You book an under-construction flat from a builder. You take a home loan to fund the payments to the builder. You are paying the EMIs to the bank. After a few years, you figure out that the construction is not going on as per the plan/contract. The builder is way behind the construction schedule.
Your agreement with the builder allows you to opt out and seek refund from the builder along with interest at say, 8% per annum. You exercise the option, and the builder agrees to refund your payment along with 8% p.a. interest.
However, you think the 8% p.a. interest is for mental agony and for opportunity cost of payments to the builder. You have been paying 10% p.a. to the bank. The builder must also compensate for the bank interest too. Is the builder liable to compensate you for the bank loan interest too?
Can You Ask the Builder to Compensate for the Bank Interest?
No, says the Supreme Court in an order dated June 4, 2025.
As per the judgement, the builders/developers are not liable to compensate home buyers for the cost of personal/home loans taken to fund the purchase even if the builder fails to give possession to the buyer within the agreed deadline.
Here is the brief timeline of events.
- The builder launches a residential project in 2011. The scheduled date of possession was in May 2015.
- May 2015: Project far from over. It would take another 2-3 years.
- The buyers (2 buyers) seek refund, and the builder agrees to refund the principal along with 8% interest. As I understand, the buyers had borrowed from the State Bank of India at 10.75% p.a. The buyers’ contention was that 8% p.a. interest was just for the deficiency of service and the builder must compensate them for the bank interest too over and above. The builder does not agree.
- The buyers go to the consumer court. State Consumer commission rules in favour of the buyer. That the builder must pay Principal + 8% p.a. + Bank interest at 10.75% p.a. + Additional costs.
- The builder appealed in the National Consumer Dispute Redressal Commission (NCRDC). No relief there.
- The builder appeals in the Supreme Court. The Supreme Court sets aside the requirement of payment of bank interest to the buyers. As per the Court, the builder must pay the principal along with 8% p.a. interest and other additional costs.
What Is the Rationale for Such a Judgement?
In our country where builders/developers harass customers to no end, this judgement providing relief to the builder may seem unfair to buyers.
However, the Court’s rationale is also spot on.
- The buyer is a consumer, and the builder is a service provider. That is the only relationship between the buyer and the builder.
- The decision to purchase an under-construction property and the decision about how to finance the purchase are 2 different decisions.
- The builder may have influenced the first decision (the decision to purchase). The financing decision was solely the buyers’ choice. Hence, the builder cannot be asked to compensate the buyer for this funding choice.
- Yes, the builder could not deliver the house on time and must compensate the buyer for the deficiency in service. As per the Court, the repayment of principal along with 8% p.a. interest (as per the contract) is sufficient compensation.
- The Court did not find any exceptional or strong reasons to ask the builder to compensate for the home loan interest too.
Another point to note here is that the builder in this case is Greater Mohali Area Development Authority (GMADA), a government organization. It is unlikely that the entity would have misled the buyers beyond a point. It is also possible that they had no loan tie-ups with any bank and the buyers had complete discretion in choosing their lenders.
With a private builder, there may be far greater misleading/inducement/false promises, and potential tie-ups with various lenders. Every case is different and therefore the ruling may also change. In some cases, the agreements may be too lopsided in favour of the builder. However, the judgement does set a precedent.
In this case, it is possible that, if the Court had found “exceptional or strong” reasons (clear instance of misleading/fraud), it may have ruled differently.
How Does This Affect You?
- This ruling clearly sets the boundaries for the extent of builder’s liability for failure to deliver projects on time.
- Yes, the builder is liable to compensate the buyers (as per the contract) for delay in possession. However, unless explicitly stated in the agreement, the builder is not responsible for interest payments on loans taken by the buyers in their personal capacity.
I know several people who have been stuck in incomplete projects for a long time. They are also paying interest on the home loans taken to purchase the house. This is clearly a setback for them. However, as mentioned above, each case is different.
With my limited understanding, this ruling also implies that the sale agreement between the buyer and the builder and the loan agreement between the buyer (borrower) and the bank are separate arrangements. That is indeed the case too. That the builder is deficient in its service does not allow you to stop paying EMIs on the loan. The bank will anyways not let you off the hook for such reasons.
Disclaimer: The honorable Supreme Court would have considered many aspects before delivering this judgement. Each such case would have its own nuances, and the courts may rule differently after considering those aspects. I am not an expert in legal matters. I have also not read the full judgement and have based this post on a few online articles. Hence, if you are buyer and have been aggrieved because of delay in project construction, do consult a lawyer before deciding your next step.