For long, buyers have been at the mercy of builders. When real-estate developers go bust, it’s the prospective buyers—the ultimate investors—in a building project who bear the maximum brunt. More often than not, they end up losing their life’s savings. Even reputed builders have repeatedly failed to protect the investment of buyers. But a landmark judgement by K K Khandelwal Chairman, Haryana Real Estate Regulatory Authority, Gurugram (HARERA) is set to fundamentally alter the relationship between the buyers and defaulting builders. If this progressive decision is adopted by other regulatory authorities across the country, it will have far-reaching impact in protecting the interest of the buyers.
At the heart of this judgement is the suo motu case of Deepak Chaudhary vs PNB Housing Finance Limited and others that passed in October 2020 by HARERA. It has been a trend in the real estate sector that promoters mortgage their project land and partial structures, all receivables from the sold and unsold inventory to lending organisations, financial institutions, banks, and creditors in order to avail of loans for funding the construction costs of developing the projects. But when such promoters fail to repay the loans, the lenders try to recoup their money by invoking the SARFAESI Act, 2002.
However, such auctions fail to account for the financial distress wreaked on prospective buyers, who have already paid in part or full to the builders in the hope of buying their dream home. Though such allotees fund the bulk of the construction activity, they are not the priority in the overall scheme of things as lenders rush to recover their money from auctions.
Dealing with one such matter the HARERA, Gurugram, with the intent to safeguard the interest of the allottees of the project Supertech Hues, pronounced the landmark judgement. The promoter, Supertech Limited, who is neither the licensee nor a collaborator, approached PNB Housing Finance Limited for a construction loan for the project, which was duly advanced to Supertech Limited, with Sarv Realtors Pvt. Ltd. as the confirming party, by way of equitable mortgage of the project land measuring 33.33 acres, by depositing the title deeds along with receivables from the mortgaged properties.
However, Supertech failed to repay the loans and became a defaulter. Consequently, the project was put for e-auction by the creditor. The aggrieved allottee Deepak Chaudhary approached HARERA Gurugram. K.K. Khandelwal Chairman HARERA Gurugram, after hearing the matter stayed the e-auction and instructed the creditor to take written approval of the authority and two-thirds of allottees before undertaking any such e-action that was bound to jeopardize the interest of 950 allottees who have invested a total amount of Rs. 328.19 crores in the project.
The judgement highlighted that in this case the promoter violated the provisions of section 11(4)(h) of the RERA, Act 2016 that enforces a restraint that the promoter shall not mortgage or create a charge on the apartment, plot or building after the execution of the agreement for sale. In the event, a promoter still creates a charge or mortgage, then the promotor will be liable for contravention of the provisions of Section 11(4)(h) and action will be taken under Section 61 of the RERA Act. The HARERA also reiterated that section 11(4)(g) and 11(4)(h) of the RERA Act makes it clear that if any such charge is created on the project it shall in no way affect the rights of the allottees.
The order further clarified that the lenders are duty bound to ensure that the loan payments are released to the promoters after due verification of the fact that the money raised is utilised towards the construction of the project. The lending institutions are equally responsible in case the loans are diverted for some other purpose.
In case, the debtor promoter fails to honour their financial obligation towards the lenders, then prior written permission needs to be obtained from the regulatory authority before proceeding for such auctions. The lenders as transferee promoter would need to perform the role of erstwhile promoter. Subsequently, if the transferee promoter (lender) intends to transfer the real-estate project to any third party to realise their loan amounts, they too need to seek prior written approval of the authority.
This mechanism of seeking prior written permission aims to ensure that the money invested by the bonafide allottees is safeguarded. K. K. Khandelwal also clarified that if the loan has been sanctioned for construction of a real estate project then in that situation the SARFAESI Act, 2002 should be read in conjunction with the RERA, Act 2016. The lending institutions are bound to disclose all rights and liabilities, including those who have invested their money in that particular real estate project. This is paramount to safeguard the interest of the allottees who’s rights would otherwise be jeopardised.
The authority ruled that lenders become the assignee of the promoter by virtue of mortgage, creating future statutory rights and liabilities in favour of such lending institution and as such covered under the ambit of definition of the promoter as provided under section 2(zk) of the RERA Act.
If lenders put up a real estate project from auction, then they are de-facto promoters by virtue of the inclusive definition of the promoter which includes in its scope an assignee. Moreover, this does not create an adverse precedent for the banking sector.
In such cases, the financial institutions have to take prior approvals from the authority in two stages. First, before initiating the auction of real estate project and second at the time of transferring the auctioned property to the new buyer apart from the consent of two-thirds of the prospective allotees.
If it is found that any lending financial institution engage in auctioning the real estate projects without the approval of the authority, it shall be deemed a serious offence and penal proceedings will be initiated against lending institutions.