SC: Your Builder Refund Isn't All Yours — What Happens to Your Home Loan When the Builder Defaults

Quick Answer: In a judgment dated October 15, 2026, the Supreme Court held that a homebuyer who cancels a flat booking can only get back money paid from his own pocket — not loan money the bank paid directly to the builder. Getting the bank's money back too would be unjust enrichment. His loan account with the bank continues separately. This week, the Supreme Court answered: no. A bench of Justices P.S. Narasimha and Alok Aradhe held that a homebuyer can only recover what he paid from his own pocket. Taking the bank-funded portion too, while the loan is still unpaid, would be "unjust enrichment" — a windfall you never lost. The case is Madhu Kudapa (formerly K. Madhusudhan Rao) v. M/s Lodha Healthy Constructions and Developers Private Limited & Anr. (Civil Appeal No. 8994 of 2022, 2026 INSC 1131). It decides who receives which part of the refund — and carries a warning every borrower must understand: your home loan does not stop just because the builder failed.

What the Supreme Court decided

The facts, as recorded by the Court and reported by Law Trend and Law Chronicle: - In 2009, the buyer booked a flat in "Lodha Bellezza" at Kukatpally, Hyderabad for Rs 2,30,73,876 — Rs 51,11,576 (about 22%) from his own funds, and a Rs 2 crore HDFC housing loan under a tripartite agreement (buyer–bank–builder). - Between 2010 and 2011, HDFC disbursed Rs 1,68,80,531 directly to the builder in thirteen tranches. The builder collected about 95% of the price — and never delivered the flat. In July 2022 — nine years after the buyer's May 2013 complaint — the NCDRC ordered the builder to refund the entire Rs 2,19,92,107 directly to the buyer with 9% interest, and found HDFC deficient — for releasing loan tranches without verifying construction progress — ordering the bank to pay the buyer Rs 2 lakh. The Supreme Court modified that order: the buyer gets back only his own out-of-pocket amount — Rs 1,27,34,726 with 12% simple interest per annum — plus Rs 15 lakh as composite compensation in full settlement of all other claims (rent, mental agony, harassment, litigation costs). The Rs 2 lakh finding against HDFC was upheld. The balance of the builder's deposit stays in an interest-bearing account, subject to the bank's recovery appeal before the High Court.

Why you only get your own money back: "unjust enrichment" explained

"Unjust enrichment" is legal language for a simple idea: you should not end up richer than you were before the problem started. The buyer paid about Rs 1.27 crore from his own money; the bank paid the rest — money the buyer borrowed and has not fully repaid. Receiving the full Rs 2.19 crore while still owing the bank would hand the buyer money that was never his loss. The Court put it plainly: the law of restitution "restores, it does not redistribute" — it returns value to the person at whose expense it was lost, not a windfall to someone merely because they were wronged. The bank's share follows the same logic. If the whole refund went to the buyer, the still-unpaid bank would be reduced "to the position of an unsecured creditor." The balance stays parked in an interest-bearing account until the High Court decides the bank's recovery appeal.

Your home loan continues even when the builder defaults

Your loan agreement is with the bank. Your flat agreement is with the builder. They are two separate contracts. Builder failure breaks the flat contract — not the loan contract. Moneycontrol's personal-finance desk (January 2026) states it plainly: a borrower's liability to service a home loan is independent of the inability to take possession because of the builder's default. The Financial Express's loan column agrees: even if the builder defaults, EMIs must still be paid regularly, and non-payment will damage your CIBIL score. The buyer kept paying the bank through his decade-long fight — and that discipline built his Rs 1,27,34,726 claim. Never stop your EMIs unilaterally because the builder stopped work. A missed EMI is recorded against you, not the builder. This is where the tripartite agreement matters. Most construction-linked loans are three-way contracts between you, the bank, and the builder: the bank pays the builder directly in stages, while you remain responsible for repaying the bank — even though the money never passed through your hands. As the Court put it, the arrangement "fastens the obligation to repay the loan on the borrower, though the money never passed through his hands." That is exactly why the bank's disbursements never became "your money," and why their refund does not become "your refund." One borrower-protection finding matters too: the Court upheld the ruling that HDFC was deficient for releasing thirteen loan tranches without evidence of stage-wise physical inspections. Banks are supposed to verify progress before paying your loan money to a builder. If your bank paid the builder while the site was nearly bare, keep that record.

Subvention schemes and RERA refunds: two more things to get right

Subvention warning. In "no-EMI-till-possession" plans, the builder promises to pay the pre-EMI interest until the flat is ready — but the promise is only as strong as the builder. If the builder stops paying, the bank still expects the money from you, and you may not realise payments have stopped until a default notice arrives. Before signing any subvention plan, get in writing what happens if the builder defaults on the subvention payments, and who pays then. RERA refund vs bank dues. A RERA or consumer commission refund order directs the builder to return what you paid, usually with interest — it settles the builder leg only. Your loan account is a separate contract: a refund order does not write off your loan, pause your EMIs, or stop interest from accruing. Use the refund to prepay or close the loan, and take a written no-dues confirmation from the bank.

Your rights ladder: from complaint to the Supreme Court

1. Write to the builder first. A formal written complaint demanding possession or refund within a clear deadline. Keep copies of everything. 2. Approach your state's RERA authority. RERA can order refunds with interest and compensation for delay — usually the fastest dedicated forum. 3. Consumer commissions. File before the district, state, or national commission depending on the claim amount. 4. Appeal upward. NCDRC orders can be appealed to the Supreme Court, as both the buyer and the bank did here. 5. Bank grievance channels, in parallel. For wrong disbursements or unfair charges, use the bank's grievance officer, then the RBI's complaint management system. Courts will protect your right to a refund — and the bank's separate right to recover its unpaid loan. Fight the builder for your money; keep paying the bank for its money.

What to do this week: a borrower's checklist

If you have a home loan on an under-construction flat: 1. Pull out your tripartite and loan agreements. Confirm who was supposed to verify construction progress before each disbursal. 2. Check whether the bank's disbursements matched actual construction. Ask the bank for inspection reports behind each tranche. 3. Never stop EMIs on your own, even if construction has stalled. If struggling, discuss restructuring with the bank — in writing. 4. Keep every receipt: booking amount, builder payments, EMIs, pre-EMI debits, all emails with the builder and bank. 5. If possession is delayed beyond the agreement date, send the builder a written demand (refund or possession, with a deadline). 6. Do not sign any builder "settlement" or "cancellation" letter without reading what it says about your loan. 7. If the dispute is large, consult a qualified lawyer before choosing between RERA and the consumer commission.

Sources: Law Trend and Law Chronicle on the Supreme Court ruling (Madhu Kudapa v. M/s Lodha Healthy Constructions and Developers Pvt. Ltd., 2026 INSC 1131; judgment October 15, 2026); Moneycontrol and The Financial Express on EMIs continuing after builder default.

This article is for educational purposes only and is not financial advice. Please consult a SEBI-registered investment adviser for personalized guidance. Investments are subject to market risk.

This article provides general legal information only and is not legal advice. Please consult a qualified lawyer for your specific situation.