Buzz Update How the court ruling is encouraging home buyers TOU

Buzz Update How the court ruling is encouraging home buyers


How the court ruling is encouraging home buyers

Are home-buyers making down payments to developers for property purchases giving them ‘credit’? If so, do they have the same rights as banks or other lenders in case of any default? And how does the value recovered from the developer prioritize between different individuals who have claims?

These have been some of the questions in the Real Estate Regulatory Act (RERA) cases and the Insolvency and Bankruptcy Code (IBC) proceedings over the past few years. Depending on the property market situation, there are many cases of financial difficulties leading to defaults by developers, these questions are very important and urgent.

A recent Supreme Court ruling upheld the rights of home-buyers and the assets of banks that resorted to provisions such as securitization and restructuring and enforcement of securities interest (SARFAESI) Act.

Double burden

At the heart of the problem is the confusion that arises from different companies creating a burden on the same property. Take the same as booking a property under construction by the home-buyer. They make payments with the agreement that the home will be delivered according to the specification. The developer will usually need additional funds to complete the construction and will mortgage the same project to the bank in order to obtain commercial loans.

Now, consider the case of default on developer payments. Banks’ rights are clear in case of non-payment – Section 13 of the SARFAESI Act allows secured lenders to take possession of real estate and manage default borrower business, including the right to lease or sell the property payable. Back. If the developer defaults on delivery, it goes without any help to home buyers.

Noting this, IBC clarified that in 2018, the payments made by the person assigned to the property developer will be treated as a financial loan and home buyers will be treated as financial lenders. Also, home-buyers can initiate an investigation under IBC against the developer. Although this puts buyers on the table, banks have a preference over claims. Controversial buyers often prefer to find a way to complete the project with new management rather than selling.

So, when the projects are not delivered, home buyers get relief under RERA. But secured lenders like banks decided to liquidate the property – their right to do so with IBC. This has led to lawsuits filed by home-buyers against banks, not just developers, in RERA courts. But the banks were reluctant to accept buyers’ claims, claiming that they were not the ‘promoters’ of the project.

Seminal ruling

An interest case was filed in the Rajasthan High Court on which the Supreme Court (SC) recently ruled in favor of home buyers. The original case was launched in 2014 by SNG Real Estate in Jaipur, a residential complex project under construction called ‘Sunrise’. Many buyers book a flat and take out a loan to make payments. The developer mortgaged the entire project to Union Bank of India to get a term loan of ₹ 15 crore. The loan has not been repaid and the entire project building has been attached by Union Bank of India and the auction process is set for 2020.

Home-buyers have filed a case with Rajasthan RERA, which canceled the auction process in November 2021. The bank was instructed to hand over the flat to RERA to complete the project. Union Bank of India has challenged the RERA order in the Rajasthan High Court.

In December 2021, the High Court ruled that RERA had the power to receive a home buyer’s complaint against a secured lender if the financial institution relied on any provisions of the SARFAESI Act. Not only that, the court said that if there were differences between the RERA and the Surfaic Act, RERA would win.

In February 2022, the SC refused to intervene in the judgment of the Rajasthan High Court on the jurisdiction of the RERA. Earlier, the SC had noted – in cases involving Amrapali, Unitech Residential Resorts and JP Associates – that home-buyers could lodge complaints with banks with RERA if they seized and liquidated their projects. The new order establishes home-buyer rights over banks and provides legal assistance through RERA.

Banks beware

If there are IBC proceedings after the developer defaults, the resource will be opened under RERA for buyers against the banks

Enormous resolution

Home-buyers have made progress on the Peking Order and gained more clarity over the years and this judgment adds a big way to it. This would put an end to the banks’ strict adherence to home-buyer rights by liquidating the assets that the banks own and the defaults on.

For one, it clearly prioritizes ownership between two parties – the buyer and the bank – who may want different results even though they have a lien on the same property. For example, if the project is nearing completion, but the developer defaults on payments to the bank, the buyer may want to go the full route. Similarly, when there are multiple bidders in IBC Proceedings, buyers may choose the person who delivers the home against the highest bidder. Banks’ preferences may be the opposite.

However, buyers may choose finishing homes over properties under construction, given the many legal implications and the slowness of financial strength for many developers.

The author is an independent financial advisor


April 15, 2022

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