Over the past decade, the country has seen multiple cases of stalled real estate projects, within which, homebuyers may or may not have already given an advance amount. Nevertheless, in case of a default by a real estate developer, a homebuyer has many rights which protect him/her in the event of such a situation.
Almost all of the agreements signed between a builder and a buyer before the emergence of the Real Estate (Regulation and Development) Act, 2016 (RERA) were one-sided. Such agreements were unjust, besides being unreasonable in terms of payment of interest on delayed payments to be made by the homebuyer and vice-versa when the default pertained to performance on the part of a builder, withdrawal by the homebuyer and following terms relating to forfeiture of earnest money etc. and delay in completion of projects amounting to a deficiency in service. However, until the case of Pioneer (supra) took place, most homebuyers had suffered hardships at the hands of unscrupulous builders.
The Builder-buyer agreement can be subjected to judicial scrutiny
The Honorable Supreme Court of India, in the case of Central Inland Water Transport Corporation Limited and Others Vs. Brojo Nath Ganguly and Others [(1986) 3 SCC 156], observed that “The Constitution was enacted to secure social and economic justice to all citizens of India.
Equality before the law and equal protection of the law is guaranteed by Article 14 of the Constitution. This means that the judiciary shall not enforce and will, when called upon to do so, cancel an unreasonable and unfair contract, or such a clause in a contract entered into between parties who are not equal, in terms of bargaining power.”
Emphasising upon the above, the Honorable Supreme Court of India, in the case of Pioneer Urban Land and Infrastructure Ltd. Vs. Govindan Raghavan [(2019) 5 SCC 725] further ruled that this principle will apply where a person has no choice, or rather no meaningful choice, but to give his/her consent to a contract or to give a signature on the dotted line in a standard or prescribed form, or to accept a group of rules as a portion of the contract, however unreasonable, unconscionable, and unfair, a clause in that contract or rules may be. Therefore, a term of a contract shall not be final and binding if it is shown that the buyer had no option but to sign on the dotted line, on a contract framed by a builder, essentially where the contractual terms of the agreement ex-facie appeared to be one-sided, unfair, and unreasonable.
Critical issues concerning homebuyers:
Forfeiture of 20 percent of the value as earnest money
The forfeiture of 20 percent of the cost of the housing unit as earnest money being a covenanted liability against the homebuyer irrespective of whichever party is defaulting, has been a matter of dispute in several cases. The Hon’ble Supreme Court (SC) settled the issue via the case of Villayati Ram Mittal (Pvt.) Ltd. Vs. Union of India & Anr. (SLP (C) No. 12144 of 2009)] dated September 21, 2010, and Satish Batra Vs. Sudhir Rawal [(2013) 1 SCC 345]. For the same, SC relied on the ratio of the Judgment in the case of Chiranjit Singh Vs. Har Swarup (AIR 1926 PC 1), wherein it had been ruled that “Earnest money is part of the purchase price when the transaction goes forward; however, the same is forfeited whenever the transaction falls through, owing to reasons of the failure or fault of the vendee”. The Supreme Court has been pleased to hold and reiterate that “Whenever such a transaction is carried out, the earnest money is part of the price of the purchase, and the same is forfeited when the transaction falls through because of the default or failure of the purchaser.”
In view of the above, therefore, the forfeiture of the earnest money (to the extent of ten percent only) is also subject to the condition of the determination of the defaulting party, whether it is the homebuyer or the builder.
Deficient service and compensation
In the case of Pioneer Urban Land and Infrastructure Limited Versus Govindan Raghavan [(2019) 5 SCC 725], the Honorable Supreme Court supplied emphasis on the following:
In Lucknow Development Authority Vs. M.K. Gupta (1994) 1 SCC 243, the Honorable Supreme Court held that when a person hires the services of a builder, or a contractor, for the construction of a house or a flat and the same is for a consideration, it is a service as defined by Section-2 (o) of the Consumer Protection Act, 1986. An inordinate delay in terms of handing over an apartment’s possession equals to deficiency of service.
In the case of Trevor D’Lima and Ors. Vs. Fortune Infrastructure & Anr. [(2018) 5 SCC 442], the Honorable Supreme Court has been pleased to hold that a person cannot be made to wait indefinitely for possession of the flat allotted to him, and is entirely within his/her rights to ask for a refund of the amount paid, along with a suitable amount of compensation.
Award of interest, compensation and costs
The Honorable National Consumer Disputes Redressal Commission has observed in paragraphs 22 and 24 of its Order/Judgment in the case of Amit Soni & Anr. Vs. Umang Realtech Private Limited & Anr. (CC No. 2524 of 2017) as follows:
Logically, if the seller is charging interest from the buyer at 18 percent per annum, we should have no hesitation in awarding the same rate. Having regard to the fact that banks have lowered the interest rate and the Honorable Supreme Court has been awarding interest keeping in view the current market situation and considering the recent decline in the cost of borrowing and return on the investments made with the banks, we are of the view that interest at the rate of 12 percent per annum, would meet the ends of justice, together with compensation of Rs 1 lakh and costs of Rs 25,000. The interest was directed to be paid from the respective dates of deposit till the date of realisation, together with compensation as above. The amount is directed to be paid within four weeks from the date of receipt of a copy of this Order, failing which, the amount shall attract interest at the rate of 14 percent per annum, for the same period.
Interest and compensation provisions in RERA, 2016
Section 2 (za) of the Real Estate (Regulation and Development) Act, 2016 (RERA) prescribes the criterion for payment of interest as follows:
The interest rate charged upon an allottee by the promoter in the situation of a default shall be the same as the interest rate which the promoter would be liable to pay, in the same situation.
The promoter shall pay interest from the date he/she received the amount, till the date when that amount with interest, is refunded. Whereas, the calculation of the interest which an allottee has to pay to a promoter will be from the date the allottee commits default of payment, till the time when the same is paid.
The rates of interest in the furtherance of the above are prescribed under the rules of the Real Estate (Regulation & Development) Act, 2016, which vary from state to state.
Section 18 of RERA is of further significance as it provides for defaulting real estate companies to pay compensation for delay in handing over possession to the homebuyers. Under the said section, a homebuyer has two options – either to terminate the agreement and seek a refund or to continue with the project and claim compensation.
In the case of Neelkamal Realtors Suburban Private Ltd. and Anr. Vs. Union of India and Ors. in Writ Petition No. 2737 of 2017 decided on December 6, 2017; the Honorable Bombay High Court has held that the payment of interest under Section 18 of RERA is compensatory and not penal.
Interpreting Section 18 of RERA, while referring to the above, the Maharashtra Real Estate Appellate Tribunal in the case Appeal No. AT006000000010751 of 2018 in Complaint No. CC006000000055001 of 2018 Sanvo Resorts Private Ltd. Vs. Ranveer Sharma and Anr. observed that “Section 18 is for the provision of interest, which includes compensation, and the same separates the amount of interest from the amount of compensation. Therefore, in our view, the seeking of refund along with interest by an allottee does not fall within the nomenclature of compensation, per se.”
This observation by the Maharashtra Real Estate Appellate Tribunal makes it clear that the claim of interest and compensation are separate from each other, and the claim must be considered accordingly.
Act in the past, with the Insolvency and Bankruptcy Code, 2016 (IBC) working even better for grievance redressal. However, owing to the restrictions imposed by the recent amendments in IBC, the Real Estate (Regulation and Development) Act, 2016 is a relatively efficacious remedy available to homebuyers for redressal of their grievances against real estate developers, in default of obligations.
RERA is a significant step forward in the protection of homebuyers. Before the advent of RERA, the builder-buyer litigation went on for years in consumer courts for various reasons including the level of pendency etc. Now in the post-RERA era, any homebuyer facing delay in possession can easily move the Real Estate Regulatory Authority with a complaint. While the final verdict shall always be dependent on merits, the benefits in so far as quick and timely disposal of a case are important factors not to be overlooked, also for the reason that the law has serious ramifications for a defaulting builder, in case he/she fails to comply with an order passed by the RERA Authority.