Cancellation and Forfeiture in Builder-Buyer Agreements
Buyers exit projects for ordinary reasons: a job moves, a loan falls through, circumstances change. The clause governing that exit is usually drafted on the assumption that it is entirely the buyer fault, and the numbers reflect that assumption.
Key takeaways
- Cancellation clauses commonly permit the promoter to forfeit earnest money and sometimes more.
- Sections 73 and 74 of the Indian Contract Act direct courts to reasonable compensation for loss actually suffered.
- A stipulated sum operates as a ceiling rather than an amount automatically payable.
- The corresponding clause for promoter default is usually far less onerous.
- What the clause says and what is recoverable under it are different questions.
What the clause usually says
A typical cancellation clause permits the promoter, on the buyer 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 hands.
Where Sections 73 and 74 come in
Section 73 of the Indian Contract Act addresses compensation for loss caused by breach. Section 74 provides that where a sum is named in the contract as payable on breach, the party complaining is entitled to reasonable compensation not exceeding the amount named.
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 sum is due. The enquiry moves to what the promoter actually lost, and in a rising market where the unit is resold at a higher price, that question has an awkward answer for the promoter.
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.
What to negotiate before signing
- Forfeiture limited to a defined and modest percentage, expressed as a genuine pre-estimate rather than a penalty.
- A refund timeline with a fixed number of days, not contingent on resale of the unit.
- Interest on the refunded amount, mirroring the interest you would pay on a delayed instalment.
- A cooling-off or transfer right, permitting you to nominate a substitute buyer rather than losing the money.
- Symmetry between the buyer-default and promoter-default consequences.
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 what it actually lost, 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 a statement of what is being retained and why, and keep the correspondence. Where the amount is significant, this is a point for an advocate rather than acceptance of the first figure offered.
Have a contract in front of you?
Upload it and get every clause checked against Indian law, with the provision each finding rests on.
Review your builder-buyer agreement contractCommon questions
The agreement says the builder can forfeit 10%. Is that final?
The agreement records what was written. Section 74 treats a stipulated sum as a ceiling on recovery rather than an amount automatically due, with the enquiry turning on loss actually suffered. What that means in your case depends on the facts and is worth advice where the sum is material.
The builder says the refund will come after the flat is resold. Is that reasonable?
It places the timing entirely in the promoter control and is a term worth resisting before signing. If you are already in it, asking in writing for a definite timeline, and keeping the response, is the practical first step.
Related guides
This article is general information about Indian law as of 2026-07-26, not legal advice, and reading it does not create an advocate–client relationship. Statutes and rules change, particularly under the Labour Codes where State rules are still being notified. Consult a qualified advocate about your own situation.