Forfeiture of Earnest Money and Unjust Enrichment in Real Estate Transactions

The practice of retaining amounts paid as earnest money or security in real estate transactions raises significant questions about justice, equity, and good conscience. When done arbitrarily, it results in the unjust enrichment of one party, violating fundamental rights enshrined in the Constitution of India, specifically Articles 14. The principle of unjust enrichment ensures fairness and prevents one party from inequitably benefiting at another's expense. This article explores the application of this principle in cases involving the forfeiture of earnest money and highlights recent decisions by MahaRERA that reflect evolving judicial perspectives.

Understanding Unjust Enrichment and Forfeiture

Unjust enrichment is a legal doctrine stating that one party should not profit unfairly at another’s expense. In breach of contract cases, this principle ensures that the aggrieved party is restored to the position they would have held if the breach had not occurred. The doctrine aligns with broader principles of justice and equity, preventing parties from gaining an inequitable advantage.

A key question is whether this doctrine can be applied when earnest money or security is forfeited according to a forfeiture clause in an allotment letter, contract, agreement, or invoice. While such clauses are common in contracts, their enforceability and fairness are often scrutinized, especially in light of recent judicial trends and regulatory frameworks like the Real Estate Regulatory Authority (RERA).

Judicial Perspectives and Precedents

Over the years, judicial perspectives on forfeiture clauses have evolved significantly. Notably, the Supreme Court's 2019 ruling in Pioneer Urban Land and Infrastructure Ltd. vs. Govindan Raghavan held that courts would not enforce unreasonable or unfair contract clauses. Held that:

"Courts would not enforce and would, when called upon to do so, strike down an unfair and unreasonable contract or an unfair and unreasonable clause in a contract, entered between parties who are not equal in bargaining power."

This judgment has been instrumental in shaping the judicial approach towards unfair forfeiture clauses.

In another significant 2019 decision, the Maharashtra Real Estate Appellate Tribunal (MREAT) in Dinesh R Humne and Anr. vs. Piramal Estate Private Ltd. emphasized that RERA is social and beneficial legislation aimed at protecting consumers' interests. Held that:

“MahaRERA reiterated that RERA is social and beneficial legislation and the object of RERA is to protect consumers' interests. The ruling mandated that any amount paid by a home-buyer to the promoter should be refunded to the allottee upon withdrawal from the project, minus a reasonable forfeiture amount.”

Significance of MahaRERA Order No. 35/2022

MahaRERA's Order No. 35/2022 has established a standard for forfeiture clauses, limiting the amount that can be forfeited to 2% of the total consideration amount. This order aims to prevent promoters from enforcing ambiguous and unreasonable clauses, ensuring fairness and equity for all parties involved. It provides a clear guideline for resolving disputes related to the cancellation of bookings before the execution of a sale agreement.

Recent MahaRERA Decisions

Recent MahaRERA decisions further illustrate the commitment to these principles:

In Joy Salve vs. Godrej Skyline Developers Pvt. Ltd. (2022) the authority deemed the forfeiture clause in the booking application form unreasonable post-RERA implementation. Held that:

"The authority directed the developer to refund the earnest money, retaining only 2% as forfeiture, in line with MahaRERA Order No. 35/2022, which prescribes this forfeiture limit before the execution of a sale agreement."

In Mrs. Preeti Santosh Dwivedi & Anr. vs. Raymond Limited (2023) relying on several precedents, including the Supreme Court judgment in Central Inland Water Transport Corporation vs. Brojo Nath Ganguly and Anr., MahaRERA emphasized that unreasonable and unfair contract clauses are unenforceable. The decision reinforced that forfeiture should not exceed 2% of the total consideration, protecting consumers' interests. Held that:

“The promoter was directed to refund the money paid by the complainants towards the consideration of their flat without any interest, after deducting 2% of the total consideration (value) of the said flat (excluding the statutory dues paid to the government/ brokerage if any) within a period of 45 days from the date of this order.”

Conclusion

The doctrine of unjust enrichment is pivotal in maintaining justice, equity, and good conscience in contractual relationships. The retention of earnest money or security must be scrutinized to prevent unjust enrichment and protect consumer rights. MahaRERA's recent decisions reflect a commitment to these principles, setting a precedent for reasonable and fair contractual practices in the real estate sector.

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Disclaimer This Article is made available by lawyer for educational purposes only as well as to give you general information and a general understanding of the law not to provide specific legal advice. This Article should not be used as a substitute for competent legal advice. The author can be reached at [email protected] or 9782620448.

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