest Money / Booking Cancellation clause in Application Form / Agreements

Most of the time, the application form has no material information to disclose. Later on when the developer finalizes the allotment process, the buyer is asked to sign a builder-buyer agreement. Some of the stringent one side clauses are included by developer in this agreement but not specifically emphasized. The buyer in most of the cases do not go much into detail of the agreement and signs it under pressure from agents that it is a standard document and nothing important is mentioned in it. Also they are pressurized that if they do not sign or withdraw the offer, the booking amount will be forfeited, so in fear and innocence the buyer signs the agreement without knowing its consequences.

Case Study: The buyer/complainant had booked a flat in one of the residential projects Excelsior,Boulder Hills, Golf and Country club at Hyderabad of Emaar MGF. He paid the booking amount of Rs 9.52 lacs along with the application and later on when allotment was finalized the buyer signed the agreement and paid 19 lacs by cheque, but he was not informed by the developer regarding any clause relating to withdrawal of offer. After four months the buyer informed the company that as the flat was anti-vastu he had no interest in keeping it and instead showed intention of buying a villa. He requested the company to cancel the flat and refund the money deposited by him along with bank interest. The company refunded the amount but after deducting 10% of sale price of the apartment.

Being aggrieved the buyer approached the National Consumer forum. There it was held that in a case where the terms & conditions agreed between the parties do not provide for the whole or partial forfeiture of the earnest money, in the event of default on the part of the buyer, the only remedy open to the builder is to prove the actual damages, if any, sustained by it on account of buyer backing out from his contractual obligations and only on proving such damages, it could seek to deduct those expenses from the money deposited by the buyer. In absence of any proof, the developer is bound to refund the full amount.

2) Cancellation clause is mentioned in Agreement

In this case the buyer deliberately delayed the payments of installment to developer and also delayed signing the agreement. The builder raised several demands for subsequent installments and also asked the complainant to sign the buyers’ agreement. However, the complainant did not pay the installments as demanded, nor sign the buyers’ agreement despite repeated letters and intimations from the builder.

Case Study: The National Commission relied on the Supreme Court’s explanation regarding ‘earnest money’. Earnest money is that amount out of the total purchase consideration which is a token to bind the purchaser to the contract. Accordingly, earnest money can be forfeited if the transaction falls through by reason of the default or failure of the purchaser in performing his obligations – which basically concern payment of consideration, unless there is anything to the contrary in the terms of the contract.

In this case, the complainant had defaulted in payment of installment as per the schedule of payment of the total price of his apartment. Also, the complainant had not signed the buyer’s agreement or returned the signed copy to the builder within the time stipulated for it despite repeated reminders for it. Thus, the Commission held that the builder was not liable to refund the earnest money as the transaction had fallen through due to default by the complainant. Thus, in the present case the National Commission decided in favor of the builder, upholding the forfeiture of earnest money as it was rightfully forfeited as per the agreement between the builder and complainant and the default in payment of installments as per the schedule of payment. This case highlights that the general perception of builders being wrong in all cases and that the right to forfeit earnest money depends on the conduct of the parties irrespective whether he is a builder or a buyer.

3) Cancellation if Project approvals are not in place

Even if there is a clause that empowers the developer to forfeit the earnest money, developer can not do so if the project approvals are not in place and buyer want to exit the project.

NCDRC in case of Emaar Excelsior project observed that, As the opposite parties have not furnished the approvals or sanction and have not adhered to their own terms, forfeiture of 10% of the consideration amount is unsustainable as the opposite parties have committed an act of deficiency in service and unfair trade practice causing mental agony to the complainant whose money has been blocked with the opposite parties for more than four years time.

edit[03/12/2015] : Clarification on Earnest Money:

The question as to what would constitute earnest money which the seller of the property is entitled to forfeit, came up before this Commission in DLF Ltd. Vs. Bhagwanti Narula, Revision Petition No. 3860 of 2014, decided on 06.01.2015 and the following view was taken:-

It would thus be seen 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 actually suffered loss to the extent of the amount forfeited by him.   In our opinion, 20% of the sale price cannot be said to be a reasonable amount which the Petitioner Company could have forfeited on account of default on the part of the complainant unless it can show it had only suffered loss to the extent the amount was forfeited by it.  In our opinion, in absence of evidence of actual loss, forfeiture of any amount exceeding 10% of the sale price cannot be said to be a reasonable amount.

    It was contended by the learned Counsel for the Petitioner Company that since the complainant had specifically agreed to treat 20% of the sale price as earnest money, the forfeiture to the extent of 20% of the sale price cannot be said to be unreasonable, the same being inconsonance with the terms agreed between the parties. This was also his contention that so long as the Petitioner Company was acting as per the terms and conditions agreed between the parties, it cannot be said to be deficient in rendering services to the complainant. We, however, find ourselves unable to accept the aforesaid contention, since, in our view, forfeiture of the amount which cannot be shown to be a reasonable amount would be contrary to the very concept of forfeiture of the earnest money.  If we accept the aforesaid contention, an unreasonable person, in a given case may insert a clause in Buyers Agreement whereby say 50% or even 75% of the sale price is to be treated as earnest money and in the event of default on the part of the Buyer; he may seek to forfeit 50% of the sale price as earnest money.  An Agreement for forfeiting more than 10% of the sale price, in our view, would be invalid since it would be contrary to the established legal principle that only a reasonable amount can be forfeited in the event of default on the part of the Buyer.

For the reasons stated herein above, we hold that (i) an amount exceeding 10% of the total price cannot be forfeited by the seller, since forfeiture beyond 10% of the sale price would be unreasonable and (ii) only the amount, which is paid at the time of concluding the contract can be said to be the earnest money.”

When can you really challenge Forfeiture of Earnest Money

As per our research, a home buyer can easily challenge the developer’s decision to forfeit the earnest money in following cases.

  • If cancellation is sought at a stage when no agreement is signed which contains cancellation clause.
  • Buyer is not happy with the terms and conditions of Builder Buyer Agreement which is not supplied on time by the developer.
  • Developer does not have necessary approvals and buyer seek cancellation.

In case of delay, if the buyer decides to stop the payments, builder has right to cancel the allotment and forfeit the earnest money. This was decided in DLF Southern Towns Pvt. Ltd. vs. Dipu C. Seminlal, 2015 in NCDRC

How to go about getting refunds

What if you want to cancel after the booking? Approach the builder with a ‘genuine’ reason for cancellation. While defining a ‘genuine’ reason is difficult, a developer is more open to concessions on humanitarian grounds rather than ones that highlight his shortcomings. So, even though a buyer thinks that a delay in delivery or change in original building plans is reason enough to seek cancellation, the builder is unlikely to see reason in the argument and is wont to cite the delay in all projects. Sometimes, the builder may not have the money if too many projects are being cancelled. However, some developers are willing to refund if a buyer faces a financial problem like an unapproved home loan or a job loss.

Things to keep in mind

  • Familiarize yourself with the sale deed before going to developer.
  • Give a good reason for withdrawing from a project; financial problems work best.
  • Consider shifting to another property by the same builder.
  • Network with other buyers in the same project.
  • Ask the developer for a written document specifying the deduction.
  • Don’t pay cash while booking the property and ask for a receipt.

Conclusion

It is imperative that buyers clearly understand the true concept of earnest money and negotiate the terms with the developer at the time of signing the agreement. The buyer should negotiate on earnest money well in advance and also he should agree on conditions subject to clause that developer also has fulfilled his obligations.

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