The order sends out the message that the minimum an allottee would be entitled to in case of delay is SBI’s highest MCLR plus 2 percent, even if the agreement between the allottee and the developer stipulates a lower compensation
The Supreme Court’s order on August 24 that said real estate developers must pay homebuyers 6 percent annual interest on the cost of the apartments for the period of delay in possession over and above the penalty places buyers' rights at an equal footing with those of developers, said experts.
According to experts, the order also clearly sends out the message that the minimum an allottee would be entitled to, in case of delay, is State Bank of India's (SBI’s) highest marginal cost of funds-based lending rate (MCLR) plus 2 percent, even if the agreement between the allottee and the developer stipulates a lower compensation.
It should be noted here that under Section 18 of the Real Estate (Regulation and Development) Act, or RERA, too, in case of delay in handing over possession, if the allottee is desirous of continuing with the project, then the allottee would be entitled to interest as may be prescribed.
Maharashtra Real Estate Regulatory Authority rules stipulate interest to be paid at the rate of SBI's highest MCLR plus 2 percent.
Therefore, this decision has set an example that courts would be inclined to disregard a lower compensation or interest provided for in the Apartment Buyers Agreements, and would follow the guidelines provided in RERA to arrive at a compensation, explained Harsh Parikh, partner, Khaitan & Co.
The top court on August 24 set aside the verdict of the National Consumer Disputes Redressal Commission (NCDRC), which, on July 2, 2019, had dismissed the complaints of 339 flat buyers by holding that they were not entitled to the compensation in excess of what was stipulated in their flat purchase agreements for delayed possession and the lack of assured amenities.
The homebuyers had booked residential flats with DLF Southern Homes, now known as Begur OMR Homes, in a project called Westend Heights at New Town, DLF, BTM Extension at Begu, Bengaluru.
The Supreme Court bench said the flat owners are entitled to the compensation in excess of the amount stipulated in their agreements with the developers.
“Save and except for eleven appellants who entered into specific settlements with the developer and three appellants who have sold their right, title and interest under the ABA (agreement), the first and second respondents (developers) shall, as a measure of compensation, pay an amount calculated at the rate of 6 percent simple interest per annum to each of the appellants,” the order said.
The compensation amount shall be computed on the total money paid towards the purchase of the respective flats with effect from the date of expiry of 36 months from the execution of the respective flat purchase agreements until the date of the offer of possession after the receipt of the occupation certificate, it said.
The compensation amount shall be in addition to the money which has been paid over or credited by the developer at the rate of Rs 5 per square foot per month at the time of the drawing of final accounts, it said.
Apartment Buyers Agreements ‘one-sided’: SC
The court also noted that it cannot be oblivious to the one-sided nature of the Apartment Buyers Agreements which are drafted by and to protect the interest of the developers.
It also considered the issue of whether flat buyers in these circumstances are constrained by the stipulation contained in clause 14 of ABA providing compensation for delay at the rate of Rs 5 per square feet per month.
“In assessing the legal position, it is necessary to record that the ABA is clearly one-sided,” it noted.
It observed that a delay on the part of the flat buyer attracts interest at the rate of 18 per cent per annum beyond 90 days. On the other hand, where a developer delays in handing over possession, the flat buyer is restricted to receiving interest at Rs 5 per square foot per month under clause 14.
“The Supreme Court by virtue of this order has re-affirmed the position of law that homebuyers cannot be constrained by such terms and conditions of the builder buyer agreements which are unfair and skewed in favour of the builder,” said Ashwarya Sinha, advocate-on-record and an expert on real estate.
“The order brings the much-needed respite to homebuyers in the event of default on part of the developer, and places their rights at an equal platform with those of the developer,” he said.
In the long-run, it should necessarily lead to a change in the way such contracts and terms are dictated and concluded between the parties. The Supreme Court has affirmed the position that courts under such cases where the terms are manifestly one-sided, ought to strike a level ground between the contracting parties, he added.
The courts have not only on this occasion but on many occasions earlier read down the provisions of a developer buyer agreement, which it has felt has been clearly one-sided.
“Though the present case was not basis RERA, however, after the advent of RERA, each state provides for a model form which requires to be used as a yard stick. Therefore, now it has become simpler for even the courts to measure the agreements between a developer and a buyer to arrive at a decision whether the same is one-sided or not, by comparing it to the model form agreements,” said Parikh.
This is an important judgment laying down certain principles in relation to disputes stemming from agreements executed in a pre-RERA era, putting to rest a relevant issue which is often raised as regards the contracts being lop-sided to the advantage of the developer in certain instances, leading to buyers’ suffering, said Rahul Arora, partner, Trilegal.
The relevance of this judgment in terms of bringing the changes to the agreements executed between buyers and developers in the context today may not be as much given that the RERA Act is in place. The Act provides a balanced approach in dealing with claims arising in this regard and fairly reduces the ambiguity regarding the remedies in case of delay in possession.
“Nevertheless, the judgment will aid in clearing out the bulk of pending litigations which are placed on a similar pedestal,” he added.
Failure of the developer to comply with the contract amounts to deficiency of service: SC
The bench comprising Justices DY Chandrachud and KM Joseph also noted that ‘service’ means a service of any description which is made available to potential users including the provision of facilities in connection with (among other things) housing construction.
“A failure of the developer to comply with the contractual obligation to provide the flat to a flat purchaser within a contractually stipulated period amounts to a deficiency. There is a fault, shortcoming or inadequacy in the nature and manner of performance which has been undertaken to be performed in pursuance of the contract in relation to the service,” the apex court said in its order.
“Flat purchasers suffer agony and harassment, as a result of the default of the developer. Flat purchasers make legitimate assessments in regard to the future course of their lives based on the flat which has been purchased being available for use and occupation. These legitimate expectations are belied when the developer as in the present case is guilty of a delay of years in the fulfilment of a contractual obligation,” the Supreme Court order said.
The court held that in case of a real estate project, a developer undertakes to provide a service in the nature of developing residential flats with certain amenities and remains amenable to the jurisdiction of the Consumer Forum.
“Basis this, the court held that flat purchasers who obtained possession or executed Deeds of Conveyance cannot be said to have lost their right to make a claim for compensation for the delay in handing over possession of the flats,” explained Parikh.
Impact on other real estate projects
The court has made a very specific observation, that in case if an allottee sells its allotment or right to obtain the flat to another buyer, such incoming buyer may not be entitled to agitate a claim for compensation in case at the time of acquisition such incoming buyer was aware of the delay in completion of the real estate project.
Going forward, this order would ensure that the marketing materials and representations made by a developer by virtue of a brochure or any other medium needs to be extremely well thought through and should not over commit. As such brochures also are a representations which a developer would be bound to follow and failure of compliance would lead to consequences, said Parikh.
This order would ensure that developers would be more circumspect in their marketing materials and also agreements to be entered into with the allottees, he added.