Rules for forfeiting earnest money

The builder can forfeit the earnest money, but it cannot exceed 10 per cent of the total cost of the house

Vivek Kumar Gupta and his wife Kavita had booked a flat in a project ‘Prateek Laurel’ in Noida by Prateek Realtors. The Guptas had paid a total amount of Rs 2.17 million in instalments. However, when the builder sent a demand letter dated December 9, 2010, asking for another instalment of Rs 496,240 to be paid within a month, the Guptas failed to make timely payment.

The Guptas later claimed that they were entitled to a 5 per cent rebate, which was disputed by the builder. In May 2011, Gupta remitted a cheque for payment of the instalment. However, the builder did not present the cheque for payment and instead sent an email on June 4, 2011, intimating that their allotment had been cancelled on April 9, 2011. Aggrieved by this, the Guptas filed a complaint before the UP State Commission seeking that their allotment be restored, or their money be refunded with interest.

The builder contested the case, contending that allotment had been rightly cancelled due to default in making payment despite two reminders. The builder stated that the flat had already been allotted to some other buyer. As the State Commission allowed the complaint, the builder appealed to the National Commission, which observed that possession of the flat had to be given by September 2012, subject to clearance of all dues on time without default.So the failure to pay the instalment of Rs 496,240 counted as default in making payment. This entitled the builder to cancel the allotment under the terms and conditions stipulated in the allotment letter.

The Guptas argued that cancellation of the allotment merely for non payment of one instalment was not justified. Rejecting this argument and differentiating the facts of the case, the National Commission pointed out that in their case default had continued despite two reminders. The Commission also observed that a private builder would require money to complete construction in a time-bound manner so it would be necessary to ensure timely payment of the instalments.

Failure to make payment by the due date would leave the builder with no alternative but to cancel the allotment and forfeit the earnest money. 

Accordingly, by its order of October 3, 2018, delivered by Justice V K Jain, the National Commission set aside the State Commission's order and held the cancellation of the allotment to be valid and justified. However, it held that the amount which could be forfeited would be merely the earnest money (defined as the amount paid at the time of concluding the contract), subject to a maximum of 10 per cent of the agreed price of the flat. Going by this interpretation, the Gupta had paid only Rs 350,000 as earnest money before the issuance of the allotment letter. Hence, the Commission concluded that the builder would be entitled to forfeit this amount, and be liable to refund the balance amount of Rs 1.8 million along with 10 per cent interest. The writer is a consumer activist