What should buyers do when a distressed project gets a new builder?

[ecis2016.org] Can a new developer, who takes over a stalled project, force existing buyers to exit or demand more payment than what was mentioned in the agreement? We examine…

Today, there are a lot of distressed properties in the market, where mergers and/or takeovers are happening. While it makes sound business sense for the builders of stressed assets, as well as the party that wants to invest in such a project, home buyers are often at the receiving end of such market transactions. Here are some examples:

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• Abhik Banerjee*, an investor in a stalled project, which was taken over by another builder, was told by the new builder to either exit the project and get a refund of the paid amount without any penalty for delay, or pay Rs 10 lakhs extra towards project escalation costs.
• In another project in Noida, the new builder who took over the distressed asset, announced more amenities and offered the existing buyers two options – either shift to a smaller apartment at the same committed cost or pay an extra amount. Refusal by a few buyers led to cancellation of the allotment on part of the builder who claimed that the buyers’ commitment was with the erstwhile builder and not him.
• Apoorvanand*, a home buyer in Bangalore, was asked by the developer who took up his stalled project to give an undertaking to not get into any future litigation.

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Can developers force buyers to exit or pay more?

The question is, can the new developer force the existing buyers to exit or make more payment? Legally speaking, not at all!

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Advocate Nirmit Srivastav says that the initial contract plays a paramount role. The contract with the erstwhile developer will be considered in such cases. The new developer cannot charge over and above the previous sale consideration. If the builder makes an additional demand, then that is a matter of litigation.

“Even if the new developer has decided to relaunch the project, the options for the existing home buyers are pretty clear and the earlier clauses and recitals of the builder-buyer agreement will play a crucial role. The Supreme Court is very clear on this,” says Srivastav.

Venket Rao, founder of Intygrat, points out that financially stronger investors and builders find distressed properties, which are available in bulk these days, as a great opportunity. It is also a great opportunity for the stuck promoter to exit.

The role of builder-buyer agreements in stalled projects

One important aspect for buyers in such properties is being up-to-date on new developments about the project. These include development about the current status of project approvals, checking on any pending regulatory actions, any court stays and of course the financial strength of the new developer and requisite approvals/documentation/structure of takeover of such property by the new developer.

“While taking over a distressed property, builders do not play with the existing receivables, unless there is a new understanding/agreement with the existing buyers in a distressed property. However, the terms of the existing agreement are sacrosanct and new terms, including fresh timelines or pricing, are not permissible. Section 15 of the Real Estate Act (RERA) specifically takes care of such a situation. However, if the distressed property is acquired by the builder as a resolution applicant under a process of the CRIP, such conditions and terms under which such resolution plan would have been approved by the NCLT would be applicable. In such a case, an increase in price is possible,” says Rao.

What should buyers do when a new developer takes over?

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Advocate Aditya Pratap points out that a majority of such takeovers happen on an ‘as is where is’ basis and the distressed assets are subject to the rights of existing flat buyers. Therefore, it would be safe to say that if you have booked a flat in a  distressed project, your rights will not be impacted, if a new builder comes in. “In fact, as per the lease of contract, the price agreed should be honoured. The new builder subsumes the contractual obligations of the older builder. As far as opting out is concerned, buyers can only claim refund, if the possession deadline is not met under Section 18,” says Pratap.

Existing home buyers, in such cases, can choose to exit from the property at any time under Section 18 of the RERA. However, in case of a project being at an advanced stage, courts are inclined to decide on a case-to-case basis and may order granting of possession rather than an exit.

Interest payment to banks or even obligation under subvention schemes is the responsibility of the buyers. At times, courts tend to grant some compensation and in certain cases builders have been directed to honour interest payments under subvention schemes.

Legal viewpoints for the buyers

• New promoter cannot demand extra money, states Section 15 of RERA.
• New builder taking over a distressed asset has to honour the contractual obligations with the previous builder.
• New builder cannot defer the timeline of the project completion on his own.
• If the stuck project has been given to the new builder under insolvency, the buyers have to honour the resolution plan.
• Buyers always have the right to exit the project under Section 18 of the RERA.
• The buyer also has a right to demand a delay penalty with the new builder, unless the project has been taken over under insolvency.

(* Names changed, upon request)

FAQ

(The writer is CEO, Track2Realty)

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