by THO
In a major relief to homebuyers, the Supreme Court has said that real estate developers cannot deduct more than 10 per cent of the basic sale price of an apartment if a buyer decides to cancel the booking, relying on terms of a one-sided agreement.
By capping cancellation charges at 10% of the Basic Sale Price (BSP), the Court has provided much-needed relief to homebuyers, preventing developers from imposing arbitrary and excessive deductions. Legal experts told HT.com that the ruling strengthens the legal stance of homebuyers and sets a precedent that the courts will strike down any unfair contractual term.
A bench of Justices B R Gavai and S V N Bhatti had ruled earlier this week that contractual terms that are ex facie one-sided, unfair, and unreasonable would constitute unfair trade practice. The courts will not enforce an unfair and unreasonable contract or such a clause in a contract between parties who are unequal in bargaining power.
The case
Earlier this week, the apex court upheld the October 25, 2022, order of the National Consumer Disputes Redressal Commission directing Godrej Projects Development Limited to refund the amount deposited by complainant Anil Karlekar and others after deducting only 10 per cent of the basic sale price.
The court was hearing an appeal filed by the real estate firm Godrej Projects Development Ltd challenging an order passed by the NCDRC that had ordered that it cannot forfeit more than 10% of the amount. The real estate company had said that it should be allowed to forfeit 20% of the amount, which was part of the agreement with the buyer, and that there was nothing wrong with enforcing it.
“The NCDRC has held, in a series of cases since 2015, that 10 per cent of the basic sale price is a reasonable amount that is liable to be forfeited as earnest money. We see no reason to upset the view consistently taken by the NCDRC,” the bench said. The bench rejected the developer’s contention that the NCDRC has grossly erred in interfering with the contractual terms between the parties.
The court, however, said that the NCDRC was not justified in awarding 6 per cent simple interest per annum from the date of payment to the date of realisation in the case.
Here’s what legal experts have to say about the order
Legal experts said that by capping cancellation charges at 10% of the Basic Sale Price (BSP), the Supreme Court has provided much-needed relief to home buyers and prevented developers from imposing arbitrary and excessive deductions.
“One-sided clauses in the builder-buyer agreement have always deterred innocent and aggrieved allottees from invoking their rights against the defaulting builders and pursuing legal remedies. The Supreme Court has repeatedly reiterated that unfair terms in such pre-drafted contracts should be unenforceable,” said Aditya Parolia, Partner at PSP Legal, Advocates & Solicitors.
Adnan Siddiqui, Partner, King Stubb & Kasiva, Advocates and Attorneys, believes that the Supreme Court’s ruling categorically holds that one-sided builder-buyer agreements, which unfairly favour developers, are unenforceable in law.
“This judgment reinforces the rules of fairness, equity, and reasonableness in contractual obligations, which is in line with the Indian Contract Act, 1872, and the Real Estate (Regulation and Development) Act, 2016 (RERA). The ruling hence strengthens the legal stance of home buyers and sets a precedent that the courts will strike down any unfair contractual term,” he said.
The Court’s finding that unreasonable forfeitures cannot be sustained will require developers to revisit existing contractual frameworks to ensure adherence to the principles of good faith and fair dealing. Thereby implementing/relying upon more balanced agreements that withstand judicial scrutiny. On the other hand, while the judgement may affect cash flow management, it will also undoubtedly enhance trust, consequently aligning with the consumer protection jurisprudence of India, he added.
Kunal Arora, Partner, Lakshmikumaran, and Sridharan explains that the contracts between homebuyers and developers typically tend to be standard form contracts without much scope for negotiation. This is mainly because individual homebuyers practically do not have any bargaining ability, whereas developers, being businesses, are in a stronger position.
Indian courts have for long held that any such contract tilting heavily in favour of either party on account of the incomparable position of the contracting parties will qualify as ‘unfair’ and ‘unreasonable’ and thus cannot be enforced as being violative of the basic principle of equality enshrined in the Indian constitution, he said.
Moreover, the existing consumer protection laws also seek to curtail such unfair trade practices by businesses and service providers and, with that aim, categorically define an ‘unfair contract’. This judgment highlights the well-established principles under the Indian commercial and consumer protection laws, which unambiguously challenge the validity and enforceability of such lop-sided contracts to safeguard the interests of the Indian consumers and homebuyers, he added.
