You have not mentioned about the sale agreement entered between your father and the builder.
The builder's claim is illegal and unjustified. If there is an agreement, then there will be a time stipulated in it within which the contract should be completed, in the absence of it, your dad may go ahead with letting the property on rent and should warn him of the consequences if he is trying to interfere. Your dad may offer to return his advance amount without interest, if he is not agreeing, he may issue him a legal notice terminating the contract and advise him to accept the advance amount which you should send it by a crossed cheque with a mention about its details in the legal notice.
If the builder's tortures are beyond tolerance, a police criminal complaint may be lodged against him for his illegal acts and threats.
There is no such thing that anyone can take law in their hands and pose dangers to others by flouting the rules or threatening others with the influence and help of anti social elements,. All are equal before law.