Things you should know, before you cancel an apartment booking

[ecis2016.org] What happens after you decide to cancel the booking of a flat, will depend on the terms and conditions in the builder-buyer agreement and whether or not this agreement has legal validity

Home buyers may, sometimes, be forced to end their home-purchase journey abruptly, for reasons beyond their control. There have been several cases in the recent past, where buyers had to cancel the apartments they had booked, because of the sudden loss of income due to the Coronavirus pandemic. In other cases, the buyer may have a change of mind, after discovering a problem with the property. Either way, they have to cancel the flat booking. This is a scenario that every buyer should consider, before they start their home purchase journey.

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What happens when you cancel a flat booking?

What happens after you decide to cancel the booking of a flat, will depend on the terms and conditions in the builder-buyer agreement and whether or not this agreement has legal validity – i.e., whether the builder-buyer agreement has been registered. In case you have bought the property from an individual seller, the terms and conditions mentioned in the agreement to sell will come into play. It begs mention here that of a registered builder-buyer agreement or agreement to sell, all the terms and conditions will be valid, even if they are tilted in favour of the selling party. This is why reading the agreement to sell and the builder-buyer agreement is absolutely crucial.

Cancellation of flat booking and refund of token money

Typically, a buyer pays a certain percentage of the transaction value as what is popularly known in India as the ‘token money‘ or bayana. Generally, at least 1% of the deal value is paid as the token money by the buyer to the seller or the builder, when the two parties give an in-principle approval to the deal. At this juncture, the paperwork is yet to start.

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In case you are buying a brand new unit in an under-construction project from a builder, by the time the builder-buyer agreement is created, the buyer has to arrange another trance of the advance payment, which is typically 10% of the property’s value, after which the document is registered to attain a legal validity. Note here that the arrangement of payment would be different in case you are buying a resale property. In this case, buyers have to typically make the payment in two tranches only.

As long as the agreement is not registered, the seller cannot deduct any money from the advance amount. If the buyer is able to negotiate well, he may be able to get his entire money refunded.

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Cancellation after builder-buyer agreement is registered

From a buyer’s point of view, cancellation at this stage is costly. “Once the builder-buyer agreement is registered, the seller is legally empowered to forfeit a certain portion of this amount. Every builder-buyer agreement is written differently and depending on the terms and conditions mentioned in the agreement, the buyer will have to let go of a part of the entire amount,” says Sanjor Kumar, a Delhi-based real estate broker.

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As this is a buyers’ market right now, real estate developers do not force the buyers to forfeit the entire booking amount, adds Dheeraj Nigam, a Noida-based real estate broker. “This is done as part of their brand-building exercise and to gain the consumers’ trust. Unless a buyer is willfully trying to sabotage the deal, developers are open to refunding the booking amount, as long as the reason behind the cancellation is genuine and legitimate,” maintains Nigam.

Legal remedy to claim refund for flat cancellation

If the buyer is not happy with the developer’s conduct, vis-à-vis the refunding of money, they can approach the Real Estate Regulatory Authority in their state. This can be done, if the seller is a developer and the unit purchased is an under-construction property. If you bought a resale home from an individual seller, you will have to approach the consumer court, to get your grievance addressed.

“These processes take time and it is better for the buyer to peacefully negotiate with the seller, to reach a satisfactory outcome for both the parties,” opines Kumar.

Tax treatment of excess amount

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has recently ruled that if a buyer receives a sum higher than what he actually paid as the earnest deposit, he will have to pay tax on this excess income. According to the tribunal, while the excess amount will not be the same as capital receipt, it will have the same treatment as capital gains.

The order by the Mumbai tax tribunal may pave the way for other court in India to follow the same example while dealing with cases of this nature. Earlier, the income tax department had held that the excess amount  earned by the buyer is “income from other sources” and should be treated as such for tax purposes.

Things to keep in mind

• The buyer has no legal right over the property, till the builder-buyer agreement is registered. This is why it is important to keep everything documented and registered.
• For every transaction, take a receipt form the seller and keep all such copies safe with you.
• Carefully read the clause pertaining to cancellation of booking and get it changed, if you find that it is heavily in favour of the seller.
• Hire a legal advisor to carry out the process, to reduce the chances of errors.

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