Penalty clause is the sole section, which holds the potential to serve a homebuyers’ interest in case of dispute with the builder. Pay extra attention to this provision while finalising a real estate deal.
The recent cases of some Noida based developers failing to deliver a project for over two decades have raised concerns over the safety of homebuyers’ investment. In view of this, it is important that before entering into an agreement or finalising a real estate deal, buyers not only know their rights well, but also the way in which these rights can be exercised. Penalty clause is one such provision in the builder-buyer agreement which needs thorough understanding since it is the sole section which can safeguard a buyer’s right in case of any violation. The penalty clause contract outlines the instances wherein there is a possibility of deviation from the accepted rules, plans, and date of delivery, among others. The clause contains the agreed penalty that the defaulting party would be imposed with in case of any of these aberrations.
The recently implemented Real Estate (Regulation and Development) Act, 2016 (RERA) gives special emphasis to the Penalty Clause and has defined punishments for some of the frequently committed transgressions such as delayed project delivery by the builder and late or no payment by the buyer.
In order to safeguard the investment by having fool-proof penalty provisions in the builder-buyer agreement, it is first vital for homebuyers to know all the possible instances of violations by the builder, which need to be mentioned under the deed.
- Calling off the deal – There should be an outlined penalty for both buyer and seller for calling off the deal after a certain token money/booking amount has been paid.
- Failure to make timely payments – The penalty clause in the builder-buyer agreement must define the fine that the buyer will be subjected to in case of failure to disburse the payments in time.
- Failure to deliver project in promised time – Similarly, the buyer must ensure a well-defined penalty to be imposed on the developer if they fail to deliver the project in the promised time.
- Deviations from approved plans – Developers must stick to the sanctioned layout and floor plans. The agreement must state a punishment for deviating from the original approved plans.
- Defective structure – In order to be able to contest a poor product quality, homebuyers must ensure that the agreement defines the consequences for the builder if the building does not meet quality standards.
In addition, homebuyers must also lay focus on the ‘escalation clause’ in the builder-buyer agreement. Dipakk Vadehra, Co-founder, Connextions Abroad says, “The escalation clause states that the buyer will have to bear the escalated cost of raw materials if it goes higher than 10-15 percent during the course of construction of the project. Buyers must clarify the same and ensure a balanced contract which is free of escalation.”
In line with these, RERA has pre-defined the penalties for certain cases of transgressions to make real estate more credible and a safe investment tool. Some of the most notable penalty norms under RERA are –
- Project delays – In case of project delays, buyers are allowed two choices – Pulling out of the investment or staying invested and getting compensated by the developer.
- If the homebuyer wishes to withdraw the investment, the promoter/developer must return all the funds collected so far, along with the applicable interest as prescribed under the rules and compensation as arbitrated by an adjudicating officer.
- If the homebuyer wishes to stay invested, the promoter/developer must pay the interest for every month of delay as compensation.
- Structural defects – As per RERA, any structural defects brought into notice in the first five years from date of possession, caused by poor workmanship, quality or provision of services will be the developer’s liability. The rectification would not attract any additional charges from homebuyers and will have to be carried out within a span of 30 days from the date of filing of the complaint. Failure to do so will entitle the buyers to seek relevant compensation as mentioned in the Act.
- Late payment by homebuyer – Buyers will be liable to pay a similar monthly interest as compensation to the developer if they default in making timely instalments. Continued violations post issuance of a notice will give the builder a right to terminate the allotment of property and refund the amount collected after deducting booking amount and interest.
In some cases, the penalties decided and documented in the builder-buyer agreement may be negotiable. The buyers may have to argue with the builder to include certain clauses or to keep the penalty norms stringent enough. For this purpose, buyers must know the ideal penalties which could act as a standard to compare the clauses mentioned in their agreement.
- Calling off the deal – Usually the seller forfeits the entire or partial booking amount if the buyer backs off. The agreement must have the provision to penalise the seller for backing out too. The seller must also be made liable to paying the entire or partial amount, above the actual booking amount. An absence of a similar penalty will empower the seller to continue looking for a better deal after the one finalised with the first buyer.
- Delayed project or payment – The interest rate of penalty for delayed payment by a buyer must be the same for delayed project delivery by a developer. Moreover, if the builder delays a project delivery and the buyer choses to opt out of the investment, the clause must entitle the buyer to receive the entire sum paid until then. If possible, homebuyers can also ask the developer to define the compensation in case the project gets stuck due to litigation, anytime in the future.
Frequently Asked Questions
What if the builder evades following the penalty clause?
The builder-buyer agreement is the final deed of understanding between the two parties regarding the sale of a product. The Penalty Clause section contains the mutually-accepted penances in case of any default from either side. After signing the dotted line, both the parties are legally bound to follow it. If the builder evades its rules, the buyer can approach the consumer forum. Now, under RERA, buyers can also approach the Appellate Tribunals of their respective states and seek redressal.
Can a builder alter penalties later on? In such a case, what should a homebuyer do?
The Penalty Clause is a legal document and cannot be altered once it has been mutually agreed upon and sealed with authentic signatures of both/all the parties involved in the deal. Changes can be discussed and made if they are mutually accepted. However, a developer cannot force the modification of clauses on a buyer. In such a case, a buyer can approach consumer forums and Appellate Tribunals under RERA to seek redressal.
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