ISSUE II : Law: Balancing realty high and consumer low

INTRODUCTION

The Indian real-estate market has witnessed unparalleled growth over the last few years. Foreign direct investment has given an additional impetus. Phenomenal growth, in realty, has been witnessed in not only tier 1 cities but also in tier 2 and 3 cities. This unprecedented expansion has given boost to a number of ancillary industries connected with real-estate sector. However, there is a flip side to this rosy picture. On the one hand, demand for commercial and residential properties is escalating and on the other, grievances of end-users are also spiraling. Often issues relating to deficiency in services by the real-estate developer like lack of proper arrangement for water, electricity, sewage or roads etc. come in forefront.

Although one can witness greater transparency in land deals due to the advent of foreign real-estate developers in India but increasingly even the courts have started to take builders to task. This bulletin primarily focuses on essential paper work involved while purchasing property, rights of ‘consumers’ vis-à-vis real-estate developers and briefly highlights the view of various courts on this issue.

1. Essential points to note

Cheaper home loan financing options, tax benefits from the government, amendment of laws such as Urban Land Ceiling and Regulation Act, reduction in Stamp Duty, supported by the sweeping shift in the mindset of buyers, where debt is no longer considered taboo, has converted dream of owning a home into a reality for many middle class Indians.

The market conditions have also undergone a change and one can see a more structured real-estate market with more transparent transactions1. However, it is important to remember that purchase of a property still cannot be an easy experience. Since for most people buying a property involves lot of emotions, it may cloud their business judgment. Therefore, it is not only important from a buyer’s perspective but also necessary for a property developer that all the documents are in order. Clean and clear transactions go a long way in building the credibility of a real-estate developer especially if it has a foreigner as a joint venture partner. Certain crucial documents that a developer must ensure are in order and which a prospective buyer must carefully scrutinize is described below:

1.1 Property Titles

The buyer must ensure, by thoroughly scrutinizing the original documents that the property is free from all charges, liens and encumbrances and the title of the property is clear. This essentially means that the seller is a rightful owner of the property and has the power/authority to sell the property. If a seller has

1 Jones Lang LaSalle: “Real-estate transparency improves around the world”; August 16, 2006; states India’s improvement from low transparency to semi-transparent in realty sector was helped by the availability of market information, improved general accounting and reporting processes, and substantial improvement among market participants about the legal process that relate to contract enforcement and legal relief.

proper and valid title, on purchase, the buyer will get a valid title. However, if the seller’s title is defective, then caveat emptor-a defective title is what a buyer shall get.

Therefore, in order to safeguard the buyer’s interest the general practice is to verify if any encumbrance exists on the property. Normally, if there are any encumbrances, it would reflect in the records and if there are any charges/mortgages/encumbrances noted in the encumbrance certificate then the buyer should wait until the same are cleared or clarified by the seller.

Buyer can apply at the office of sub-registrar, where the immovable property is located, for an encumbrance certificate. Detailed information about the property2 should be mentioned in the application along with the period for which encumbrance certificate is required. The encumbrance certificate will show the details of registered documents relating to the property like sale deed, mortgage deed, etc. If there are no such registered records relating to the property, a nil encumbrance certificate shall be issued.

Mortgages/charges  can  be  created  by  depositing  the  registered  title  deeds3.  If  charge  has  been created by registered documents like deed of mortgage, then it would reflect in the encumbrance certificate. In case the charge has been created by depositing title deeds, the encumbrance certificate will not disclose it. Therefore, the prospective buyer must ask for the original title deeds for verification. If the owner possesses the original title deeds then the obvious conclusion is there are no charges on the property. However, if the originals are lost or misplaced then a buyer must ask for an affidavit stating that the original title deeds are lost and that no charge has been created on the property. Along with this, the prospective buyer can also bring out a general notice for public in a prominent national daily and a local regional newspaper. A buyer can further safeguard his interest by incorporating a clause in the sale deed whereby the seller guarantees non-existence of an encumbrance4 on the property.

Some of the important aspects to be borne in mind while purchasing a land can be classified as follows:

Firstly, a buyer must know the nature of seller’s right on the property and source of his right/title. The seller may have an absolute ownership right, or a conditional or limited right. A person may have title to a property by purchase, inheritance, partition, gift, settlement, or grant by Government. However, it is always best to buy a freehold land because in freehold properties, the title in the property belongs to the seller. In such a case, the property can be bought through a sale deed wherein there is no restriction on the right of the holder of the property to further transfer the property.

Given below is a table wherein types of rights and its source are listed.

S.No.Types of rights on a landSource of right
1.Free hold or absolute ownership landSale deed
2.Right of permanent leaseDeed of permanent lease
3.Right through inheritanceEntries     in     revenue     records     and
predecessor’s title
4.Right through partitionPartition deed
5.Right through giftGift deed
6.Through settlementSettlement deed
7.Grant by governmentGrant order of the government

1.1.1 Right by purchase: The buyer must inspect the original sale deed and if possible, the title records for previous thirty years, in order to determine if the title of the property is clear in the hands of the seller.

1.1.2 Right by inheritance: If the target property has been inherited by the seller, then the buyer must try to trace the inheritance history to ensure that the title in the hands of the seller is clear. The seller may have got rights in the property through sale, gift, or inheritance. In such cases, it is important to verify the details about the transfer of title. Another possibility can be that the rights in the property have been acquired through partition. If there are joint-owners to the property then buyer must enquire about a valid partition amongst co-owners. In case of partition, the prospective buyer should review the partition deed for any conditions or restrictions like, water rights, rights of way, payment of maintenance etc. If a valid partition deed has not been executed between the joint-owners then it effectively means that the seller’s title in the property is defective. If any co-owner of the property challenges the right of the seller to sell the property in the court of law then the buyer may find himself unnecessarily dragged into a civil suit.

1.1.3 Right by gift, settlement, or grant: In such cases the original gift deed, settlement deed, or grant order of the Government, as the case may be, must be scrutinized by the buyer. Documents must be thoroughly read to see if there are any conditions, like reservation of life interest, restrictions for alienation, payment of maintenance, etc. Sometimes there may be reservation of life interest in the deed, i.e. the gift deed may give only right of enjoyment but no right to sell. Usually, rights acquired under various types of grant orders are subject to several conditions regarding alienation and enjoyment, which must be verified.

1.1.4 Right by permanent lease: Leasehold properties are those in which perpetual leasehold has been granted by the title, principally in favor of the lessee. In such properties, the main title lies with President of India who delegates power to various Government bodies like different development authorities, Land and Development Office (L&DO). Leasehold properties are not freely transferable. Depending upon the covenants of the lease deed, prior permission of the lessor is required to transfer the property. Therefore, buyer must inspect the deed of permanent lease and check the conditions stated therein because right of permanent lease is a conditional right. Generally, the Government allots industrial lands to industrialists on a permanent lease of ninety-nine years.

1.2 Credibility check

Every buyer should check reliability factor of the developer especially in a new project. It is essential before committing to buying any property. The developer’s past track record should be checked to ascertain his reputation and deliverables. Timely possession, quality of construction, compliance with agreement to sell, especially penalty clauses, providing the amenities as promised by the developer, etc. are a few other aspects that must be kept in mind while verifying a developer.

1.2.2 Documents related to a residential real estate project

Following additional documents should be verified by the purchaser. These include:

  • Development agreement with the landowner, if the developer is not the owner of the property: This is important because in case of leasehold land, the owner of the land prescribes his own set of terms and conditions for usage of the land. For instance, in case the lease has to be renewed after some years, the owner may charge a premium, which a buyer may not be aware of.
  • Sanctioned zoning plan and approved building plans along with number of floors: Government authorities frame building bye-laws and zoning plans for the construction of buildings on the allotted piece of land. These regulations provide specific information regarding the extent of land exploitation allowed on a particular piece of land depending on its land use5 and provides broad guidelines on the maximum height of building permitted, location, design etc. This is to ensure minimum standards of aesthetics and urban design are maintained. Copy of zoning plans can be obtained from the office of concerned District Town Planner on payment of requisite fee.
  • Commencement certificate: It is provided by the municipal corporation and indicates the exact location of the project. It is also a permit for the developer to start construction on the project.
  • Clearance certificate from the Central/State Pollution Control Board: The Board gives this certificate prior to commencement of construction on the site and it is a prerequisite for commencing any building work. An application for environment clearance covers several aspects of environment protection. A developer is required to give information about issues like climate and air quality, water balance, solid wastes, noise etc. of the proposed site. Based on this information and scrutiny, the concerned pollution control board clears a project. Supreme Court in T.N. Godavarman Thirumulpad v. Union of India6 and Vellore Citizens Welfare Forum v. Union of India7 has clearly held that prior clearance certificate from the Pollution Control Board is absolutely mandatory before any construction work is undertaken as development and environment protection must go hand in hand.
  • Occupancy  certificate/completion  certificate:  It  is  a  crucial  document  given  by  the  municipal corporations to the developer after the completion of formalities like getting water and electricity connection and completing the construction as per the given permissions, etc.
  • Certification from structural engineer: A certificate confirming the quality and safety of the building constructed by the real-estate developer must be viewed.
  • Other necessary approvals: A buyer must ensure that the builder has acquired all the necessary approvals from various government departments for installation of electricity and water connections.

1.2.2 Documentation for a property transaction

Firstly, a buyer and seller sign an agreement to sell, for sale and purchase of a property specifying the negotiated price with certain terms and conditions including indemnification from any charges/lien/encumbrances.  Upon  payment  of  consideration,  sale  and  conveyance  deed  is  executed, transferring ownership of a property from a seller to the buyer is signed thus completing the transaction.

1.2.3 Stamp duty and property registration

Stamp duty is a duty levied by the government on instruments to validate the sale of property. Registration of the conveyance deed should be carried out by lodging the original stamped agreement with the respective registration office. Typically, the buyers pay the stamp and registration duties to get the property registered in their name unless agreed otherwise. The stamp duty depends upon the location of the property. Each state in India has its own rates of stamp duty which varies from 8% to 15%. However, certain States8 have slashed stamp duty rates which now vary between 5% to 8% and the endeavor of the Government is to make this rate uniform. Stamp duty is calculated on the actual consideration paid by the buyer. Given the prevailing rates of stamp duty in India, the amount payable by the buyer is quite substantial.

2. Changing trends in law

“Consumerism” is likely to dominate the Indian market, thanks to the economic reforms and the several agreements signed as part of WTO commitments. The transition is from a predominantly “sellers market” to a “buyers market” where the choice exercised by the consumer is influenced by the level of consumer awareness achieved. “Consumerism” essentially means the process of realizing the rights of the consumer as envisaged in the Consumer Protection Act, 1986 (the Act) and ensuring right standards for the goods and services for which one pays. This objective can be achieved only when the public, the Government, and the judiciary play their respective roles effectively.

2.1 Consumer Protection Act, 1986

Ensuring consumer welfare is the responsibility of the government. Accepting this, policies were framed and the Act was introduced. A separate Department of Consumer Affairs was created in the Central and State Governments to focus on protecting the rights of consumers as enshrined in the Act.

The main objective of the Act is to provide speedy and inexpensive redressal to the grievances of the consumer, provide relief, and award compensation, wherever appropriate.

The Act defines the consumer as one who purchases goods and services for his/her use. The user of such goods and service with the permission of the buyer is also a consumer. However, a person is not a consumer if he purchases goods and services for resale purpose. Over a period of time, the courts have widened the scope of the definition of service providers and builders and real-estate developers have also

8 States such as Orissa, West Bengal, Tamil Nadu, Andhra Pradesh, and Delhi.

come within the ambit of the Act. There are a series of landmark judgments, described below, wherein courts have upheld the rights of a consumer against realty developers.

3. Judicial precedents

  • Lucknow Development Authority vs. M.K. Gupta9 is a landmark judgment delivered by Supreme Court wherein the court held that statutory authorities such as Lucknow Development Authority or Delhi Development Authority10, private builders and contractors come within the ambit of the Act for any act or omission relating to housing activity such as delay in delivery of possession of the houses to allottees, non-completion of the flat within stipulated time, or defective construction. The Court stated that the word ‘housing construction’ includes construction of a house or flat for the benefit of person for whom it is constructed for which he pays consideration. Therefore, he is a consumer11 and activities of a builder qualifies as “service12” as defined in the Act. In case service is defective then it would amount to unfair trade practice13. Therefore, every service except when it is free of charge or under a constraint of personal service is included in the definition of service.
  • In another case, Nandita Shamnik vs. DLF Limited14 (the Company), a popular real-estate development company was taken to task by the courts because of deficiency in service. The Company refused to handover the possession of a flat bought by the consumer even though she agreed to pay stamp duty and registration only after getting possession of her flat. National Consumer Disputes Redressal Commission (the Commission) ruled in favor of the consumer. Briefly, the facts of the case are, the consumer paid the Company INR 6.1 million (USD 137,23215) in the year 1999 to purchase a flat developed by the Company, but was not given possession. This was despite her written undertaking to pay stamp duty, registration and other charges after getting possession of the flat as per the agreement signed with the builder. The Commission passed an interim order asking the Company to hand over the flat to the consumer. She was in turn asked to pay stamp duty and registration charges by a cheque and to file an unconditional undertaking that she would pay holding charges, maintenance charges, interest or any other amount, if asked by the Commission. The Commission further ordered that a report of the premises would be prepared, stating the status of construction and various amenities, before handing over the possession. This was done to avoid future disputes. The Commission finally ruled in favour of the consumer and ordered a compensation of INR 200,000 (USD 4,499).

Text Box: www.psalegal.comThe Company went in appeal against this order, which was dismissed. The Commission after considering the overall evidence and the ‘conduct of the builder’ held that the agreement between the Company and the consumer required the builder to permit “permissive possession for use and occupation of the apartment” to the consumer when cash-down payment is made. The consumer had paid the entire purchase price, and there was no justifiable ground for not delivering possession. The court also ruled that the consumer is required to pay necessary charges at the time of execution

of final documents but that should not prevent the builder from handing over possession. The Commission stated that a builder is not supposed to retain the charges with him, which would, amount to an unfair trade practice. The consumer was committed to pay those charges and would have done it at the appropriate time. Therefore, the Commission observed that there was gross deficiency of service.

  • HP Housing Board vs. Varinder Kumar Garg16, is a case involving a public sector housing board, which was trying to sell the buyer off with a flat that had serious construction defects, which could have led to its collapse, therefore, there was serious deficiency in services rendered by the housing board. The case went to the Supreme Court after two lower courts had shown no support to the public sector housing board. The apex court offered the buyer a choice – to keep the flat and retain a compensation of INR 60,000 (USD 1,350) ordered by the lower courts for repairs, or return the flat and get back his deposit (against the flat purchase) with 18% interest from the date of deposit.
  • National Consumer Disputes Redressal Commission in the case of Consumer Protection Council vs. Rourkela Development Authority17 held that a builder cannot hand over possession to a consumer without basic infrastructure and amenities such as water, electricity and drainage as well as connecting roads being in place.
  • Monopolies and Restrictive Trade Practices Commission (MRTPC) in Ekta Seth vs. DLF Universal Limited18 held that if the builder after collecting initial deposits delays construction and demands escalation charges which the buyer is unable to pay then the builder cannot forfeit the earnest money. MRTPC stated in its order that withholding earnest money and imposing escalation charges without the consent of the buyer tantamount to unfair trade practice.

CONCLUSION

In view of the above, it is imperative that the real-estate developer must ensure that there is complete transparency while negotiating land deals and the paper work is complete. This goes a long way in formulating the credibility of the builder. The above-mentioned citations also reflect the mindset of the Indian courts who want to protect the consumer rights and have tried to deter large companies from dragging consumers through long-drawn litigations. The general view in the industry is that with the entry of foreign companies, there is some transparency in the property deals. However, the Indian builder has to beware that the consumer is also becoming aware of his rights and is no longer willing to accept deficiency in services as his fate.

1 Jones Lang LaSalle: “Real-estate transparency improves around the world”; August 16, 2006; states India’s improvement from low transparency to semi-transparent in realty sector was helped by the availability of market information, improved general accounting and reporting processes, and substantial improvement among market participants about the legal process that relate to contract enforcement and legal relief.

2 Such as survey number, extent of land, name of the village, name of ward.

3 Section 17, the Registration Act, 1908.

4 Section 55, Transfer of Property Act, 1882.

5 Such as Floor Area Ratio (F.A.R,), ground coverage etc.

6 133(2006) DLT 605 (SC).

7 AIR 1996 SC 2715.

9 (1994) 1 SCC 243.

10 These are the authorities constituted under State Acts to carry on planned development of the cities in their particular State.

11 Section 2 (d) of the Act.

12 Section 2 (o) of the Act.

13 Section 2 (r) of the Act.

14 III (2005) CPJ 74 (NC).

15 1USD= 44 INR.

Archives

 

DISCLAIMER

The Bar Council of India restricts advocates from maintaining a website as a source of advertising. This site contains general information for informative purposes only. The reader should not consider / construe information on this site to be an invitation for any attorney-client relationship.