Supreme Court Establishes 10% of Basic Sale Price as Reasonable Forfeiture in Real Estate Transactions

Introduction

The Supreme Court of India in “Godrej Projects Development Limited v. Anil Karlekar & Ors. (2025 INSC 143)” addressed the legality of forfeiture clauses in real estate contracts. The case revolved around the cancellation of a residential apartment booking and the forfeiture of the earnest money by the builder. The Respondents (buyers/Complainants) sought a refund of the entire booking amount paid to the developer, whereas the developer (Appellant) defended its right to forfeit as per the terms in the Apartment Buyer Agreement. The principal question before the Court was whether a clause permitting a 20% forfeiture of the Basic Sale Price (BSP) was enforceable, or whether it needed to be reduced or held invalid due to its unconscionable nature.

The key parties involved were:

Appellant: Godrej Projects Development Limited, a real estate developer.
Respondents: Homebuyers (the Complainants) who had canceled their apartment booking and demanded a refund.

This judgment clarifies how contractual clauses in real estate agreements dealing with the forfeiture of earnest money should be interpreted, especially when they appear one-sided and impose disproportionate penalties on homebuyers.

Summary of the Judgment

The Supreme Court upheld the National Consumer Disputes Redressal Commission’s (NCDRC) ruling that limited the forfeiture amount to 10% of the BSP, instead of the 20% stated in the Apartment Buyer Agreement. However, the Court disagreed with the NCDRC’s award of interest on the refunded balance, mainly because:

The buyers had voluntarily canceled the agreement due to falling market prices.
The developer had, in fact, completed construction and offered possession.
The arrangement allowing a 20% forfeiture was considered excessive and unconscionable, but awarding interest to the buyers, in the Court’s view, was not justified given they canceled for market-related reasons.

Consequently, although the developer was required to return the sum exceeding 10% of the BSP, the Supreme Court disallowed payment of interest on that refunded amount.

Analysis

1. Precedents Cited

Several precedents shaped the Court’s reasoning:

Satish Batra v. Sudhir Rawal (2013) 1 SCC 345: This case established that the forfeiture of a deposit labeled as “earnest money” may be justified if the clauses are clear and explicit and the depositor is genuinely in default. However, the Supreme Court noted that in Satish Batra, the buyer’s and seller’s obligations had a more balanced contract: the seller was equally liable to pay double the earnest money if the seller defaulted.
Desh Raj & Ors. v. Rohtash Singh (2023) 3 SCC 714: This case again approved the principle that earnest money can be forfeited if it is a proper security for contract performance but typically applies to transactions where both parties have near-equal bargaining power.
Maula Bux v. Union Of India (1969) 2 SCC 554: The Court here stated that forfeiture of earnest money must be reasonable; if it crosses a certain threshold to become punitive, Section 74 of the Indian Contract Act, 1872, would be triggered, qualifying it as a penalty.
Pioneer Urban Land and Infrastructure Limited v. Govindan Raghavan (2019) 5 SCC 725, Wing Commander Arifur Rahman Khan & Ors. v. DLF Southern Homes (2020) 16 SCC 512, and Ireo Grace Realtech Private Limited v. Abhishek Khanna & Ors. (2021) 3 SCC 241: These cases address the prevalence of one-sided agreements in real estate, classifying them as unfair trade practices under consumer protection laws. The Supreme Court recognized that developers often draft such agreements with clauses that heavily favor the builder, leaving the buyers in a weaker position.

Ultimately, the Court in the present case leaned on the rationale from Pioneer Urban and Ireo Grace, where it firmly disapproved of vehemently one-sided contract terms.

2. Legal Reasoning

The Court employed the following legal reasoning:

Applicability of earnest money principles: Under Indian contract law and prior Supreme Court rulings, forfeiture must not be punitive or disproportionate. If the contract specifically names the deposit as “earnest money,” the forfeiture must be reasonable.
One-sidedness of the Agreement: The Supreme Court noted that while the buyer was subject to a stiff forfeiture of 20% of the BSP, the developer’s liability for any delay was minimal, capped at a nominal per-square-foot penalty. This stark mismatch in risk allocation and compensation indicated an “unfair contract” under consumer laws.
Contractual clauses under the Consumer Protection Act: The Court underscored that Indian consumer law, both under the old statute (Consumer Protection Act, 1986) and the new one (Consumer Protection Act, 2019), guards consumers against unfair trade practices or unfair contracts. If a clause is palpably unconscionable, courts can intervene and revise or strike it out.
Rationale for no interest on the refund: While the Supreme Court confirmed that only 10% of the BSP would be forfeited, it did not permit interest on the amount refunded to the Respondents because it was the Complainants who canceled the booking in view of declining market prices. The Court felt that awarding interest in that scenario was unjust.

3. Impact

This judgment will have a significant impact, particularly in real estate transactions where standard-form contractual terms can be heavily weighted in favor of the developer:

Reinforces Consumer-Friendly Approach: The judgment emphasizes consumer courts’ and the Supreme Court’s readiness to strike down or modify terms they consider unfair or unreasonable in builder-buyer agreements.
Establishes a 10% Threshold: Developers, in practice, often inserted excessively high forfeiture clauses (20% or more). This ruling effectively clarifies that forfeiture above 10% of BSP is likely to be deemed a penalty, and hence, unenforceable.
Signals Fairness Requirement: Real estate agreements must show balanced risk allocation. Builders can no longer rely purely on boilerplate contract clauses that disclaim significant buyers’ rights without providing reciprocal obligations.
Influences Future Contract Drafting: Builders and financial institutions will have to revise their documentation to ensure they do not embed harsh penalty provisions. This enforces greater fairness and transparency.

Complex Concepts Simplified

Below are some key legal concepts in simpler terms:

Earnest Money: A sum paid as a pledge to fulfill a contract. If a buyer defaults, the seller may retain this money as compensation. However, if it is excessive or used punitively, it becomes a penalty, and courts may not permit it to be fully forfeited.
Unconscionable or One-Sided Contract: An agreement in which one party has overwhelming bargaining power and imposes unfair or excessive obligations on the other. Courts can strike down or modify such terms.
Forfeiture Clause: A provision in a contract allowing one party to keep a deposit or partial payment in case the other party defaults. This must remain within reasonable limits to avoid being considered a penalty.
Consumer Protection Act: The principal legislation in India protecting consumer interests. Under the old Consumer Protection Act, 1986 and the new Act of 2019, “unfair trade practices” and “unfair contracts” are disallowed, giving courts wide latitude to protect consumers.

Conclusion

In Godrej Projects Development Limited v. Anil Karlekar & Ors., the Supreme Court delivered a landmark decision confirming two vital principles: (1) forfeiture clauses in real estate contracts must be measured and not disproportionate, and (2) any forfeiture that exceeds 10% of the Basic Sale Price risks being characterized as punitive rather than a legitimate indemnity. More broadly, the judgment stands as yet another warning against one-sided contracts in the Indian real estate sector. Developers must ensure contractual fairness because consumer courts and the Supreme Court are willing to modify or negate terms they find unjustifiable. This brings greater balance and reasonableness to builder-buyer agreements and upholds the rights of consumers in real estate transactions.