On non-exercise of a developer's option, the developer forfeits 25% of the booking fee and refunds the rest
A worked RES examination question on forfeiture rules, from our Paper 2 bank — with the rule it turns on, and why each of the four options is right or wrong.
The question
Devi pays a 5% booking fee on a $1,200,000 uncompleted apartment and receives the developer's Option to Purchase. Her bank later declines her mortgage, so she lets the option lapse without exercising it. The developer applies the standard forfeiture for a developer's option that is not exercised. The sum the developer is entitled to forfeit is:
The answer, and why
Answer: C
The rule. On non-exercise of a developer's option, the developer forfeits 25% of the booking fee and refunds the rest. (This is distinct from the 20%-of-*price* forfeiture that applies after the S&P is signed.)
Why C is correct. Booking fee = 5% × $1,200,000 = $60,000; forfeit 25% = $15,000 (Devi is refunded the other $45,000).
The other options.
- A $60,000 forfeits the whole booking fee, not 25% of it.
- B $240,000 applies the 20%-of-price aborted-sale rule, which needs an exercised S&P.
- D $45,000 forfeits 75% and refunds 25% — the figures reversed.
Exam note. Non-exercise = 25% of the booking fee (here 1.25% of price). Not the whole fee, and not the 20%-of-price rule.
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