HARERA Gurugram holds FIs, lending banks assignees of the project promoter

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“To safeguard the interests of the allottees, HARERA Gurugram delivered a landmark judgment on September 11. Herewith, we reproduce the detailed Press Note issued by the Authority in this regard.”

A peculiar trend has been noticed recently in the real estate sector that promoters mortgage their project land/structure thereupon, as well as all receivables from the sold/unsold inventory to lending organisations/financial institutions/banks/creditors in order to attain bank loans to fund the construction costs for developing the projects. But when these promoters fail to repay the loans taken, then the financial institutions/banks/creditors directly auction residential or commercial properties that have been pledged with them to recover loans from borrowers by invoking the SARFAESI Act, 2002.

Such auctions invoke great anguish and distress to the allottees of the project as there is no acknowledgement of the huge investments made by the allottees into buying their dream home. The future of such allottees is in complete darkness and obscurity. Such aggrieved allottees are bound to languish for their own hard-earned money.

While dealing with one such matter the HARERA, Gurugram, with an intent to safeguard the interest of the allottees of the project “Supertech Hues”, pronounced a landmark judgment in the suo moto case of Deepak Chowdhary v M/s PNB Housing Finance Limited on 11.9.2020.

The facts of the case are that the promoter M/s Supertech Limited who is neither the licensee nor a collaborator, approached PNB Housing Finance Limited for a construction loan for the project “Supertech Hues”, which was duly advanced to M/s Supertech Limited, with M/s Sarv Realtors Pvt. Ltd. as the confirming party, by way of equitable mortgage of the project land measuring 33.33, by the deposit of the title deeds along with receivables from the mortgaged properties. However, M/s Supertech Limited failed to repay the loans taken and hence became a defaulter. Consequent upon, the said project was put for e-auction by the creditor company.  The aggrieved allottee Mr. Deepak Chaudhary approached the Authority and the Authority on hearing the matter on an urgent basis stayed the e-auction proceeding as prior written approval of the Authority and 2/3 allottees was not taken and any such transfer through e-auction would have jeopardized the interest of 950 allottees who have invested a total amount of 328.19 crores in the project.

  • Such auctions invoke great anguish and distress to the allottees of the project as there is no acknowledgment of the huge investments made by the allottees into buying their dream home.
  • Supertech Limited failed to repay the loans taken and hence became a defaulter. Consequently, the said project was put for e-auction by the creditor company.
  • In this case the promoter violated the provisions of section 11(4)(h) of the RERA, Act 2016 that enforces a restraint that the promoter shall not mortgage the apartment after the agreement for sale.
  • This mechanism of seeking prior written permission aims to ensure that the hard-earned money invested by the bonafide allottees is safeguarded in the eventuality of the project being transferred.
  • It will also help protect the interest of such landowners who have been promised units by the collaborator/developer in lieu of developing the real estate project on their licensed land.
  • If bank/ financial institution put a real estate project to auction, it would stand in the shoe of the promoter by virtue of the inclusive definition of the promoter which includes in its scope an assignee.
  • The Authority is in no way against the auction of the real estate project by a lending institution to secure the re-payment of the loan amount, but they are mandated to seek prior written approval.
  • To safeguard the interests of the allottees, HARERA Gurugram delivered a landmark judgment on September 11. Herewith, we reproduce the detailed Press Note issued by the Authority in this regard.

The Authority in its order dated 11.09.2020 has strongly emphasized that the rights of the allottees are not subservient to those of the bank and therefore, in case of failure of the banks to ensure that the funds were applied for the purpose they were granted, banks cannot be allowed to supersede the rights of the allottees.

It is highlighted that in this case, the promoter violated the provisions of section 11(4)(h) of the RERA, Act 2016 that enforces a restraint that the promoter shall not mortgage or create a charge on the apartment, plot, or building after the execution of the agreement for the sale of such apartment, plot or building in favor of the allottee. In the event the promoter does create a charge or mortgage on an apartment, plot, or building, then he shall be liable for a contravention of the provisions of section 11(4)(h) and shall be proceeded under Section 61 of the RERA Act. The Authority reiterated that section 11(4)(g) and 11(4)(h) of the RERA Act makes it clear that if any such charge is created on the project it shall in no way affect the rights of the allottees.

The Authority in its order clarified that the financial institutions/lending banks/creditors are duty-bound to ensure that the loan payments are released to the promoters after due verification of the fact that the payment so released is actually utilized towards the construction of the project. The lending institutions/individuals shall be held equally responsible if the amount, so released is not put into construction purpose and is allowed to be diverted.

In case any debtor promoter fails to honor his financial obligation towards the financial institution/lending bank/creditors and such creditor intend to enforce his security by way of auctioning the mortgaged property i.e the real estate project then in that case first prior written approval of the Authority shall be sought, whereupon the financial institution/lending bank/creditors become the transferee promoter and shall step into the shoe of the erstwhile promoter. Subsequently, if the transferee promoter i.e the financial institution/lending bank/creditors intend to transfer the real estate project to any third party to realize their loan amounts then in that situation too such financial institutions, who are promoters for the limited purpose of mediating the transfer of property, shall also seek prior written approval of the Authority. This mechanism of seeking prior written permission aims to ensure that the hard-earned money invested by the bonafide allottees is safeguarded in the eventuality of the project being transferred to the party.  The Authority also clarified vide this judgment that if the loan has been sanctioned for the construction of a real estate project then in that situation the SARFAESI Act, 2002 has to be read harmoniously with the RERA, Act 2016 and the lending institution shall first disclose all rights and liabilities on the project that includes all the rights and liabilities of the allottees (eg. refund amounts, interest, compensation, delayed possession charges, possession of the unit, etc.) who have invested their money in that particular real estate project. This is paramount to safeguard the interest of the allottees whose rights would otherwise be jeopardized. Such disclosures will also enable the transferee promoter to take an informed decision and will present him with a clear picture of his rights and liabilities towards the allottees who have bought their units from the erstwhile promoter. It will also help protect the interest of such landowners who have been promised units by the collaborator/developer in lieu of developing the real estate project on their licensed land.

The Authority in this matter clarified that the financial institution/lending bank/creditors become the assignee of the promoter by virtue of mortgage creating future statutory rights and liabilities in favor of such lending institution and as such covered under the ambit of definition of the promoter as provided under section 2(zk) of the RERA Act.

If a bank/ financial institution put a real estate project to auction, it would stand in the shoe of the promoter by virtue of the inclusive definition of the promoter which includes in its scope an assignee. Moreover, this does not create an adverse precedent for the banking sector w.r.f. other industries, as the banker is deemed to be assignee by virtue of the statutory definition of the promoter, in the absence of which, it cannot be held accountable in the sectors.

It is also clarified that the financial institutions/lending banks/creditors have to take prior approvals from the Authority at two stages i.e. first before initiating the auction of real estate project and second at the time of transferring the auctioned property to the new buyer.

It is also appropriate to reiterate for the convenience of all the financial institutions/lending banks/creditors engaged in the business of lending finance for the construction of a real estate project that the Authority is in no way against the auction of the real estate project by a lending institution to secure the re-payment of the loan amount, but they are mandated to seek prior written approval of the Authority and two-third allottees before transferring of their rights in a real estate project to a third party as per the provisions of section 15 of the Real Estate (Regulation and Development)Act, 2016, while such transfer arising out of enforcement of security or mortgage. The procedure to be followed has been laid down by the Authority vide circular no. 01/RERAGGM Circular 2020, dated 29.06.2020.

If it is found that any lending financial institution engages in auctioning the real estate projects without the approval of the Authority, the same shall be deemed seriously and penal proceedings shall be initiated against the debtor promoter and the lending institutions/individuals. Such actions shall be demanded solely to protect the money invested by the allottees, who are not as powerful and resourceful as the builders and financial lender counterparts.