Homebuyer stops EMIs after builder resells flat; K’taka HC quashes SBI’s case — ‘Outstanding loan not criminal offence’

The Karnataka High Court quashed criminal proceedings initiated by the State Bank of India (SBI) against a Mumbai-based homebuyer who halted his home loan EMIs upon discovering that his builder had illegally sold his allotted flat to a third party.

Delivering a key ruling on borrower rights, the court observed that an outstanding financial liability cannot automatically be treated as a criminal offence.

Anatomy of the dispute

According to an Economic Times (ET) report, in the financial year 2019-20, Mr Bari took a ₹39.92 lakh home loan from SBI to purchase a flat (B-306) in Bengaluru’s Grandeur Park project. He reportedly signed a standard tripartite agreement with the bank and the developer on 8 February 2020.

Because he lived in Mumbai, Bari could not regularly inspect the site, but he consistently paid his Equated Monthly Instalments (EMIs).

However, Bari later discovered the builder had sold his allotted flat to a third party in March 2023 without informing him or SBI. In response, Bari immediately stopped his EMI payments.

Instead of solely pursuing the builder, SBI filed an FIR against Bari in September 2024, accusing him of cheating, criminal breach of trust, and misappropriating the loan amount.

Citing clauses 2,4, 5 and 6 of the tripartite agreement, SBI’s lawyers said that if the builder has cancelled the booking due to Bari defaulting or the project getting shelved, then the builder is legally obliged to repay the bank any money received from Bari.

Under Clause 5 of the agreement, the builder was explicitly mandated to refund the entire amount collected from the homebuyer directly to the bank if the project fails to materialise.

What did the High Court rule?

Quashing the FIR against Bari, the Karnataka High Court noted that the homebuyer never received the property title, took no part in the resale, and gained no financial benefit from the builder’s fraudulent transaction.

The court strongly criticised the bank’s approach, stating that a public-sector institution is expected to exercise due care before invoking criminal proceedings against a customer.

“The existence of an outstanding loan or the failure of the underlying transaction, by itself, cannot be treated as constituting a criminal offence,” the court observed, emphasizing that criminal prosecution cannot be used as a shortcut for civil financial recovery unless there is clear malicious intent.

However, the ruling does not resolve the question about what happens to Bari’s booking and the money paid towards the property, since the court was dealing with the criminal case proceedings.

Why did the homebuyer win?

Kalpit Khandelwal, Partner at Aekom Legal, told ET that the agreement explicitly made the builder—not the buyer—liable to repay the bank if the project failed. Because Bari exhibited no dishonest intent, the court correctly classified the dispute as a civil recovery matter.

He advised homebuyers to carefully scrutinise their tripartite agreements, as these contracts dictate who bears the financial risk if a builder defaults or a housing project stalls.