Cancellation and Forfeiture in Builder-Buyer Agreements

What the clause usually says

A typical cancellation clause permits the promoter, on the buyer's default or on the buyer seeking to withdraw, to terminate the allotment and forfeit the earnest money, which is commonly defined as ten per cent of the total consideration, together with interest accrued on delayed payments, brokerage and taxes already incurred.

The balance is then returned, often without interest and frequently only after the unit has been resold, which places the timing of your refund entirely in the promoter's hands. Some agreements go further, defining earnest money as 15 or 20 per cent, or allowing deduction of all amounts paid towards taxes, stamp duty and administrative charges.

What do Sections 73 and 74 of the Contract Act say about forfeiture?

Section 73 of the Indian Contract Act, 1872 addresses compensation for loss caused by breach. Section 74 provides that where a sum is named in the contract as payable on breach, or the contract contains any other stipulation by way of penalty, the party complaining is entitled to reasonable compensation not exceeding the amount named, whether or not actual loss is proved.

The phrase that does the work is not exceeding. A named forfeiture figure sets a ceiling on what can be retained; it does not establish that the whole sum is due. The Supreme Court in Kailash Nath Associates v Delhi Development Authority (2015) explained the position: reasonable compensation is the measure, proof of loss is generally required, and a genuine pre-estimate may be awarded without proof only where loss is difficult or impossible to prove.

In a rising market where the unit is resold at a higher price, the question of what the promoter actually lost has an awkward answer for the promoter. That is the lever in any negotiation over a large deduction.

Why earnest money is treated differently

Earnest money is a deposit given to bind the bargain, and courts have long treated forfeiture of a reasonable earnest amount as permissible where the contract provides for it and the buyer is at fault. The difficulty arises when a clause labels a large share of the price as earnest money. At that point courts generally look at the substance, and a large forfeiture is assessed as a penalty under Section 74.

Consumer commissions and several State RERA authorities have often treated around ten per cent of the sale consideration as the outer limit of a reasonable earnest money deduction in builder-buyer cases, and have directed refund of amounts retained beyond that. Some State authorities have issued regulations on the point. The figure is a strong guide rather than a fixed rule, so check what your State authority has done.

A worked example

A buyer in Thane agreed to buy a flat for ₹1 crore and has paid ₹30 lakh. A job transfer forces him to cancel. The builder's statement deducts 15 per cent earnest money (₹15 lakh), ₹1 lakh brokerage, ₹1.2 lakh in interest on two late instalments and ₹50,000 administrative charges, and offers ₹12.3 lakh, payable after resale.

A buyer who knows the law would respond differently. Earnest money at ten per cent is ₹10 lakh. Interest on late instalments is a genuine charge if the agreement provides for it at a rate consistent with RERA. Brokerage paid by the builder to its own agent and an unexplained administrative charge are harder for the builder to justify as loss caused by the buyer. On that approach, a refund of around ₹18.8 lakh, on a fixed date, is a reasonable opening position.

Taxes already paid to the government, such as GST, and stamp duty on a registered agreement may need separate handling. Ask how each will be refunded or credited, and note that many States allow a stamp duty refund application on cancellation only within a limited period, so move quickly.

How do buyer and builder defaults compare?

When the builder is the one at fault

If you are leaving because the promoter has failed to give possession by the agreed date, you are not cancelling for your own reasons. Section 18 of the Real Estate (Regulation and Development) Act, 2016 provides for return of the amount received with interest and compensation where the allottee withdraws. A forfeiture clause drafted for buyer default should not be applied to that situation, and a builder that tries to deduct earnest money from a Section 18 refund should be challenged in writing.

The reverse protection also exists. Section 11(5) of RERA provides that the promoter may cancel an allotment only in terms of the agreement for sale, and that an allottee may approach the authority if the cancellation is not in accordance with the agreement, is unilateral or is without sufficient cause.

The asymmetry

Compare the buyer default clause with the promoter default clause in the same agreement. The buyer forfeits a defined percentage plus accrued charges. The promoter, on failing to deliver, frequently owes a modest amount per square foot per month, or is excused entirely by a broad force majeure provision.

That asymmetry is worth naming explicitly in negotiation, because it is difficult to defend on its own terms. Asking for the two clauses to mirror each other is a clear, specific request rather than a general complaint about fairness.

Put simply: if you pay interest at the prescribed rate when you are late, the builder should pay interest at the same rate when it is late with your refund. If you lose ten per cent for walking away, the builder should not keep any of your money when it is the one that failed to deliver.

What to negotiate before signing

• Forfeiture limited to a defined and modest percentage, ideally not more than ten per cent of the price, expressed as the full extent of the promoter's claim.
• A refund timeline with a fixed number of days, such as 45 days from cancellation, not contingent on resale of the unit.
• Interest on any refund paid late, at the same rate you would pay on a delayed instalment.
• No deduction of brokerage or administrative charges that you did not agree to pay separately.
• A transfer right, permitting you to nominate a substitute buyer, subject to a reasonable transfer fee, rather than losing the money.
• A clear default notice, such as 30 days to cure, before the promoter can cancel for late payment.

Sample wording for a fairer cancellation clause

If the builder will accept a markup, a clause along these lines is a reasonable proposal: "If the Allottee cancels the allotment otherwise than on account of a default by the Promoter, the Promoter shall be entitled to retain an amount not exceeding ten per cent (10%) of the total price as earnest money, in full settlement of its claims arising from the cancellation, together with any interest on delayed instalments already due under this Agreement. The balance shall be refunded to the Allottee within forty-five (45) days of the cancellation, failing which it shall carry interest at the rate prescribed under the applicable RERA rules. The refund shall not be conditional on resale of the Apartment."

The words in full settlement stop the earnest money becoming a floor to which other charges are added. The fixed refund date, backed by interest, removes the incentive to delay. Builders often resist the interest sentence, but the fixed number of days alone is a significant improvement on the usual draft.

If you are cancelling now

Read the clause, but do not treat the number in it as settled. What the promoter may retain is a question of reasonable compensation, and that is fact-specific: how far the project progressed, whether the unit has been resold, at what price, and what costs were genuinely incurred on your allotment.

Put your cancellation in writing, ask for an itemised statement of what is being retained and why, and keep the correspondence. Consider whether a transfer to a substitute buyer is possible before cancelling, as it often recovers more. Where the amount is significant, this is a point for an advocate rather than acceptance of the first figure offered.