Supreme Court Protects Homebuyers: Limits Forfeiture in Real Estate Deals


Court: Supreme Court of India.

Case Name: GODREJ PROJECTS DEVELOPMENT LIMITED vs. ANIL KARLEKAR.

Citation: 2025 INSC 143 (Reportable)

Background of the Case

  • The case involves a dispute between Godrej Projects Development Limited, a real estate developer, and apartment buyers, Anil Karlekar and others.

  • The buyers booked an apartment in the "Godrej Summit" project in Gurgaon in January 2014, paying ₹10,00,000 as application money.

  • An apartment was allotted in June 2014, and an Apartment Buyer Agreement was signed.

  • The developer received the Occupation Certificate in June 2017.

  • The developer offered possession in June 2017, but the buyers sought cancellation and a full refund due to a market recession.

  • The developer claimed the right to forfeit 20% of the Basic Sale Price (BSP) as earnest money, as per the agreement. The buyers sought a full refund, citing the recession in the market.

  • The National Consumer Disputes Redressal Commission (NCDRC) directed the developer to deduct only 10% of the BSP towards cancellation and refund the balance with 6% interest per annum.

  • The developer challenged the NCDRC order in the Supreme Court.

Arguments Presented

Appellant's (Godrej Projects) Arguments

  • The developer argued that the NCDRC erred in interfering with the forfeiture clause in the agreement, which allowed them to forfeit 20% of the BSP as earnest money.
  • The buyers themselves canceled the deal due to a recession, so the developer was within its rights to forfeit the deposit as per the agreement.
  • The developer relied on precedents such as Satish Batra v. Sudhir Rawal and Desh Raj and others v. Rohtash Singh, which supported the forfeiture of earnest money.

Respondent's (Buyers) Arguments

  • The buyers argued that a 20% forfeiture was unreasonable, one-sided, and unconscionable.
  • They cited NCDRC judgments that consistently reduced forfeiture to 10%.
  • They referred to Ireo Grace Realtech Private Limited v. Abhishek Khanna and others and Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan to reinforce their claim that such a clause is unenforceable.
  • They relied on the Real Estate (Regulation and Development) Act, 2016, and Haryana regulations stating that forfeiture cannot exceed 10% of the BSP.

Supreme Court Analysis and Rulings

  • The Court acknowledged that earnest money is a guarantee for contract performance, and forfeiture is justified if the terms are clear.
  • The Court examined clauses 4.2 and 4.3 of the Agreement and found an imbalance in obligations, heavily favoring the developer.
  • The court held the agreement was one-sided.
  • The Court invoked Article 14 of the Constitution of India and cited Central Inland Water Transport Corporation Limited and Another v. Brojo Nath Ganguly and Another, stating that courts can strike down unfair contracts between parties with unequal bargaining power.
  • The Court endorsed rulings from Pioneer Urban Land and Infrastructure Limited, Wing Commander Arifur Rahman Khan and Aleya Sultana and others v. DLF Southern Homes Private Limited, and Ireo Grace Realtech Private Limited where similar one-sided agreements were deemed unfair trade practices.
  • The Court noted the definition of "unfair contract" under the 2019 Consumer Protection Act, which includes "imposing any penalty on the consumer... which is wholly disproportionate to the loss occurred".
  • The Court distinguished the case from Satish Batra & Desh Raj, as those contracts were not one-sided and had provisions for reciprocal obligations.
  • The Court, quoting Maula Bux v. Union of India, affirmed that forfeiture of a "reasonable amount" as earnest money is permissible and upheld the NCDRC’s view of 10% of the BSP being reasonable.
  • The Court reversed the NCDRC's decision to award interest on the refunded amount, stating the buyers canceled due to a decline in property prices and likely used their funds elsewhere.

Rationale

The Supreme Court's reasoning in this case is primarily based on the principle of fairness and equity in contractual agreements. The court highlighted the following:

  • Unequal Bargaining Power: The court observed that the Apartment Buyer Agreement was heavily tilted in favor of the developer, creating an imbalance of power between the parties. This disparity allowed the developer to impose harsh terms that were not reciprocal.
  • Unfair Contract Terms: The court found the 20% forfeiture clause to be unreasonable and disproportionate, essentially acting as a penalty rather than a genuine pre-estimate of damages. This was deemed to be an "unfair contract" under the Consumer Protection Act, 2019.
  • Consumer Protection: The court emphasized its role in protecting consumer rights, citing Article 14 of the Constitution, which ensures equality before the law. The court noted that consumers should not be forced to accept one-sided contracts.
  • Precedents on Unfair Trade Practices: The Supreme Court relied on previous judgments like Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan and Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly and Another to support its view that courts should not enforce contracts that are one-sided and unfair.
  • Reasonable Forfeiture: While acknowledging that earnest money can be forfeited, the court ruled that the forfeiture must be a reasonable amount. It upheld the NCDRC's decision that 10% of the BSP is a reasonable amount for forfeiture in such cases.
  • Distinction from other cases: The Court distinguished this case from Satish Batra v. Sudhir Rawal and Desh Raj and others v. Rohtash Singh, which had upheld full forfeitures, because these cases did not involve one-sided contracts.
  • No Interest on Refund: The court did not grant interest on the refund amount, reasoning that the buyers likely used the funds for other purposes, as they cancelled the booking due to a market decline.

Excerpt

  • "It can thus be seen that the Agreement is one-sided and totally tilted in favour of the Developer."
  • "This principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power."
  • "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."
  • "if the forfeiture of earnest money under a contract is reasonable, then it does not fall within Section 74 of the Indian Contract Act, 1872, inasmuch as, such a forfeiture does not amount to imposing a penalty."

Points to Remember

  • Earnest Money: Earnest money is a guarantee for contract performance, and forfeiture is justified if the terms are clear and explicit.
  • One-Sided Contracts: Courts will not enforce unfair and unreasonable contracts between parties with unequal bargaining power.
  • Reasonable Forfeiture: Forfeiture of earnest money must be reasonable; a forfeiture beyond 10% of the BSP is unlikely to be considered reasonable.
  • Consumer Protection: The Consumer Protection Act and the Constitution of India protect consumers against unfair contracts and trade practices.
  • Reciprocal Obligations: Agreements should have reciprocal obligations between developers and buyers; one-sided agreements are not enforceable.
  • Unfair Contracts: "Unfair contracts," including terms that impose disproportionate penalties, will not be upheld by courts.
  • Precedents: Cases such as Pioneer Urban Land and Infrastructure Limited, Wing Commander Arifur Rahman Khan, and Ireo Grace Realtech Private Limited reinforce the principle that one-sided agreements are not enforceable.

Conclusion

The Supreme Court's decision in Godrej Projects Development Limited vs. Anil Karlekar is a significant victory for homebuyers in India. It reinforces the judiciary's role in safeguarding consumer rights against unfair contractual clauses imposed by real estate developers. The judgment establishes a precedent for courts to scrutinize agreements with unequal bargaining power and intervene in cases of unconscionable terms. The ruling clarifies that while earnest money forfeiture is permissible, its reasonableness must be determined on a case-by-case basis and highlights the need for transparency and fairness in real estate transactions. The Supreme Court's final order directed Godrej Projects to refund the balance amount of ₹12,02,955 to the buyers within six weeks.

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