This article is written by Anushka Merchant, pursuing a Certificate Course in Real Estate Laws from LawSikho.

Introduction

Prior to the passing of the Real Estate (Regulation and Development) Act 2016 (“RERA”), the real estate sector in India was highly unregulated and unorganized. Although some states and union territories had passed legislations for regulating the promotion of construction, sale, management and transfer of real estate projects, the completion of construction was not included in the statutory scheme of these legislations. This created a serious legislative lacuna and promoters and developers found themselves in a position to dominate over and exploit the homebuyers. Consequently, the homebuyers suffered on account of false and misleading representations, lack of transparency, one-sided agreements, reneging on contractual commitments and the increasing number of projects where construction was either substantially delayed or not completed at all.

Although the homebuyers had recourse against the promoters under the Consumer Protection Act 1986, a need was felt to pass a more comprehensive and multifaceted legislation to safeguard their interests. It was against this background that RERA came into force on 1^st May 2016 with the notification of 59 out of 92 sections,^[1] with an aim to regulate the sector, to provide a dispute redress mechanism to homebuyers and to increase the accountability of developers. RERA makes provisions for the mandatory registration of real estate projects and agents, for the constitution of a regulator and tribunals and for various penalties and punishments.

What are stalled projects

A real estate project can become stalled in any of its phases. A project is said to become stalled when it is still active but for a given reason/s it has no actions pending or cannot make progress/move forward. Most real estate projects become stalled for the following reasons:

1. problems with land acquisition;
2. lack of or delay in obtaining project finance;
3. change in market conditions;
4. unavailability of construction material;
5. delay in obtaining approvals, sanctions and permissions from concerned authorities;
6. fraud/unethical practices of the promoter for eg: diversion of funds by the promoter to another project; siphoning of funds by the promoter etc; and
7. litigation affecting the land, project and/or property.

While discussing the concept of stalled projects under the pre-RERA regime, Mr. Justice R. G. Ketkar of the Hon’ble Bombay High Court, in Neelkamal Realtors Suburban Pvt. Ltd. and Ors. vs. Union of India and Ors.,^[2] observed as follows:

“…Amounts collected from purchasers were either being diverted to other projects, or were not used towards development at all, and the developer would often be left with no funds to finish the project despite having collected funds from the purchasers. For a variety of reasons including lack of funds, projects were stalled and never completed and individual purchasers who had invested their life-savings or had borrowed money on interest, were left in the lurch on account of these stalled projects. Individual purchasers were often left with no choice but to take illegal possession of premises offered to them under the guise of fit-outs etc., and without the developer having obtained an occupation/completion certificate, which in turn would be on account of a range of different acts of omission and commission such as non-adherence to the sanctioned plans, excess construction, lack of having obtained the requisite permissions etc…”^[3]

Can stalled projects be restarted under RERA

Sub-section (1) of section 7 of RERA allows the RERA authority, either suo moto or on receipt of a complaint, to revoke the project registration if it is satisfied that the promoter:

• has made a default in doing anything required to be done by or under RERA or the rules or the regulations made thereunder;
• has violated any of the terms or conditions of the approvals given by the competent authority; or
• is involved in any kind of unfair practice or irregularities.^[4]

Section 8 of RERA states that upon lapse or revocation of project registration, the RERA authority may approach the appropriate government to take such action as it may deem fit including the carrying out of the pending development work by the competent authority or by an association of allottees (“AoA”) or in any other manner, as the authority may determine. However, no such direction, decision or order can take effect until the expiry of the appeal period provided for under RERA. Section 8 also provides that in case of revocation of project registration, the AoA shall have the right of first refusal for carrying out the outstanding development work.^[5]

1. Jaypee Kalypso Court – Uttar Pradesh RERA: In 2019, the Uttar Pradesh RERA (“UP RERA”) utilized its conciliatory platform to assist the AoA and the promoter, Jaiprakash Associates Limited in respect of the stalled project “Jaypee Kalypso Court (Phase II)”. In an attempt to provide relief to the parties, the UP RERA authority encouraged its state government to formulate a policy on the lines of Section 8 of RERA, which would allow the authority to direct the allottees of such projects to form an AoA that could work towards completing the pending development work in the stalled project. The UP RERA described it as a “joint development of delayed projects, wherein the promoter continues to be responsible for completing the project and delivering on its obligations, while the homebuyers through their collective are responsible to ensure the payments made by them are being deployed only on the project.”^[6]

In case of stuck projects, the RERA authorities usually pass an order for refund or recovery of booking amounts. However, on 29^th July 2020, the UP RERA, with a view to protect the interests of the AoA and to facilitate the time bound completion of the project, used its powers under Section 8 (read with Section 37) of RERA to direct the AoA to undertake the completion of the remaining development work of the project. This order helped to transform stalled projects into rehabilitation projects under Section 8 of the RERA.^[7]

2. DSK Sadaphuli – Maharashtra RERA: On 22^nd October 2019, the Maharashtra RERA (“MahaRERA”) revoked the registration in respect of two phases of the project named “DSK Sadaphuli” located in Talegaon, Pune. The project was 90% complete but came to a standstill after the builders were arrested in February 2018. As a result, 131 allottees filed an application seeking MahaRERA’s permission to complete the pending development work and restrain the mortgagee from selling or creating third party rights in the project property. MahaRERA appointed a resolution panel (comprising developer Niranjan Hiranandani and consumer rights activist Shirish Deshpande) and a panel of professionals (comprising an architect, chartered accountant and project engineer). By its order, MahaRERA handed over the task of completing the pending developmental work to the AoA, who in consultation with Tata Capital Housing Finance Limited and the designated panels consented to complete the pending work either by the appointment of a contractor or another developer and to execute the agreements for sale in respect of the unsold apartments.^[8]
3. Piyush Heights – Haryana RERA: Haryana’s Panchkula RERA also passed an order in 2019 calling upon the AoA of the “Piyush Heights” project to complete the remaining construction work as the directors of the developer company had been jailed and the construction had come to a grinding halt. The project was to be completed in 2011 and consisted of 16 residential towers of which the builder had handed over possession of only 14. The allottees of the remaining 2 towers moved the RERA authority for relief. Ultimately, the aggrieved allottees agreed to pool in more money to complete the project.^[9]

When can stalled projects be restarted

Firstly, there must be a mutual understanding and agreement between the aggrieved allottees to entrust the task of completing the pending construction work to the AoA. Secondly, it is for the RERA authorities to determine whether or not the project is one that can be taken over by the AoA. This more or less depends on the size of the project, financing/investment required, stage of project completion and number of aggrieved allottees. Usually, the RERA authorities will step in and direct the AoA to undertake the pending development work only if the project is nearing its completion stage. If the project is still in its early stages, it may become very difficult for the AoA to take over and the authorities will be more likely to direct the promoters to provide a refund of their monies along with interest and compensation.

How can stalled projects be restarted

In order to restart a stalled real estate project, the AoA will first have to file a complaint along with a declaration as regards the pendency of the project, before the RERA authority. This will have to be accompanied with a list of all the stakeholders and the contact details of all the landowners, promoters, investors, architects, engineers, chartered accountants, banks and third parties interested in the resolution of the issue. The AoA will also have to submit the consent of more than 50% of the allottees of the unconstructed/under construction flats. Thereafter, the concerned RERA authority will hold meetings between the various stakeholders and if satisfied, it will pass an order under Section 7 of RERA, revoking the registration of the existing developer. In effect, the developer loses its rights over the project, the project-related bank accounts are frozen and the AoA is appointed to complete the pending work under Section 8.

Subsequently, the AoA will either begin the process of construction itself or it will appoint a contractor or a new developer for completing the construction work. The developer so appointed will be made to submit a notarized affidavit swearing to complete the project within the agreed period and the progress of the project will be monitored and reviewed by the authority at regular intervals, usually on a quarterly basis.

In some cases, the allottees may be required to pump in more money into the project to facilitate its completion. The monies so paid will be kept in a separate account and the AoA will have to come up with a plan for utilising the same. In case the monies collected are not sufficient to fund the construction as per the existing plans and specifications, the AoA may have to alter them accordingly.^[10]

Real estate stress funds

Stress funding is another method that can be used to help recommence stalled real estate projects. In November 2019, the central government announced the creation of a Rs. 25,000 Crore stress fund, managed by SBICAP Ventures. The fund is being utilised to help facilitate last-mile funding for over 1,500 incomplete and stalled real estate projects comprising almost 5 lakh units across the country. This method will be especially useful for those projects which have come to a standstill because of project financing issues. Stress funding can give a boost to these projects, which will make existing lenders more willing to issue necessary no objection certificates for further financing.^[11]

Other legal remedies

In addition to the project completion policy formulated under Section 7 and 8 of RERA, in case of stalled projects and delayed possession, a homebuyer will have the following legal remedies against the promoter:^[12]

1. Remedies under RERA: Under RERA, an allottee can file a complaint with the RERA authority and will be entitled to claim a refund of the booking amount/earnest money along with interest (at a rate that may be prescribed by the appropriate government) and compensation. The authority, in a fit case, may even suspend or revoke the registration of the promoter and/or impose penalties, which could extend up to 5% of the estimated costs of the project.^[13]
2. Remedies under the Consumer Protection Act 2019: Housing construction is included within the purview of “service” under Section 2(42) of the Consumer Protection Act 2019. Further, an allottee in an under construction project is a “consumer” within its meaning under Section 2(7). Therefore, if an allottee in an under construction project (not being a commercial one) is aggrieved on account of the deficient services provided by the developer, he may file a complaint against the developer before the appropriate consumer forum.
3. Remedies under the Insolvency and Bankruptcy Code 2016: Allottees are deemed to be “financial creditors” within its meaning under Section 5(8)(f) of the Insolvency and Bankruptcy Code 2016. In case of a delay in the completion of a real estate project, a corporate insolvency resolution process can be jointly initiated against the promoter by not less than 100 allottees or not less than 10% of them, under the same real estate project, whichever is less.^[14]
4. Remedies under the Indian Contract Act 1872: If the promoter and homebuyer have made and executed an allotment letter/term sheet/letter of intent etc. or have entered into an agreement for sale, which fulfils the requirements of a valid contract and is enforceable in law, then then the homebuyer will have recourse against the promoter under the Indian Contract Act 1872.^[15] If the promoter fails to fulfil or perform its obligations under the contract then the homebuyer can file a civil suit against the promoter seeking damages, penalty or liquidated damages, as the case may be, depending on the terms and conditions of the contract.^[16]
5. Remedies under the Specific Relief Act 1963: If the promoter and homebuyer have entered into a valid and enforceable agreement as aforesaid, then the homebuyer can sue the promoter for specific performance of the same under the provisions of the Specific Relief Act 1963.^[17]
6. Remedies under the Arbitration &Conciliation Act 1996: In the event the contract made and entered into between the promoter and allottee contains an arbitration clause, the allottee can invoke the same for the speedy resolution of a dispute.^[18]
7. Remedies under the Civil Procedure Code 1908: The homebuyer can also file a civil suit against the developer for recovery of money paid for booking the unit.^[19]
8. Remedies under the Indian Penal Code 1860: If the promoter is guilty of cheating or fraud or making false and misleading representations or any other crime of like nature, the homebuyer can file a criminal complaint against the developer. The homebuyer will be entitled to compensation and the developer will be entitled to be punished by way or fine, imprisonment or both.

Conclusion

Real estate projects may come to a standstill for numerous reasons and homebuyers who have borrowed money on interest or have invested their life-savings in these projects suffer for no fault of their own. The model formulated under Section 8 of RERA allows homebuyers to have stalled projects completed under the aegis of the AoA. This is especially useful for projects that are close to completion and where refund of booking amounts along with interest and compensation is not the best alternative to provide relief to the homebuyers.

As discussed in the MahaRERA and Haryana RERA cases above, when the promoters are insolvent, languishing in jail or are absconding, the RERA authorities have limited options to provide relief to the homebuyers. On one hand, efforts made by the authority to order the refund of booking amounts may prove to be futile as the promoter may not be financially capable of doing the same. On the other hand, sealing and attaching the project property will only do more harm to the homebuyers who have been awaiting possession for years at end. Thus, in these cases too, restarting a stalled project through the AoA may prove to be the best option for safeguarding the home buyers’ interests.

However, the real estate and construction sectors are burdened with unorganized processes, which can make the policy somewhat challenging for the AoA. Project management includes various fundamental components like procurement of sanctions and approvals, product procurement, financing, workforce management, supply chain management, legal sanctions, etc. Therefore, to be able to successfully restart and complete a stalled project the AoA will require a great degree of expertise and business acumen. Consequently, they may need to make further investments to be able to finance a new workforce or to seek the assistance of contractors, developers, consultants and a panel of professionals.

References

[1] Ministry of Housing and Urban Affairs, ‘Background – Real Estate (Regulation and Development) Act-2016’ <http://mohua.gov.in/cms/real-estate-regulation-and-development-act-2016.php> accessed on 3 November 2020.

[2] 2017 SCC OnLine Bom 9302.

[3] ibid [230].

[4] RERA, s 7.

[5] RERA, s 8.

[6] Uttar Pradesh Real Estate Regulatory Authority, Press Release (19 September 2020) <https://www.up-rera.in/frm_Ifram_for_PDf.aspx?Param=Press_Release_43842JaypeeKalypso-PR-English.pdf> accessed on 15 November 2020.

[7] Uttar Pradesh Real Estate Regulatory Authority, Order No.450/U.P.RERA/Project/Rehabillitation/NCR/2020-21 (29 July 2020) <https://www.up-rera.in/pdf/KalypsoOrder.PDF> accessed on 11 November 2020.

[8] Maharashtra Real Estate Regulatory Authority, Complaint Nos.CC005000000023275 and CC005000000023293, Interim Order (Rectified) (15 November 2020).

[9] Amarpal Jakhar, Centrik ‘Centrik helped to get justice to 144 home buyers by handover of stalled projects’ (6 September 2020 <https://www.centrik.in/blogs/centrik-helped-to-get-justice-to-144-home-buyers-by-handover-of-stalled-projects/> accessed on 24 November 2020; and Adv. Srishti Girdhar, Centrik ‘Haryana RERA Handovers the Project to Allottess’  (30 October 2019) < https://www.centrik.in/blogs/haryana-rera-handovers-the-project-to-allottess/> accessed on 24 November 2020.

[10] Vandana Ramnani, Money Control ‘Can RERA authorities direct homebuyers’ associations to complete stalled real estate projects?’ (21 May 2020) <https://www.moneycontrol.com/news/business/real-estate/can-rera-authorities-direct-homebuyers-associations-to-complete-stalled-real-estate-projects-5293921.html> accessed on 19 November 2020.

[11] Economic Times – New Delhi, ‘SBICAP Ventures lowers IRR to 12% in stress fund for stalled housing projects’  (1 June 2020) <https://realty.economictimes.indiatimes.com/news/industry/sbicap-ventures-lowers-irr-to-12-in-stress-fund-for-stalled-housing-projects/76128407> accessed on 25 November 2020.

[12] Nidhi Verma, RERA Filing ‘Legal Remedies for stalled projects’ (28 July 2020) <https://www.rerafiling.com/rera-article-detail.php/688/legal-remedies-for-stalled-projects> accessed on 18 November 2020.

[13] RERA, ss 7, 19, 31 and 61.

[14] Insolvency and Bankruptcy Code 2016, s 7.

[15] Indian Contract Act 1872, ss 10-23,

[16] ibid, ss 73-75.

[17] Specific Relief Act 1963, s 10.

[18] Arbitration and Conciliation Act 1996, ss 7 and 8.

[19] Code of Civil Procedure 1908, Order VII and XXXVII.

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