Housing woes: Builder's default is buyers' pain

Approach debt recovery tribunal to prevent lender from taking physical possession of the project

The woes of home buyers don’t seem to end. After grappling with indefinite project delays, many are now facing issues with developers defaulting on loans and lenders threatening to take possession of the project.
 

Central Bank of India recently issued a ‘symbolic possession’ notice for real estate developer HDIL’s project at Kurla, Mumbai. The project started in 2009, is already delayed and the recent development has added to buyers’ worries. Despite the delay, Supriyo Rana, 32, bought a flat in the same project in 2015 after paying the token money. However, when he applied for a home loan, his bank asked him to get a no-objection certificate (NoC) from Central Bank of India, (CBI), as the developer had mortgaged the property to it. CBI refused because HDIL had already started defaulting. “There are many others suffering the same fate,” says Rana.
 

When Business Standard contacted HDIL on the default and other issues buyers were facing, the company replied: “Please refer to our statements to stock exchanges, wherein we have mentioned that we have written a letter to Central Bank of India to pay off the loan. We have already commenced the process to pay off the loan. We are in touch with all our customers and don't comment on the roving enquiry.”
 

HDIL is not the only one. There are others like Orbit’s Parel project, taken over by the Bombay High Court (through the appointment of a court commissioner) on June 4. This will include all the residential or commercial office premises currently constructed or those that will be constructed, along with the towers. This case is still different because usually, a bank moves the court to auction the property and recover the loan amount. Orbit’s case is unique for the fact that buyers who invested in the under-construction Orbit Terraces in Lower Parel have approached the HC to raise money and take over the project themselves.
 

Buyers have faced similar issues in Media Majestic Towers in Ghaziabad and the Teen Kanya project in Kolkata.

According to lawyers, buyers across the country are facing similar issues. “Courts are, however, taking a pragmatic approach,” says Abhishek Khare, founder and managing partner, Khare Legal Chambers.

Courts have directed the economic offences wing of the police to investigate the usage of funds if a developer says it doesn’t have the money to complete the project. They are even considering suggestions of involving another realtor to complete the project if the original one is incapable. “These are not well-settled solutions but are being tested,” says Khare.
 

If a developer defaults and a lender initiates the process to take over the property, the remedy for buyers depends on several factors such as whether the buyers have an NoC from the lender for the project, if they have paid stamp duty and registration, if they are allottees, etc. 

Bank can take over your property: Symbolic possession is the first step towards taking physical possession of a property. Lenders paste a notice at the project. This, however, does not prevent the developer from constructing the project. The builder can approach the bank for settling the loan, as well as complete the project and hand over the units.
 

In case the developer defaults, the lender to the project can initiate physical possession of all flats. Only those buyers who have paid the stamp duty registered it and also obtained an NoC from the lender are protected. These buyers also need to have a letter stating the lender is releasing their flat from the mortgage.
 

Typically, a builder starts selling under-construction flats after taking a loan for construction. It is the realtor’s obligation to inform the lender when he sells any unit in the project and ask the financer to release the charge for the specific house.

In some states, like Maharashtra, the law makes it clear that for an under-construction property, it is the developer’s responsibility to have a clear and marketable title. “If a project is mortgaged to a lender and the developer still allows you to pay stamp duty and register the flat, without getting an NoC from the lender, it amounts to cheating,” says Ashoo Gupta, partner, Shardul Amarchand Mangaldas & Co.
 

If a buyer has made only part-payment to the developer but paid stamp duty and completed the registration, they would need to approach the court. Before buying a property, it’s the buyer’s responsibility to do complete due-diligence. If the project is mortgaged to a lender, it is a registered document and thereby public. The court may take a view that the buyer purchased the flat despite having complete knowledge of the situation.

The law gives first preference to secured creditors over buyers who only have an allotment letter. “The agreement that lenders sign with the developer gives them superior rights over allottees,” says Kavita Agarwal, partner, J Sagar Associates.

Approach the debt recovery tribunal: To prevent a lender from taking over their flats, buyers need to approach the debt recovery tribunal. They need to get a stay order preventing the lender from taking physical possession. Buyers need to convey to the tribunal that their rights will be jeopardised if the lender takes physical possession. “Buyers can also form an association to implead in court. Though the case is between the developer and lender, courts do admit such appeals and give a hearing to aggrieved parties,” says Agrawal.
 

Many times, when developers mortgage property and take a construction loan, they also give a personal guarantee. “Buyers can also request the court to direct the lender to use the personal guarantee to recover dues and let the realtor complete the project,” says Khare.
 

Before buyers take any action, they must involve the lender. “Before approaching the court, arrange a joint meeting with the lender and the developer. Buyers can also try to initiate a tripartite agreement involving the lender and the developer on future payments,” says Hitesh Jain, senior partner, ALMT Legal Partners.
 

Buyers should also approach the high court and file a suit for specific performance of the contract. “The suit would seek directions from the court to make the developer honour the agreement with buyers and carry out his obligation of constructing and handing over flats,” says Anirudh Hariani, counsel at Bombay High Court.

Hold your payments: The payments in most projects are now linked to the construction. In a default, a developer may ask buyers to pay the dues so that he can hand over the flat, to try and prevent the lender from taking physical possession. Once a property is occupied, the lender needs to get an eviction order from a court for each occupant. This is a tactic to delay the bank’s proceeding and only benefits the developer, say lawyers. A lender can still evict the owners by approaching the court. In the past, buyers have come together, repaid the loan for their portion of the property and taken over the project. This is possible for a property that is nearing completion. Then, another developer finishes the project, while buyers purse cases against the errant one.