- Recently, the National Consumer Disputes Redressal Commission (“NCDRC”) in the case of Ramesh Malhotra & Ors. v. Emaar MGF Land Limited & Ors. has held that, – only the sum which was deposited by the flat buyers at the time of booking the flat would constitute earnest money despite a definition to the contrary given in the agreement executed with the Builder which gives the right to the Builder to deduct a higher sum than the initial deposit. The Order was given on 29th June, 2020.
- The judgment was given in the context that, – the buyers had deposited with the Builder a sum of INR 10 lacs at the time of booking the flat. The Builder failed to complete the construction on time.When the flat was offered for possession, the buyers refused to take the possession of the flat and sought for refund of the amount paid by them to the Builder along with interest and compensation.As per the terms of the Agreement signed between the Builder and the buyers, if the buyers refused to take possession, the builder was obliged to refund the sale consideration but after deducting the Earnest Money and after the Builder was able to sell the allotted flat. The term ‘Earnest Money’ was defined in the Agreement to mean 20% of the Sale Price of the flat.
- You would be aware that when you book a residential flat in an under-construction building, at the time of booking, the builders require you to pay an amount as ‘initial deposit’ as an initial commitment. Thereafter, you enter into an Agreement for Sale with the Builder which inter alia provides the payment schedule for the balance sale consideration.
- The Agreements record that, – if you chose to withdraw from the deal (i.e. decide not to purchase the flat) or ifyou default in paying any instalment as per the agreed schedule, the Builder will have the right to forfeit a certain amount and refund you the balance. This forfeiture amount varies from 10% of the Sale Consideration of the Flat and at times goes as high as 30% or even 40%. This varies from builder to builder. Most Agreements provide for 20%.
- For flats whose sale consideration runs into a few crores of rupees (which is very common in cities like Mumbai), even a sum of 20% or even 10% of the Sale Consideration turns out to be substantial vis-à-vis the initial deposit paid. In such case, the buyer is seriously prejudiced when the Builder deducts such substantial sum as penalty for withdrawing from the deal. You would be surprised that, – there are judgments given by the Hon’ble Supreme Court which frowns upon such practice; but it is very common to see these penalising clauses in the so called ‘standard form’ agreements customarily used by the Builders.
- In fact, as per section 18 of the RERA Act, 2016, if the builder fails to complete or is unable to give possession of an apartment in accordance with the terms of the agreement for sale or for any reason whatsoever, and if the buyer wishes to withdraw from the project, the builder has to return the amount received by him in respect of that apartment with interest @ 2% above SBI’s marginal cost of lending rate. The Model Agreement prescribed under RERA specifically states that, – “in any event, matter and substance mentioned in those clauses, which are in accordance with the statute and mandatory according to the provisions of the Act shall be retained in each and every Agreement executed between the Promoter and Allottee. Any clause in this agreement found contrary to or inconsistent with any provisions of the Act, Rules and Regulations would be void ab-initio”. The law and precedents are however seldom followed in practice.
3. Facts of the case (in brief)
- Ramesh Malhotra and Mrs. Renu Malhotra (collectively referred to as “Buyers”) booked a residential flat in a project of Emmar MGF Land Limited (“Builder”) in Gurgaon, making an initial booking payment of INR 10 lakhs. The total consideration for the flat was agreed at INR 1,68,19,512.
- The possession was to be delivered within -42 months from the start of construction and a grace period of -3- months was also available to the Builder. The payment was to be made in instalments linked with the progress of the construction.
- The Builderfailed to complete the construction on time and there was a delay of about 1 year and -2- months in offering possession.When the flat was offered for possession, the Buyers refused to take the possession of the flats and sought for refund of theamount paid by them to the Builder along with interest and compensation.
- The Buyers had deposited with the Builder a sum of INR 10 lacs at the time of booking the flat and before even execution of the Agreement. As per the terms of the Agreement signed between the Builder and the Buyers, if the Buyers refused to take possession, the Builder was obliged to refund the sale consideration but after deducting the Earnest Moneyand after the Builder was able to sell the allotted flat. The term ‘Earnest Money’ was defined to mean 20% of the Sale Price of the flat.
- The Builder refused to refund the Sale Consideration paid by the Buyers.
4. Issue which was to be decided by the NCDRC
- One of the issues which arose for consideration was that, – what would constitute the “earnest money” and to what extent was the Builder entitled to forfeit the same?
5. Key aspects of the Judgement of the NCDRC (Unquoted)
- The NCDRC observed that the Agreement entered into with the Buyer was wholly one sided which constituted an unfair trade practice and, therefore, could bind the flat buyer. The NCDRC particularly noted that the initial payment was made by the Buyers on 26th February 2013, and the Buyer’s agreement came to be executed on 15th April, 2013, the Buyers had no option but to sign on the dotted lines after already having made the initial payment of INR 10 lakhs to the Builder even before the Agreement came to be executed.
- The NCDRC inter alia relied on the following decisions of the Hon’ble Supreme Court:
- Pioneer Urban Land & Infrastructure Ltd. v. Govindan Raghavan (2019) CPJ 34 (SC) in which it was held that a term of a contract will not be final and binding if it is shown that the flat purchasers had no option but to sign on the dotted line, on a contract framed by the builder. The Court held that incorporation of such one-sided clauses in an agreement constitutes an unfair trade practice as per Section 2(r) of the Consumer Protection Act, 1986 since it adopted unfair methods or practices for the purpose of selling the flats by the Builder.
- Maula Bux Vs. Union of India – 1969 (2) SCC 554 in which it was held that, – forfeiture of a reasonable amount paid as earnest money does not amount to imposing a penalty. But if forfeiture is of the nature of penalty, Section 74 of the Indian Contract Act, that requires actual damage or loss to be proved, applies.It was ruled 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. Therefore, it was upheld that a ‘reasonable amount’ would require specific evidence of loss due to the default of payment, and anything beyond the loss caused thereby would constitute a penalty, which is not permissible under Section 74 of the Indian Contract Act. In this case, the Supreme Court held that, -the builder could forfeit 20% of the sale price on account of default on the part of the Complainants only if it couldbe shown had it had suffered loss to the extent of 20%. In absence of evidence of actual loss, an amount exceeding 10% of the total price was unreasonable (and of the nature of penalty) and hence could not be forfeited.
- Taking into consideration the aforesaid precedents, the NCDRC held that, – only a sum of INR 10 lacs which was deposited by the Buyers would constitute earnest money despite definition to the contrary given in the buyer agreement executed between the parties and the balance amount be refunded by the Buyer along with interest.
6. Brief Analysis and Key Take Away
- This Order of NCDRC is surely a sigh of relief for the flat buyers. It is definitely one of the most important precedents being set by the highest trial forum established under the Consumer Protection Act in an era where the Indian laws (like RERA) are becoming more conscious of the troubles and the harassment faced by the flat purchasers. In fact, section 49(2) and 59(2) of the Consumer Protection Act, 2019 empowers the State Commission and NCDRC to declare any terms of contract, which is unfair to any consumer, to be null and void.
- While the Order relies upon more than a couple of landmark Supreme Court precedents which apparently frowns upon the practice of the Builders to deduct a higher sum as “Earnest Money” which is more than the initial deposit given, it is nonetheless important to note that, – this judiciary made law may not be a sacrosanct in all cases. This is because the Supreme Court has also held that, – if the Builder can show that it has indeed suffered a loss which is higher than the Initial Deposit paid by the flat buyer in a particular case, then the he would be entitled to forfeit an amount to the extent of such actual loss caused to the Builder. Hence, there is still a chance for builders to prove that they have incurred a loss which is higher than the initial deposit paid.
- It is also very important to note that, – in addition to this issue of forfeiture of earnest money, the Agreements for Sale also record numerous other onerous provisions. One of such provisions being that, – if the buyer decides not to purchase the flat any longer, the builder will have the right to not only forfeit certain deposit but also levy losses / liquidated damages which is equivalent to the difference between the sale price agreed to paid by buyer (who has walked out) visavis the sale price agreed with the new buyer. So, for example, if the sale consideration agreed with Mr. X, the buyer is INR 5 crores. Mr. X walks out, due to which the builder has to find a new buyer (say Mr. Y). The builder agrees to sell the same flat to Mr. Y at 4 crores. The builder reserves the right to claim the differential price of Rs. 1 Crore from Mr. X as loss. Furthermore, the Agreement would also say that builder would refund the deposit to the buyer only when he is able to find a new buyer. We have personally represented a buyer wherein the Agreement of a very well known builder (selling ‘super luxurious’ flats) said that if there is a delay in handing over the possession, then the buyer has to make a decision in some prescribed time (it was 30 days mostly) whether he wants to claim for refund or whether he wants to chose to remain invested. If he choses to remain invested then he loses his right for claiming refund forever.
- India still needs similar precedents from High Courts and Supreme Court which holds such onerous provisions as void ab initio on account of being unfairly penalising, contrary to provisions of section 74 of Indian Contract Act and against public policy.