LEGAL POSITION ON COMPLETION/OCCUPATION CERTIFICATES

The Supreme Court has reaffirmed the necessity of Completion Certificates (CC) and Occupation Certificates (OC) for property transactions, particularly in financing and mortgage-related transactions. It has laid down several principles that banks and financial institutions must adhere to.

(A) Issuance of Completion/Occupation Certificate Across States

• Non-Uniformity in Procedures: The Court recognized that the issuance process for CC and OC is not uniform across states and Union Territories in India. Different rules apply depending on the type of property: High-rise buildings (multi-storied apartments) Low-rise buildings Independent houses/bungalows Row houses
• Legal Compulsion for CC/OC: Despite the variation, the Court held that no building should be occupied without an OC, and financial institutions should ensure compliance before financing any property.

(B) Lack of Uniformity in State Procedures

• Some states have a structured and clear process for issuing CC/OC, while others lack proper enforcement.
• The Court directed State Governments and local authorities to ensure a uniform and legally binding procedure for CC/OC issuance.
• The ruling specifically emphasized that a property’s lack of an OC or CC cannot be overlooked, even if it has been standing for several years.
• Banks must verify whether a property is legally habitable (through an OC) before approving any mortgage, as failure to do so could result in litigation and liability.

(C) Applicability to Banks & Financial Institutions Financing Under-Construction Properties

• Key Concern: When banks finance under-construction properties, they cannot hold a Completion or Occupation Certificate at the time of financing, as the construction is ongoing.
• Commencement Certificate (CC) Requirement: The Court clarified that banks must at least ensure that a valid commencement certificate (CC) has been obtained before financing.
• Strict Enforcement on Mortgage-Based Financing: A mortgage or loan should not be granted on a completed building unless it has an Occupation Certificate. This is particularly relevant for resale transactions, where lenders must verify that the property is legally habitable.
• Criminal & Departmental Action Against Erring Officials: The judgment mandates that authorities take strict action against government officials who approve unauthorized buildings without OC/CC. This could also extend to financial institution officers who approve loans without proper verification.

II. IMPACT ON BANKS, NBFCs & FINANCIAL INSTITUTIONS

The judgment sets new compliance standards for banks and NBFCs involved in home loans, project financing, and mortgages.

(A) Due Diligence Requirements for Banks & NBFCs

Banks must update their risk assessment and loan approval policies to ensure:

1. For Under-Construction Properties: Commencement Certificate (CC) is mandatory before approving a loan for under-construction properties. Ensure the developer has obtained other statutory approvals such as environmental clearances, fire safety approvals, etc. Conduct periodic verification of construction progress to ensure compliance with regulations.
2. For Completed Properties: Completion Certificate & Occupation Certificate are mandatory before granting loans for ready-to-move-in properties. If an OC is absent, the property must not be considered for mortgage financing. Special caution is needed for properties that are older yet lack an OC, as these might be illegal constructions.
3. For Resale Transactions: Verify that the original owner had obtained an OC before selling the property. Ensure that the resale property has no pending regulatory issues with local municipal authorities.

(B) Preventing Legal Risks & Loan Defaults

Failure to comply with these directions could lead to:

1. Loan Defaults & Bad Debt Accumulation: If a property is later declared illegal due to lack of OC, its value may collapse, increasing Non-Performing Assets (NPAs) for the bank. Borrowers could also refuse to repay loans, claiming misrepresentation or failure to conduct due diligence by the bank.
2. Regulatory & Legal Action Against Banks: The RBI and National Housing Bank (NHB) could issue stricter regulations mandating OC/CC verification. Borrowers may initiate legal action against banks for financing unauthorized properties.
3. Loss of Collateral Value: If a bank has financed an illegal building, it cannot auction or resell the property to recover outstanding dues. Such properties may be marked for demolition as per the Supreme Court’s ruling, leading to total loss of the bank’s collateral.

(C) RERA Compliance for Banks & NBFCs

• As per the Real Estate (Regulation and Development) Act, 2016 (RERA): A project must be registered under RERA before banks approve financing. Banks must not approve loans for unregistered projects. Developers must provide periodic construction updates, which banks should monitor to ensure legal compliance.

III. SUPREME COURT'S DIRECTIVES TO BANKS & FINANCIAL INSTITUTIONS

The Court issued explicit directions to banks, NBFCs, and financial institutions:

1. No loans/mortgages against unauthorized properties: Banks must verify that a property has a valid CC and OC before approving loans. Financing a property without these certificates could result in legal and financial consequences.
2. Mandatory verification of land use and zoning laws: The Court emphasized that violations of land-use planning cannot be condoned. Lenders should ensure that the property’s intended use aligns with zoning regulations.
3. Criminal liability for approving illegal projects: Banks and NBFCs that finance illegal constructions may face legal scrutiny. The Court warned that officials approving such transactions could be held personally liable.
4. Integration of OC/CC verification into loan processing: Banks must incorporate OC/CC verification as a standard part of loan due diligence. Any property that lacks these documents should be flagged as high-risk.

IV. FUTURE REGULATORY IMPLICATIONS

1. Strengthening RBI & NHB Guidelines: Following this judgment, the Reserve Bank of India (RBI) and National Housing Bank (NHB) may introduce stricter lending regulations. Banks might be required to certify OC/CC compliance before loan disbursement.
2. Higher Compliance Burden for Developers & Lenders: Developers will now be under increased scrutiny to obtain CC/OC before selling or financing properties. Banks may require additional documentation from developers, adding to compliance costs.
3. Increased Rejection of Loan Applications: Banks might reject a higher percentage of home loan applications where the CC/OC is not available. This could reduce the demand for under-construction properties without commencement certificates.

V. CONCLUSION

The Supreme Court’s ruling in Rajendra Kumar Barjatya has far-reaching consequences for real estate financing in India. The judgment enforces strict compliance with CC/OC requirements, directly impacting how banks and NBFCs evaluate properties for mortgage and home loan approvals.

Key Takeaways for Banks & NBFCs:

? Mandatory CC/OC Verification: Banks must check Commencement Certificates for under-construction properties and Completion/Occupation Certificates for completed buildings. ? Higher Due Diligence for Loan Approvals: Financial institutions must verify zoning compliance and land-use approvals before financing properties. ? Legal Risks & NPAs: Financing illegal or unauthorized buildings could result in loan defaults, legal penalties, and reputational damage. ? Regulatory Scrutiny: The RBI and NHB may introduce stricter home loan guidelines, making it harder for buyers to get loans for non-compliant properties.