Homebuyers' guide: What you need to know about arbitrary payment clauses in builder agreements

Hindustan Times

4 days ago

In 2022, Ramesh Mehta booked an under-construction apartment in Pune. His builder-buyer agreement stated that each instalment would be due on 'completion of the corresponding construction milestone or 60 days from the date of booking, whichever is earlier.' The second instalment was tied to the completion of the first-floor slab. However, the builder demanded payment just 60 days after booking, even though the slab work hadn't started. Since the clause allowed it, Mehta was forced to pay despite no visible progress. Later, construction stalled for months, leaving him financially strained with no assurance of timely possession.
This example highlights the importance of thoroughly understanding all aspects of the purchase, especially when buying property in India. Go through the timeline of payments to the builder as mentioned in the agreement.
The 'whichever is earlier' clause typically links payments to either the achievement of a construction milestone or a pre-decided calendar date—whichever occurs first. 'If the date arrives before the milestone is achieved, the buyer is still obligated to pay, even if the project is delayed. This can place an undue financial burden on the buyer,' says Jayesh Rathod, co-founder and director, The Guardians Real Estate Advisory.
In property sales agreements, the clause of 'whichever is earlier' usually pertains to payment deadlines of a fixed period, such as three months, or an event which involves loan disbursement, approvals, or when the seller has met their obligations. 'If this event takes place ahead of the fixed period, the buyer will be required to make an immediate payment and not doing so may result in forfeiting of the amount paid in advance, or the agreement is terminated,' says Santhosh Kumar, vice chairman, ANAROCK Group.
Although developers often support their demand notices with progress photographs and certifications from project engineers or architects, it is critical that the sale agreement explicitly requires that such demand notices be substantiated with certified proof of milestone achievement.
'From a buyer's standpoint, aligning payment schedules with actual project development helps avoid premature cash outflows, prevents EMI burdens on under-construction loans, and provides greater financial flexibility,' says Shubhi Jain, principal partner and head of CRM, Square Yards.
'You may receive a notice of payment default and not actioning it may result in penalties, interest being levied, or even the booking cancelled,' says Kumar. 'Much depends on how clearly the milestones are mentioned in the agreement. If they are ambiguous or misleading, you may be able to find recourse with Real Estate (Regulation and Development) RERA or consumer forums,' says Kumar.
Under RERA, buyers in India have a legal right to negotiate their payment terms. The law promotes payment plan systems that are construction-linked rather than linked to arbitrary dates.
'To get this right financially, the payment should be linked to the completion of the verified stages of construction—slab completion, internal finishing, or any such step that can be financially measured. Whenever any request is presented forthwith to the developer, he does entertain the request. It would indeed be advisable to get legal advice during the drafting of the agreement and ensure that the schedule of payments is drafted in your favour,' says Rathod.
'It is advisable to negotiate for payment triggers that are linked to specific, tangible milestones, such as completion of certain floors, receipt of the Completion Certificate (CC), or formal application for the Occupancy Certificate (OC),' agrees Kumar.
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A payment clause that is flexible and based on milestones thus reduces the risk of premature payments.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics