What you could lose if you cancel a property booking

Joydeep Karmakar was happily on his way to leaving rentals behind and becoming a homeowner when things came to a grinding halt. The 43-year-old, who works in the travel industry, had put down a deposit out of his savings to book a flat in a standalone apartment building and taken a loan to fund the rest when he suddenly found himself without a steady income. Karmakar realized that the impact of covid-19 on his industry and income would not be short-lived, and decided to opt out of the purchase. But when he tried to cancel the booking, the builder told him he would not get his deposit back. “He said that he had reinvested the money into the project, so he couldn’t refund it,” said Karmakar, who is already strapped for cash, and losing the deposit amount is the last thing he needs.

Given the layoffs and pay cuts that have followed the covid-19 pandemic, and the possibility of the money crunch getting worse, many like Karmakar are being forced to shelve their dreams to buy a home for now. But if you have already booked a home and decide to cancel, can you lose your deposit or end up in a legal limbo with your builder? Here’s what you should know before you cancel the booking for that dream home.

If you booked it

Earlier this year, Surya Dutta and Nabanita Bhattacharyya, both 31, decided it was time to buy their first home together. The couple, who had lived in different cities for work and education, settled on Hyderabad as the city they wanted to call home. “We looked at a few properties and zeroed in on one based on the brochures,” said Dutta, who works in operations.

Dutta and Bhattacharyya thought they were getting a great deal and wanted to book the apartment right away, so they paid the booking amount of ₹5 lakh through bank transfers. But things didn’t go according to plan. “We were just browsing one day and stumbled upon old cases against the builder in the consumer court for delayed possession and not returning the money. Now we are sceptical whether to go ahead or not. We plan to visit the site and talk to people who already have possession and then decide. The builder promised a 100% refund if we cancel after a site visit, but given their track record, we’re not sure,” said Dutta.

However, since Dutta and Bhattacharyya booked the flat online during the lockdown, there is some hope. According to Prashant Thakur, director and head, research, ANAROCK Property Consultants, builders had to do things differently during the lockdown. “The cancellation process varies from project to project and from builder to builder. Properties booked prior to the lockdown may not have the provision to get full refund. There would be some percentage of cancellation charges by the builder. However, during the lockdown period, there were quite a few projects where builders asked homebuyers to pay a certain sum as the booking amount, with the option to get a full refund in case they don’t want to go ahead after the lockdown, when they are able to visit the site,” he said.

When paying a deposit amount, make sure you have some kind of documentation to support your case. “Save any acknowledgement document you receive in lieu of a payment, especially if there is no agreement in place. Pay through cheques or electronic transfer instead of cash so that there is a paper trail. Keep all allotment letters, the acknowledgement letter, copies of the application form and other documents, safely, so that you can file a claim if need be,” said Abhinav Kaul, vice-president, strategic partnerships, BankBazaar, an online marketplace for financial instruments.

If you signed it

The key document to support your case when it comes to cancelling your booking for a home is the agreement, if you have signed one. “Builder-buyer agreements including sale agreement or property allotment documents usually contain cancellation clauses. So, if you have signed such a contract, read it carefully to find out how much money you are liable to be refunded. Usually, the builder would deduct 10% of the booking amount and refund the balance,” said Kaul.

From a legal perspective, the cancellation and refund clause of your agreement will dictate what you can get back and what you might have to forfeit. “The buyer has the right to demand a refund of the deposit. However, in most cases, the sale agreement provides a right to the developer to forfeit a certain amount as penalty or liquidated damages. The penalty may vary from builder to builder. We have seen penalty amounts ranging from 1% to 10% of the total sale consideration and also depending upon the stage at which the buyer walks out. Some developers also follow the practice where they levy losses or liquidated damages which is equivalent to the difference between the sale price agreed to be paid by the buyer who has walked out, vis-a-vis the sale price agreed with a new buyer,” said Chirag Sancheti, advocate, solicitor and partner, Bulwark Solicitors, a law firm.

But what if the builder refuses to refund your deposit amount, as in the case of Karmakar? “If the project is governed by the Real Estate (Regulation and Development) Act, 2016 (Rera Act), the buyer can file a complaint with the concerned authority (like MahaRera in Maharashtra). If the state government has not yet set up a regulatory authority or if the project is not required to be registered under Rera, the buyer can also file a civil suit against the builder. Alternatively, the buyer can file a consumer complaint under the Consumer Protection Act for deficiency in service before the appropriate dispute redressal forum,” Sancheti added.

Stuck with a loan

Karmakar’s other concern is that he is now stuck with a loan that he applied for to fund the purchase of the apartment, which he no longer intends to buy. In such cases, if the loan amount has not been disbursed, you can cancel your loan by writing to the bank and informing them of your decision to not go ahead with the purchase. If the loan has been sanctioned, the bank will not return the processing fees.

Alternatively, you can delay the disbursal by up to six months, if you think the situation will improve and you will be able to go ahead with the purchase then. “However, once the loan is disbursed, even partially, you cannot cancel it, because when the loan disbursal happens, the loan account number is already created and the agreement between you and the lender is in force,” said Kaul. He suggested using the moratorium facility if you think you don’t have the means to start making payments immediately. But keep in mind that this is only going to be a temporary fix, and will only increase your interest burden in the long term (read more at bit.ly/2X6Oc41).

Another option you might consider is to refinance the loan with a higher tenure and lower EMI to lighten the burden in these difficult times. But if you are a buyer in a new project and can finance your EMIs, you might still have to suffer the consequences if too many other buyers back out. The project can end up getting stalled or shelved altogether due to lack of funds. “It depends on the builder in question. Larger, organized developers are adequately capitalized and would not see their project funding stalled because of customer cancellations. Smaller builders may face problems,” said Thakur.

In view of the pandemic, the ministry of housing and urban affairs advised the state governments and Rera to allow extension of up to nine months to developers for the completion of projects. So if you’re a buyer who is going through with a purchase in an under-construction project, you can expect delays. If you were contemplating buying a house, this is not the time to invest in a project that hasn’t been kickstarted yet.

These are tough times in many ways, and facing a cash crunch or uncertainty about your income is a huge possibility. If you have booked an apartment but feel unsure about whether you can afford to pay for it going forward, it makes sense to cancel your booking even at the risk of losing some money right now. If you decide to go ahead with the purchase, make sure you have enough stowed away in your emergency fund to service the loan EMIs in case your income gets cut back or dries up as a result of the economic downturn.