In the past few years inefficiency in project management, lack of transparency, improper planning and monitoring of projects, unjustifiable delays in project completion, liquidity crunch in financial institutions, rising court disputes and unethical practices have made sale of under construction inventory challenging for small and medium developers in India.
To avoid the aforesaid, small and medium sized developers preferred partnering with larger developers to sell and market the project in the name of the larger reputed developer. Typically, a small / medium sized developer executes a development management agreement with a large developer, wherein the large developer is appointed as a development manager by the small / medium sized developer for a project.
A development manager assumes the responsibility of the project as an agent or a contractor of the developer without acquiring any right, title and interest in the immovable property on which the project is being developed. All the costs and liabilities of execution of a project are that of the original developer. The arrangement has succeeded at rescuing the prolonged projects of the small / medium sized developers by making them associate with a brand and utilize its core competencies for project execution.
The developer in the development management model usually retains an element of control over its project by requiring development manager to obtain its consent or approval for important decisions and processes regarding the project. However, the day to day running and supervision of the project is predominantly with the development manager. Further, in many cases, the development manager is entitled to sell units constructed in the Project as the agent of the developer. The model has aided strong sales in the real estate industry since its inception. The branding of the real estate by virtue of a development management model has facilitated the developers in adding value to the property and offering it at premium to buyers / investors. The fees paid to the development manager generally is in the form of a revenue or profit share generated from such project.
In this regard, recently on 5th March, 2021, the Maharashtra Real Estate Regulatory Authority ("MahaRERA") in Gauri Thatte & ors. vs. Nirmal Developers, Dharmesh Jain Shapoorji Palonjee Private Limited & ors. adjudicated on the issue whether a development manager having exclusive right to sell the units of a project will be classified as a 'promoter' under the provisions of Real Estate(Regulation and Development) Act, 2016 ("RERA") for that project.
In the aforementioned case, four allotees ("Complainants") of a project at Mulund ("Project") claimed refund of principal amounts along with interest for the delay in construction and possession of their flats under the provisions of Section 12 of RERA. The Complainants, inter alia, sought a direction from MahaRERA that (i) Nirmal Developers, Dharmesh Jain and Shapoorji Palonjee Private Limited be made liable for refund of amounts; and (ii) Shapoorji Palonjee Private Limited be added as a promoter of the Project on the website of MahaRERA. Nirmal Developers and Dharmesh Jain, the promoters of the Project have appointed Lucrative Properties Private Limited, a subsidiary of Shapoorji Palonjee Private Limited ("Development Manager") as the development manager for providing assistance in the management, planning, supervision of the Project and for use of its brand name for marketing of the Project in consideration of being granted a fees and on the terms and conditions mentioned in the development management agreement executed between Nirmal Developers ("Developer") and the Development Manager ("Development Management Agreement").
The MahaRERA, while interpreting whether the Development Manager assumed the responsibility of a 'promoter' under RERA, placed reliance on the Development Management Agreement which, inter alia, provided that:
- the Development Manager was appointed as the exclusive development manager for branding and marketing of the Project;
- the Development Manager shall associate its brand name solely for the purpose of branding and marketing the Project in its capacity as a development manager of the Project;
- the Development Manager has the exclusive right to manage, supervise, plan the Project upto completion thereof and prepare the mutually agreed business plan of the Project in accordance with the terms of the Development Management Agreement;
- the Development Manager shall have the exclusive and/or the absolute right to market and sell the saleable area of the Project as per the terms of the business plan and the Development Management Agreement;
- the name of the Development Manager shall along with the Developer appear on all brochure, pamphlets, handouts, websites and all print and electronic medic for marketing the Project in accordance with the branding policies agreed and approved by the Development Manager under the brand license agreement executed between the Developer and the Development Manager;
- the Development Manager shall also undertake all responsibilities on behalf of the Developer in respect of customer management including inter alia sale process, sale closure, marketing, customer interaction, customer relationship management, handover of possession, assistance in formation of society.
The MahaRERA opined that although the Development Management Agreement mentioned that the Developer shall at all times be solely construed as a 'promoter' under RERA for the Project and be solely liable for the obligations under RERA, Section 2 (zk) of RERA makes it explicitly clear that, a 'promoter' shall mean (i) the person who constructs or converts the building into an apartment or develops a plot for sale; or (ii) the person who sells the apartment or plots. MahaRERA further stated that, in the event the person who sells the apartment is different from the one who constructs it, both shall be jointly liable as 'promoter' under RERA. In this particular instance, the Development Management Agreement provided the Development Manager with the authority to supervise and control all the activities of planning, selling, funding and construction of the Project. Further, the Development Manager was entitled to sell the units in the Project at discounted rates in the event of shortfall of funds till the Project meets the shortfall funding. Further, MahaRERA observed that the Development Manager used its brand name and goodwill while marketing the Project, collected money from purchasers of the units in the Project, issued receipts with its logo and name and controlled the sale of the units of the Project.
Notwithstanding the fact that the Development Management Agreement provided that the financial liabilities of a Project including claims of allotees / purchasers are the sole responsibility of the Developer, MahaRERA pronounced that the Development Manager comes within the purview of a 'promoter' under RERA and thus shall comply with all the rules and regulations therein.
It is evident from the order of MahaRERA that although a builder is admitted as a development manager for a project, without having any right in the immovable property of the project, it cannot evade from the responsibility of a 'promoter' under RERA, if it represents to the allottees of the project that it is developing the project and markets the project essentially under its brand name.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.