SC limits Developer Deductions in Homebuyer Agreements to 10% of BSP

The Supreme Court ruled that one-sided agreements between homebuyers and real estate developers, favoring the latter, cannot be enforced. It stated that developers cannot deduct unreasonable amounts if a buyer cancels a booking, limiting the forfeiture to a maximum of 10% of the basic sale price (BSP). 

A bench comprising Justices B.R. Gavai and S.V.N. Bhatt held that contractual terms that are unfair and heavily skewed towards developers constitute an unfair trade practice. The court rejected the plea of Godrej Projects Development, which sought to forfeit 20% of the amount, as per its agreement with a buyer. 

Referring to past Supreme Court rulings, the bench noted that forfeiture of earnest money is valid if reasonable and does not fall under Section 74 of the Indian Contract Act, 1872.

However, if the forfeiture amounts to a penalty, Section 74 becomes applicable. The court emphasized that if a contract requires a breaching party to pay or forfeit a sum beyond reasonable limits, it qualifies as a penalty and cannot be enforced. 

The case arose from an appeal filed by Godrej Projects Development against an order by the National Consumer Disputes Redressal Commission (NCDRC), which ruled that the company could not forfeit more than 10% of the buyer’s payment. The company argued that the 20% forfeiture clause was part of the agreement and should be upheld. 

The Supreme Court's decision reinforces consumer protection, ensuring that developers cannot impose excessive penalties on homebuyers. The ruling sets a precedent for fair trade practices in the real estate sector, preventing arbitrary forfeiture clauses that disproportionately burden buyers.