Are Banks the New Promoters?

The Real Estate Regulation and Development Act, 2016 (hereinafter referred to as “RERA Act”) is a breakthrough legislation in the field of real estate. Prior to this legislation, the sector was marred by exorbitant delays in delivery of possession, unfair practices adopted by the builder and a lack of a single grievance redressal mechanism for the aggrieved parties. This Act has established an Authority and office of the Adjudicating Officer “AO”) for redressal of grievances, enacted fair provisions that penalize misrepresentation, cheating and other high handed practices by the builders as well as provided the remedy of refund, delay possession charges etc. for delays.

The Act however, covers in its ambit three stakeholders namely- the Promoter, Allottee and the Real Estate Agent. This is also evident by Section 31 of RERA Act which provides that

??????????????“Any aggrieved person may file a complaint with the Authority or the adjudicating officer, as the case may be, for any violation or contravention of the provisions of this Act or the rules and regulations made thereunder against any promoter, allottee or real estate agent, as the case may be.”

Section 31 is self-explanatory in the sense that the jurisdiction of the Authority or the AO is limited to issuing directions or orders to either the Promoter, the Allottee or the Real Estate Agent. As per section 2(zk) of the Act, a Promoter is a person who constructs or causes to construct an existing building or converts a building into apartments for the purpose of selling all or some of them and includes his assignees. Section 2(d) of the RERA Act defines allottee as a person to whom a plot, apartment or building is sold or otherwise allotted in a real estate project. A Real Estate Agent as defined in section 2(zm) is any person who negotiates or acts in behalf of one person in a transaction of transfer of his plot, apartment or building. From a conjoint reading of these definitions, it is clear that the RERA Act envisages a transaction pertaining to a real estate project wherein the promoter is selling a plot, apartment or the building to an allottee and the same may be mediated vide a real estate agent.

Need to widen the scope of the Act:

Despite the best legislative intention to formulate a holistic Act with the widest ambit as possible, there is still scope for judicial interpretation to fill in the lacunae that is felt during practical implementation of the Act. For instance, for developing a Real Estate Project, the Promoter require large scale of funds. Some part of the financing does come from the pre-construction stage bookings by the allottees, however these will be insufficient to build the scale and magnitude of the projects as envisaged. Therefore, usually banks or a consortium of banks can step in to provide the funds required for the development of the Real Estate Project. In such a case, the Promoter mortgages the Real Estate Project as security for the loan advanced by the Bank for the development of the Real Estate Project. If the Promoter is able to repay the loan along with interest on time, there is no issue. However, if the Promoter fails in furnishing the loan, the banks can under the section 13 of the SARFEASI, after issuing a notice, declare the same as a NPA i.e. a Non Performing Asset and move to auction the Real Estate Project to recover its dues.

It goes without saying that an auction of the Real Estate Project would adversely affect the rights of the Allottees. Having invested their hard-earned savings in the project, if a Bank was to take over the Real Estate Project on account of default of the Promoter, the Allottees will be worst hit as they cannot then enforce their obligations against anyone.

From a perusal of the scheme of RERA Act, 2016 it is self-evident that the Act places corresponding rights and obligations on the Allottee and the Promoter. It places an obligation on the Promoter to deliver the project on time and a corresponding right on the Allottee to claim refund or delay possession charges in case of default. Similar obligation is placed on the Allottee to pay instalments within stipulated period and on corresponding right on the Promoter to charge interest if the same are delayed. Other examples include the obligation of the Promoter to upload the quarterly up-to date progress of the project on the website of the Authority and of the allottee be entitled to know the stage-wise completion of the project including provision for sanitation, water, electricity and other amenities. The Promoter shall be entitled to make the information pertaining to sanctioned plans, layout plans available to the allottee and the allottee has a right to obtain the information pertaining to the statutory approvals as obtained by the competent authority.

Therefore, the landmark legislation that bestows the allottee with several rights which as per the scheme of the Act, can be claimed against the Promoter. It is clear that the RERA Act, as it presently stands, includes within the ambit the Promoters, Allottees and Real Estate Agents who together comprise the substantial actors who can materially affect the sector. Therefore, the regulation and the power to pass binding directions is also limited to these three stakeholders as the Act has been originally drafted.

The eventuality that the Bank that has advanced huge loans to the Promoter, in case of default in furnishing the loan and interest payments, the Bank can declare the Real Estate Project as a Non Performing Asset i.e. a NPA and take over the same has not been accounted for by the Act as originally drafted. This can then leave the Allottees in a lurch as developer will cease to be a Promoter within the meaning of the Act and the Banks are outside the purview/jurisdiction of the Authority.

The RERA Act has foreseen this issue and has already plugged the same through the addition of the provision section 11(4)(h) which reads as follows,

” after he executes an agreement for sale for any apartment, plot or building, as the case may be, not mortgage or create a charge on such apartment, plot or building, as the case may be, and if any such mortgage or charge is made or created then notwithstanding anything contained in any other law for the time being in force, it shall not affect the right and interest of the allottee who has taken or agreed to take such apartment, plot or building, as the case may be.”

Therefore, after the agreement for sale has been executed between the builder and buyer, no mortgage or charge can be created on the sold unit and even if the same is created, that will not estop the allottee from claiming rights over the unit.

However, the question arises what happens to mortgages executed on units before they eventually sold to allottees. In such a case, if the Banks have taken over the project, can the allottees then claim the same from the Banks?

Banks the “Assignee” Promoters

Purposive construction of statutes is referred as the creative interpretation of statutes in the case of Rameshwar Prasad vs Union of India , SC, 2006. It has been held that,

“The golden rule in determining whether the judiciary has crossed the Lakshman Rekha in the guise of interpreting a statute is whether he only ironed out the creases that he found in the statute in the light of its object or whether he has altered the material of which the Act is woven. In short, the difference is the well-known philosophical difference between "is" and "ought". Does the Judge put himself in the place of the legislator and ask himself whether the legislator intended a certain result, or does he state that this must have been the intent of the legislator and infuse what he thinks should have been done had he been the legislator. If the latter, it is clear that the Judge then would add something more than what there is in the statute by way of a supposed intention of the legislator and would go beyond creative interpretation of legislation to legislating itself. It is at this point that the Judge crosses the Lakshman Rekha and becomes a legislator, stating what the law ought to be instead of what the law is.”

The Haryana Real Estate Regulatory Authority (“HARERA”) has explored this question in depth in the case of Deepak Chowdhary vs PNB Housing Finance Ltd. & Ors., 2145 of 2020 wherein it was discussed at length whether a bank/financial institution could be treated as a Promoter under the definition of Section 2(zk) of the Act. It was submitted that there was no question of a bank falling within the definition of promoter as no rights pertaining to completion/construction and sale of the project were assigned to Banks.

However, it was noted by the Ld. Authority that the definition of the Promoter under the RERA Act includes its assignees. Assignees as defined in legal parlance is complete transfer of rights to receive benefits accruing to one party. It was observed that that the lender caused the project to be constructed by giving a construction loan to develop the project which in turn would be sold and the receivables would be used to generate revenues with which the loan of the lender could be repaid. In return, the Promoter assigned its rights in the Project to consolidate its risk. Furthermore, it was noted that in practice in order to avoid the astronomical stamp duty lenders prefer not to execute a separate deed of assignment but join it together with registered mortgage. Also, Section 4(2)(l)(B) which provides that Promoter is required to submit on affidavit the details of any encumbrance on such land. This requirement has been inserted in the Act so if there is any enforcement of security by a bank/financial institution on the real estate project, the entity on whom the assignment is made is already in the knowledge of the Ld. Authority.

Therefore, it was held for the limited purpose of auctioning the project for recovering its dues, the Bank would fall within the definition of the Promoter i.e. an assignee and would have to compulsorily take the approval of the Authority and of the 2/3rd Allottees as is required under section 15 of the RERA Act. Hence, it was held that the Bank will be considered a Promoter, by the operation of law, for the limited purpose of mediating the transfer in the interim period by virtue of falling under the ambit of “assignee” under Section 2(zk) of the Act. ????????????

That the issue continued to plague the Courts can be seen by the recent judgment of the Hon’ble Rajasthan High Court in the case of?Union Bank of India vs Rajasthan Real Estate Regulatory Authority, Rajasthan High Court,2021.

The High Court relying on the observations made in the Supreme Court case in Bikram Chatterjee and Ors. Vs. Union of India and Ors., 2019 19 SCC 161, have stated that the,

“RERA Authority has the jurisdiction to entertain a complaint by an aggrieved person against the bank as a secured creditor if the bank takes recourse to any of the provisions contained in Section 13(4) of the SARFAESI Act.”

It noted that Legal Dictionaries have defined assignment as taking over any right one has over an estate. Assignment of rights and liabilities under the law can be either by way of contract of the parties or by operation of law such as when a party dies or becomes bankrupt.

In terms of section 13 of the SARFAESI Act, when a borrower is unable to pay the debt and the asset is classified as a non-performing asset, the lender (bank) can after issuing a notice, take over the possession of the secured asset in accordance with section 13(4) and enjoy all the rights which the borrower had including the right of sale for realising the secured asset, transfer by way of lease, appointing a person to manage the asset. ?For all intents and purposes, the secured creditor steps in the shoes of the borrower in relation to the secured asset, this being a classic case of assignment of rights of the borrower in the secured creditor by operation of law. Therefore, the moment the bank takes possession of the secured asset or any step as per section 13(4), it triggers statutory assignment of the rights of the borrower in the secured creditor. Accordingly, as the Bank or the financial institution takes recourse under section 13(4), RERA Authority gets jurisdiction to entertain a complaint filed against the Bank by an aggrieved person.

This has been upheld by the Hon’ble Supreme Court?in the case of ?Union Bank of India vs Rajasthan Real Estate Regulatory Authority, Supreme Court,2022, wherein it was reiterated that,

??????????????????“ RERA Authority has the jurisdiction to entertain a complaint by the aggrieved person against the bank as a secured creditor if the bank takes recourse to any of the provisions contained in Section 13(4) of the SARFAESI Act.”

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Way Forward

The issue pertaining to Banks falling within the definition of Promoter and consequently within the ambit of RERA has now conclusively determined by the highest court of the land.

The implications of this judgment is yet to be felt across the Banking sector. Traditionally, the role of the Banks is limited to service of loan by effectively channelizing the deposit it receives. In cases of default, it takes over secured asset by invoking section 13(4) of the SARFAESI Act and auctions the same to recover its due. It is a novice development even for the financial sector wherein for the first time, it has been saddled with sector specific obligations.?