Is your builder a defaulter?

To ensure the property right is not contested, one has to take various steps, including getting a bank NoC

Real estate developers are grappling with the issue of meeting loan repayment commitments. Recently, Mumbai-based real estate developer Orbit Corporation defaulted on a Rs 96-crore loan provided by LIC Housing Finance. The developer has mortgaged about 2,40,000 sq ft across three of its projects.

In a public notice last week, LIC Housing Finance restrained the developer from creating any third-party rights on the mortgaged land.

Anshuman Jagtap, advocate at Hariani & Co, says properties mortgaged by developers are usually those where "structures would come up eventually".

It is likely there would be more cases of defaults, as banks might further tighten the screws on the unregulated sector by asking for more collateral, which would make it tougher for real estate companies to borrow. S Kalyanaraman, general manager (estate management), Bank of Baroda, suggests while buying a house, it's best to hire an advocate. "Home buyers should ensure the property they are about to buy is free of mortgage and has clear titles."

In case the house you want to buy (on a loan) is found to be mortgaged by the developer, your bank could request the developer's bank to issue a no-objection certificate (NOC) to the developer. This would make the house to be bought loan-free.

"An NOC is issued to a developer subject to some conditions, because the developer is still under debt," says Kalyanaraman. Once the mortgage tag is removed before you sign an agreement for a house, the ownership would rest with you even if the builder defaults on his loan. Typically, a bank takes one-two months to issue an NOC.

Therefore, due diligence is important before buying a house. Experts say if a house is bought on a loan, even if the buyer isn't alert, it's the duty of the bank to check the details. This aspect might be overlooked if a house is purchased with full down-payment, in cash. This is because there is no intermediary (bank) in this case.

Developers carry out many transactions that might not be accounted for. For instance, some developers might agree to sell you a flat at a discount if you agree to buy it while under mortgage. In case a developer keeps the house as mortgage after a sale agreement has been executed, the mortgage wouldn't affect the buyer.

Mumbai-based consumer activist Jehangir Gai says this is because in this case, the property would be protected under the Maharashtra Ownership of Flats Act, which states purchasers have the first right to the land and the building.

In such cases, developers could either stop construction or refuse to give possession of flats that are already ready. Therefore, home buyers would have to recover their money by taking the legal route. However, the law would favour the home buyer only if the sale agreement is executed before the house is mortgaged.