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Builders have to keep promises to buyers, have no excuse, says legal experts

real estate Updated: Aug 26, 2016 15:59 IST
property

As many as 70 flat buyers have sought refund for investing in the Parsvnath project which has told the Supreme Court that it has no money.(Getty Images/iStockphoto)

A few days after Unitech claimed in Supreme Court that it had no money to refund homebuyers, another developer active in Delhi and NCR has told the Supreme Court (SC) it cannot compensate buyers of its Parsvnath Exotica project in Ghaziabad because of financial difficulties.

As many as 70 flat buyers have sought refund for investing in the Parsvnath project and had moved SC in the matter.In May this year, the National Consumer Disputes Redressal Commission (NCDRC) had asked Parsvnath Developers to refund the amount paid by 70 homebuyers in its Parsvnath Exotica project in Ghaziabad with 12% interest for delaying the project.

On August 13, Unitech had informed SC that it was not in a position to refund money to homebuyers who had invested in its projects in Noida and Gurgaon and had not received possession of their flats due to delay in construction. “We don’t have the money. If we had the money, we would have constructed the flats and given them to the buyers,” their lawyer had told the Bench hearing the case. SC, however, did not buy the excuse and ordered Unitech to deposit Rs 15 crore in its registry to be paid as refund to buyers not keen to hold apartments.

SC in July had also asked Unitech to deposit an interim penalty of Rs 5 crore after the company challenged the NCDRC order asking the realty firm to refund the money to three homebuyers in its Noida projects with interest.

In another case involving DB Realty in Mumbai in which 3,500 buyers have been waiting to get possession of their homes despite having paid 90% of the total amount were reportedly told in April this year that the company “does not have the funds to complete the project.”

The bigger issue here is what happens if more builders claim that they do not have the cash flows to restart stalled projects? Till date, there are around 6,000 projects out of a total of 13,500 that have been delayed in the top eight cities in the country, as per estimates by real estate research firm Liases Foras.

Legal experts are of the opinion that in case a developer fails to pay up or deliberately flouts the court orders, contempt proceedings can be initiated against him. “The (Unitech) order sets a precedence. If a developer has promised a project, he had better deliver it. The country is not a banana republic and buyers cannot be taken for a ride. The order also emboldens the RERA Act under which there are stringent rules to deal with violations,” says S K Pal, a Supreme Court lawyer.

A builder may not have money to complete the construction for a variety of reasons, (a) he took a bad business call or decision and did not calculate the cost of the project; (b) he over committed or sold cheaper than he should have; or (c) diverted money collected from buyers to other projects or elsewhere or; (d) is yet to receive money from the buyers. Each of such matters would have different consequences.

If the builder has taken a bad decision about his business and erred on cost or sold or promised to sell at an unfeasible price it will undoubtedly lead to loss. However, a builder cannot say that because he has suffered loss, he will not give the buyers what is promised. The buyers would always be free to claim compensation from the sellers in case of breach.

The basic principle of law is if a party breaches a contract he will be bound to pay all losses which arose in the natural course or which the defaulting party knew the non-defaulting party would suffer. The question as to whether the defaulting party can actually pay the compensation is a different matter. If the defaulting party does not have the money, it will be wound up (if it’s a company) or have to declare insolvency (in case of individuals) for which the consequences are grave. Usually, neither a company nor an individual would allow this to happen unless they are truly not in a position to repay. In case of liquidation, the assets of the company will go to a liquidator and under the supervision and process of court, such assets will be sold and sale proceeds will be distributed in the manner as provided for under the Companies Act, explains Sudip Mullick from Khaitan & Co.

A builder not belonging to an organisation and operating as an individual will suffer insolvency and action will be taken under the Presidency Towns Insolvency Act, 1909, or the Provincial Insolvency Act, 1920 as the case may be.

The buyers’ claim against the builder is not only limited to the property or compensation in lieu thereof , they can also proceed against the builder under the applicable criminal law in case the builder intentionally defrauded them,says Mullick.

If the builder has diverted money to other projects or elsewhere, the buyer’s quickest remedy not by way of actual receipt of cost but by way of forcing the builder to settle would be to initiate criminal proceedings, without prejudice to their right to file civil proceedings for recovery of their unit/property. In case the buyer chooses to terminate the agreement then they have to recover the principal amount and compensation, say legal experts.

And what happens if a buyer is left in a state where he cannot recover money from the builder? Legal experts say that buyers take the risk of investing in an under-construction project and that is an individual risk. Buyers have the legal right to recover the amount but if they cannot, that is the consequence of their risk. However, if land and semi constructed buildings belonging to the builder exist then buyers can nvest some more money into the project with other buyers, complete the construction and take possession, they say.