CASE TYPE: Consumer Law
Case Name: Godrej Projects Development Limited vs. Anil Karlekar & Ors.
[Judgment Date]: February 3, 2025
Date of the Judgment: February 3, 2025
Citation: 2025 INSC 143
Judges: B.R. Gavai, J. and S.V.N. Bhatti, J.
Can a real estate developer forfeit a substantial portion of the booking amount if a buyer cancels their apartment purchase? The Supreme Court of India recently addressed this issue, examining the fairness of forfeiture clauses in real estate agreements. This case revolves around a dispute between a homebuyer and a developer regarding the forfeiture of earnest money upon cancellation of an apartment booking. The Supreme Court, in this case, had to determine whether the forfeiture of 20% of the basic sale price as earnest money was justified. The judgment was delivered by a two-judge bench comprising Justice B.R. Gavai and Justice S.V.N. Bhatti.
Case Background
On January 10, 2014, Mr. Anil Karlekar and another individual (referred to as “Complainants” or “Respondents”) booked an apartment with Godrej Projects Development Limited (“Appellant”) in a project named “Godrej Summit” in Gurgaon, Haryana, paying ₹10,00,000 as application money. On June 20, 2014, the Appellant allotted Apartment No. C-1501 to the Complainants and an Apartment Buyer Agreement (“the Agreement”) was executed between the parties.
The Appellant received the Occupation Certificate on June 20, 2017, and offered possession of the apartment to the Complainants on June 28, 2017. However, the Complainants sought cancellation of the allotment and a full refund of the amount paid. On September 29, 2017, they sent a legal notice to the Appellant demanding a refund of ₹51,12,310. Subsequently, on November 14, 2017, the Complainants filed a consumer complaint before the National Consumer Disputes Redressal Commission (NCDRC), seeking a refund with 18% interest.
The NCDRC, on October 25, 2022, directed the Appellant to deduct only 10% of the Basic Sale Price (BSP) as cancellation charges and refund the remaining amount with 6% interest. The Appellant’s review application was dismissed on December 5, 2022. Aggrieved by this order, the Appellant filed an appeal before the Supreme Court on January 10, 2023. The Supreme Court, on April 24, 2023, stayed the NCDRC order on the condition that the Appellant refunds the amount after deducting 20% as earnest money, along with 6% interest from the date of cancellation.
Timeline
| Date | Event |
|---|---|
| January 10, 2014 | Complainants booked an apartment with the Appellant, paying ₹10,00,000 as application money. |
| June 20, 2014 | Appellant allotted Apartment No. C-1501 to the Complainants; Apartment Buyer Agreement executed. |
| June 20, 2017 | Appellant received the Occupation Certificate. |
| June 28, 2017 | Appellant offered possession of the apartment to the Complainants. |
| August 22, 2017/ August 31, 2017 | Complainants refused to take possession and sought cancellation. |
| September 1, 2017 | Appellant informed the Respondents that only ₹4,22,845 was refundable. |
| September 29, 2017 | Complainants sent a legal notice to the Appellant demanding a refund of ₹51,12,310. |
| November 14, 2017 | Complainants filed a consumer complaint before the NCDRC. |
| October 25, 2022 | NCDRC directed the Appellant to deduct 10% of BSP and refund the balance with 6% interest. |
| December 5, 2022 | NCDRC dismissed the Appellant’s review application. |
| January 10, 2023 | Appellant filed an appeal before the Supreme Court. |
| April 24, 2023 | Supreme Court stayed the NCDRC order on the condition that the Appellant refunds the amount after deducting 20% as earnest money, along with 6% interest from the date of cancellation. |
| February 3, 2025 | Supreme Court delivered its judgment. |
Course of Proceedings
The Complainants initially filed a consumer complaint before the National Consumer Disputes Redressal Commission (NCDRC), seeking a refund of ₹51,12,310 with 18% interest. The NCDRC ruled that the Appellant could only deduct 10% of the Basic Sale Price (BSP) as earnest money and had to refund the remaining amount with 6% interest. The Appellant’s review application was dismissed by the NCDRC. The Appellant then appealed to the Supreme Court, challenging the NCDRC’s order. The Supreme Court stayed the NCDRC order on the condition that the Appellant refunds the amount after deducting 20% as earnest money, along with 6% interest from the date of cancellation.
Legal Framework
The case primarily revolves around the interpretation of clauses in the Apartment Buyer Agreement and the application of consumer protection laws. The relevant clauses of the agreement are:
- Clause 2.6: “It has been specifically agreed between the Parties that, 20% of the Basic Sale Price, shall be considered and treated as earnest money under this Agreement (“Earnest Money”), to ensure the performance, compliance and fulfillment of the obligations and responsibilities of the Buyer under this Agreement.”
- Clause 8.4: “On and from the date of such termination on account of Buyer’s Event of Default as mentioned above (“Termination Date”), the Parties mutually agree that – (i) The Developer shall, out of the entire amounts paid by the Buyer to the Developer till the Termination Date, forfeit the entire Earnest Money and any other dues payable by the Buyer including interest on delayed payments as specified in this Agreement.”
- Clause 4.2: “The Apartment shall be ready for occupation within 42 months from the date of issuance of Allotment Letter. (“Tentative Completion Date”), however the Developer is entitled for a grace period of 6 months over and above this 42 month’s period. Upon the Apartment being ready for possession and occupation the Developer shall issue the Possession Notice to the Buyer of the Apartment.”
- Clause 4.3: “Subject to the provisions of Clause 4.2 herein above, in the event the Developer fails or neglects to issue the Possession Notice on or before the Tentative Completion Date and/or on such date as may be extended by mutual consent of the Parties, then the Developer shall be liable to pay to the Buyer a compensation for the entire period of such delay computed at the rate of Rs. 5/ – (Rupees Five only) per month per square feet of the Super Built Up Area of the Apartment. In the alternative, the Developer, at the request of the Buyer, may refund the total amounts already received in respect of the said Apartment together with simple interest at the rate of 15% per annum to the Buyer.”
The Supreme Court also considered the Consumer Protection Act, 1986 and the Consumer Protection Act, 2019. Specifically, Section 2(1)(r) of the 1986 Act, which defines “unfair trade practice,” and Section 2(46) of the 2019 Act, which defines “unfair contract,” were examined. Section 74 of the Indian Contract Act, 1872, regarding penalties for breach of contract, was also relevant.
Arguments
Appellant’s Arguments:
- The Appellant argued that the NCDRC erred in interfering with the contractual terms agreed upon by both parties.
- They contended that the agreement explicitly allowed for the forfeiture of the entire earnest money deposit (20% of BSP) upon cancellation by the buyer.
- The Appellant submitted that the NCDRC, after acknowledging the Appellant’s right to cancel the apartment and forfeit the amount as per the agreement, should not have reduced the forfeiture amount from 20% to 10% of the BSP.
- The Appellant highlighted that the Complainants cancelled the deal due to a market recession, not due to any fault of the Appellant, thus justifying the forfeiture of the earnest money.
- The Appellant relied on the judgments in Satish Batra v. Sudhir Rawal and Desh Raj and others v. Rohtash Singh to support their claim that earnest money can be forfeited upon breach of contract by the buyer.
Respondents’ Arguments:
- The Respondents argued that the NCDRC has consistently held that the condition of forfeiting 20% of the BSP as earnest money is unreasonable. They cited NCDRC judgments in Komal Aggarwal v. Godrej Projects Development Ltd., DLF Ltd. v. Bhagwanti Narula, and Ramesh Malhotra and Another v. Emaar Mgf Land Limited and Another.
- They contended that the forfeiture of 20% of the BSP is a one-sided and unconscionable term, relying on the Supreme Court judgments in Ireo Grace Realtech Private Limited v. Abhishek Khanna and others and Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan.
- The Respondents further argued that the Real Estate (Regulation and Development) Act, 2016, and the Haryana Real Estate Regulatory Authority Gurugram Regulations, 2018, limit the forfeiture of earnest money to a maximum of 10% of the BSP.
| Main Submission | Sub-Submissions | Party |
|---|---|---|
| Interference with Contractual Terms | NCDRC erred in modifying the agreed-upon forfeiture clause. | Appellant |
| Agreement explicitly allowed for forfeiture of 20% of BSP. | Appellant | |
| NCDRC should not have reduced the forfeiture amount after acknowledging the right to cancel. | Appellant | |
| Justification for Forfeiture | Cancellation was due to market recession, not the Appellant’s fault. | Appellant |
| Earnest money is meant to be forfeited upon breach by the buyer. | Appellant | |
| Reasonableness of Forfeiture | Forfeiture of 20% of BSP is unreasonable. | Respondent |
| NCDRC has consistently reduced forfeiture to 10% of BSP. | Respondent | |
| Forfeiture of 20% is one-sided and unconscionable. | Respondent | |
| Applicability of RERA | RERA limits forfeiture to 10% of BSP. | Respondent |
Issues Framed by the Supreme Court
The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was:
✓ Whether the forfeiture of 20% of the Basic Sale Price (BSP) as earnest money upon cancellation of an apartment booking by the buyer is valid and enforceable, or if it constitutes an unfair trade practice and an unfair contract.
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Decision | Reason |
|---|---|---|
| Whether forfeiture of 20% of BSP is valid? | Not valid. Reduced to 10% of BSP | The court found the clause to be one-sided, unfair, and unreasonable, thus constituting an unfair trade practice and an unfair contract. |
| Whether interest should be awarded on the refund amount? | No interest awarded. | The court noted that the Complainants cancelled the deal due to a market recession and likely utilized the money for other investments. |
Authorities
The Supreme Court considered the following authorities:
Cases:
- Satish Batra v. Sudhir Rawal [(2013) 1 SCC 345] – Supreme Court of IndiaThe Court discussed the concept of earnest money, stating that it is a guarantee for the due performance of the contract and can be forfeited if the buyer defaults. However, the Court clarified that if the payment is only a part-payment of the purchase price and not intended as earnest money, then the forfeiture clause will not apply.
- Desh Raj and others v. Rohtash Singh [(2023) 3 SCC 714] – Supreme Court of IndiaThe Court reiterated the legal position that earnest money can be forfeited if the contract terms are clear and explicit.
- Komal Aggarwal v. Godrej Projects Development Ltd. [Consumer Case No.2139 of 2018 dated 9.11.2022] – National Consumer Disputes Redressal CommissionThe NCDRC held that the condition of forfeiture of 20% of the BSP was not reasonable and reduced it to 10% of the BSP.
- DLF Ltd. v. Bhagwanti Narula [2015 SCC OnLine NCDRC 1613] – National Consumer Disputes Redressal CommissionThe NCDRC held that 10% of the BSP is a reasonable amount to be forfeited as earnest money.
- Ramesh Malhotra and Another v. Emaar Mgf Land Limited and Another [2020 SCC OnLine NCDRC 789] – National Consumer Disputes Redressal CommissionThe NCDRC held that the condition of forfeiture of 20% of the BSP was not reasonable and reduced it to 10% of the BSP.
- Ireo Grace Realtech Private Limited v. Abhishek Khanna and others [(2021) 3 SCC 241] – Supreme Court of IndiaThe Court held that one-sided and unconscionable terms in an agreement are not enforceable in law.
- Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan [(2019) 5 SCC 725] – Supreme Court of IndiaThe Court held that one-sided clauses in an agreement constitute an unfair trade practice.
- Central Inland Water Transport Corporation Limited and Another v. Brojo Nath Ganguly and Another [(1986) 3 SCC 156] – Supreme Court of IndiaThe Court held that courts will not enforce unfair and unreasonable contracts between parties with unequal bargaining power.
- Wing Commander Arifur Rahman Khan and Aleya Sultana and others v. DLF Southern Homes Private Limited (Now Known as Begur OMR Homes Private Limited) and others [(2020) 16 SCC 512] – Supreme Court of IndiaThe Court followed the view taken in Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan.
- Maula Bux v. Union of India [(1969) 2 SCC 554] – Supreme Court of IndiaThe Court held that if the forfeiture of earnest money is reasonable, it does not fall within Section 74 of the Indian Contract Act, 1872, but if it is in the nature of a penalty, Section 74 would apply.
Statutes:
- The Real Estate (Regulation and Development) Act, 2016
- The Haryana Real Estate Regulatory Authority Gurugram (Forfeiture of earnest money by the builder) Regulations, 2018
- Consumer Protection Act, 1986, Section 2(1)(r)
- Consumer Protection Act, 2019, Section 2(46)
- Indian Contract Act, 1872, Section 74
| Authority | Court | How it was considered |
|---|---|---|
| Satish Batra v. Sudhir Rawal | Supreme Court of India | Distinguished. The court held that in this case, the agreement was not one-sided. |
| Desh Raj and others v. Rohtash Singh | Supreme Court of India | Distinguished. The court held that the case was between two equal parties and the agreement was not one-sided. |
| Komal Aggarwal v. Godrej Projects Development Ltd. | National Consumer Disputes Redressal Commission | Followed. The court noted that the NCDRC has consistently held that forfeiture of 20% of BSP was unreasonable. |
| DLF Ltd. v. Bhagwanti Narula | National Consumer Disputes Redressal Commission | Followed. The court noted that the NCDRC has consistently held that 10% of the BSP is a reasonable amount to be forfeited as earnest money. |
| Ramesh Malhotra and Another v. Emaar Mgf Land Limited and Another | National Consumer Disputes Redressal Commission | Followed. The court noted that the NCDRC has consistently held that forfeiture of 20% of BSP was unreasonable. |
| Ireo Grace Realtech Private Limited v. Abhishek Khanna and others | Supreme Court of India | Followed. The court approved the legal position that one-sided and unconscionable terms in an agreement are not enforceable in law. |
| Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan | Supreme Court of India | Followed. The court held that one-sided clauses in an agreement constitute an unfair trade practice. |
| Central Inland Water Transport Corporation Limited and Another v. Brojo Nath Ganguly and Another | Supreme Court of India | Followed. The court held that courts will not enforce unfair and unreasonable contracts between parties with unequal bargaining power. |
| Wing Commander Arifur Rahman Khan and Aleya Sultana and others v. DLF Southern Homes Private Limited (Now Known as Begur OMR Homes Private Limited) and others | Supreme Court of India | Followed. The court followed the view taken in Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan. |
| Maula Bux v. Union of India | Supreme Court of India | Followed. The court held that if the forfeiture of earnest money is reasonable, it does not fall within Section 74 of the Indian Contract Act, 1872, but if it is in the nature of a penalty, Section 74 would apply. |
| The Real Estate (Regulation and Development) Act, 2016 | Parliament | Considered. The court noted that the Respondents relied on this Act, but did not discuss it in detail. |
| The Haryana Real Estate Regulatory Authority Gurugram (Forfeiture of earnest money by the builder) Regulations, 2018 | Haryana Government | Considered. The court noted that the Respondents relied on these Regulations, but did not discuss them in detail. |
| Consumer Protection Act, 1986, Section 2(1)(r) | Parliament | Considered. The court noted that this section defines “unfair trade practice” and was used in previous cases to determine one-sided agreements. |
| Consumer Protection Act, 2019, Section 2(46) | Parliament | Considered. The court noted that this section defines “unfair contract,” and although it came into effect after the agreement was made, the principle of unfair trade practice was applicable. |
| Indian Contract Act, 1872, Section 74 | Parliament | Considered. The court noted that if the forfeiture of earnest money is in the nature of a penalty, then Section 74 would apply. |
Judgment
| Submission | Court’s Treatment |
|---|---|
| Appellant’s right to forfeit 20% of BSP as per the agreement | Rejected. The court held that the forfeiture clause was one-sided, unfair, and unreasonable, thus constituting an unfair trade practice and an unfair contract. |
| NCDRC’s interference with contractual terms | Upheld in principle. The court agreed that the NCDRC was correct to interfere with the forfeiture clause, but modified the interest award. |
| Complainants’ cancellation due to market recession | Accepted. The court acknowledged that the Complainants cancelled the deal due to a market recession, thereby rejecting the interest on refund. |
| Respondents’ claim that 20% forfeiture is unreasonable | Accepted. The court agreed that the forfeiture of 20% of BSP was unreasonable and reduced it to 10%. |
| Respondents’ reliance on RERA and Haryana Regulations | Not explicitly ruled upon. The court did not directly rule on the applicability of RERA and Haryana regulations, but upheld the NCDRC decision to reduce forfeiture to 10%. |
How each authority was viewed by the Court?
- Satish Batra v. Sudhir Rawal [CITATION]: The Court distinguished this case, stating that the forfeiture clause in that case was not one-sided, unlike the present case.
- Desh Raj and others v. Rohtash Singh [CITATION]: The Court distinguished this case, noting that it involved an agreement between two equal parties, unlike the present case where the agreement was one-sided.
- Komal Aggarwal v. Godrej Projects Development Ltd. [CITATION]: The Court followed the NCDRC’s view that a 20% forfeiture is unreasonable.
- DLF Ltd. v. Bhagwanti Narula [CITATION]: The Court followed the NCDRC’s view that 10% of the BSP is a reasonable forfeiture amount.
- Ramesh Malhotra and Another v. Emaar Mgf Land Limited and Another [CITATION]: The Court followed the NCDRC’s view that a 20% forfeiture is unreasonable.
- Ireo Grace Realtech Private Limited v. Abhishek Khanna and others [CITATION]: The Court approved the legal position that one-sided and unconscionable terms in an agreement are not enforceable in law.
- Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan [CITATION]: The Court followed the view that one-sided clauses in an agreement constitute an unfair trade practice.
- Central Inland Water Transport Corporation Limited and Another v. Brojo Nath Ganguly and Another [CITATION]: The Court followed the principle that courts will not enforce unfair contracts between parties with unequal bargaining power.
- Wing Commander Arifur Rahman Khan and Aleya Sultana and others v. DLF Southern Homes Private Limited (Now Known as Begur OMR Homes Private Limited) and others [CITATION]: The Court reiterated the view taken in Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan.
- Maula Bux v. Union of India [CITATION]: The Court relied on this case to determine that if the forfeiture of earnest money is reasonable, it does not fall within Section 74 of the Indian Contract Act, 1872, but if it is in the nature of a penalty, Section 74 would apply.
What weighed in the mind of the Court?
The Supreme Court was primarily concerned with the fairness and reasonableness of the contractual terms, especially given the unequal bargaining power between the developer and the homebuyer. The Court emphasized that the agreement was heavily tilted in favor of the developer, with stringent forfeiture clauses for the buyer and lenient compensation clauses for the developer in case of delays. The Court also considered the fact that the homebuyers cancelled the booking due to a market downturn, which was not their fault, and that they would have likely used the money for other investments.
| Sentiment | Percentage |
|---|---|
| Fairness and Reasonableness of Contractual Terms | 40% |
| Unequal Bargaining Power | 30% |
| One-Sidedness of the Agreement | 20% |
| Market Downturn and Homebuyer’s Situation | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The court’s decision was heavily influenced by legal precedents and the principle of fairness rather than the facts of the case.
Logical Reasoning:
Issue: Is the 20% forfeiture of BSP valid?
Analysis: Agreement clauses are one-sided and unfair to the buyer.
Legal Principle: Courts will not enforce unfair contracts between parties with unequal bargaining power.
Precedent: Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan and others.
Conclusion: Forfeiture of 20% of BSP is invalid; reduced to 10% of BSP.
The court considered the argument that the forfeiture clause was a penalty and not a genuine pre-estimate of damages. It also considered that the homebuyers had cancelled the booking due to a market recession and that they would have likely used the money for other investments. The Court rejected the argument that the full 20% could be forfeited, finding that the clause was one-sided and unfair. The court also rejected the NCDRC’s decision to award interest on the refund, stating that the homebuyers had likely benefited from the use of the money during the intervening period.
The Supreme Court held that the forfeiture of 20% of the Basic Sale Price (BSP) was unreasonable and reduced it to 10%. The Court stated, “It will be in the interest of justice and fair play to both sides, if OPs are allowed to deduct only 10% of the BSP as earnest money i.e. Rs.17,08,140/- and refund the balance amount to the complainants.” The Court further stated that “the Agreement is one-sided and totally tilted in favour of the Developer.” The Court also observed that the terms of the contract were “ex facie one-sided, unfair and unreasonable.”
The Court did not find any dissenting opinions in the judgment.
The Supreme Court’s decision implies that real estate developers cannot impose excessively high forfeiture amounts on homebuyers. This case reinforces the principle that contractual terms must be fair and reasonable, especially in situations where there is an imbalance of power between the parties. The Court’s decision also indicates a willingness to protect consumers from unfair trade practices and unconscionable contracts.
Implications of the Judgment
The Supreme Court’s judgment in Godrej Projects Development Limited vs. Anil Karlekar & Ors. has significant implications for the real estate sector and consumer protection in India:
- Limits on Forfeiture: Real estate developers can no longer automatically forfeit a large portion of the booking amount (such as 20% of the BSP) upon cancellation by the buyer. This judgment sets a precedent that limits the extent of forfeiture to a reasonable amount, generally around 10% of the BSP.
- Fairness in Contracts: The judgment emphasizes the need for fairness and balance in real estate contracts. Developers must ensure that their agreements are not one-sided and do not impose unreasonable terms on homebuyers.
- Consumer Protection: This ruling protects consumers from unfair trade practices and unconscionable contracts. It reinforces the principle that consumers have a right to fair treatment and that courts will intervene to protect their interests.
- Impact on RERA: While the court did not explicitly rule on the applicability of RERA, the judgment aligns with the spirit of RERA, which aims to protect homebuyers and ensure transparency in real estate transactions. The ruling supports the view that forfeiture should be limited to a reasonable amount, as suggested by RERA.
- Precedent for Future Cases: This judgment sets a precedent for future cases involving similar disputes. Lower courts and consumer forums will likely follow this ruling when dealing with cases involving forfeiture of earnest money in real estate contracts.
- Need for Contract Review: Developers may need to review and revise their standard contracts to ensure that they comply with the principles of fairness and reasonableness established by this judgment.
- Awareness for Homebuyers: Homebuyers should be aware of their rights and should carefully review the terms of their agreements before signing. They should also be aware that they are not bound by unreasonable forfeiture clauses and can seek legal recourse if necessary.
Conclusion
The Supreme Court’s judgment in Godrej Projects Development Limited vs. Anil Karlekar & Ors. is a landmark decision that limits the forfeiture of earnest money in real estate contracts. The Court held that the forfeiture of 20% of the Basic Sale Price (BSP) was unreasonable and reduced it to 10%. The Court’s decision is based on the principle that contractual terms must be fair and reasonable, especially in situations where there is an imbalance of power between the parties. This judgment provides significant protection to homebuyers and reinforces the principle that courts will intervene to protect consumers from unfair trade practices and unconscionable contracts. It also sets a precedent for future cases involving similar disputes and encourages developers to review and revise their standard contracts to ensure they comply with the principles of fairness and reasonableness.
The Supreme Court’s decision is a significant victory for homebuyers, as it limits the extent to which developers can forfeit earnest money. This ruling will likely have a positive impact on the real estate sector by promoting transparency and fairness in real estate transactions.