22 April 2024

Ensuring Fairness: Bombay High Court's Decision On Promoter Accountability In Real Estate

Shardul Amarchand Mangaldas & Co


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In a Second Appeal, the Bombay High Court deliberated on a dispute between Wadhwa Group Housing Private Ltd. ("Appellant"), Mr. Vijay Choksi ("Respondent 1"), and SSS Escatics Pvt. Ltd. ("Respondent 2").
India Real Estate and Construction
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In a Second Appeal, the Bombay High Court deliberated on a dispute between Wadhwa Group Housing Private Ltd. ("Appellant"), Mr. Vijay Choksi ("Respondent 1"), and SSS Escatics Pvt. Ltd. ("Respondent 2"). The appeal contested the decision of the Maharashtra Real Estate Appellate Tribunal ("Appellate Tribunal"), which directed the refund of payments made by Respondent No. 1.

While the Tribunal instructed both the Appellant and Respondent No. 2 to refund the amount with interest, the Appellant, disputing its liability, contested this decision.

This case interprets the legal obligations of real estate promoters and the complexities involved in refunding payments under The Real Estate (Regulation and Development) Act, 2016 ("RERA").

SSS Escatics Pvt. Ltd., identified as Respondent No. 2, spearheaded the "The Nest" a project under the Slum Rehabilitation Scheme, regulated by the Development Control Regulations of 1991. In a collaborative effort, Respondent No. 2 entered into a Joint Development Agreement ("JDA") with the Appellant on September 5, 2012, allocating the constructed area between them for sale. On July 19, 2013, Respondent No. 1 booked a 3-bedroom flat, committing to a payment of Rs. 2,65,35,000/-. An initial payment of Rs. 1,20,00,000/- was made, followed by receipt of an allotment letter.

When RERA came into effect, the project was still under construction, necessitating Respondent No. 2 to register it under RERA as ongoing project. During the registration process, the Appellant was declared as a Promoter (Investor).

Citing inconsistencies in flat details and payments, Respondent No. 1 sought redressal and demanded refund of Rs. 2,62,35,056/-. Respondent No. 2 and the Appellant countered, citing project challenges and contractual agreements. The Appellant contended that it was not obligated to refund Respondent No. 1's payments since the payments were made to Respondent No. 2.

Maharashtra Real Estate Regulatory Authority ("MahaRERA"), in response to Respondent No. 1's refund plea, initially rejected it, directing all involved parties to either sign an agreement for sale within 30 days or refund the entire amount paid within six months. Discontented with this decision, Respondent No. 1 filed an appeal before the Appellate Tribunal.

The Appellate Tribunal by its order, directed both Respondent No. 2 and the Appellant to refund the entire amount to Respondent No. 1 with interest, and awarded costs of Rs. 20,000/-.

The Appellant contested the Appellate Tribunal's decision and filed the present appeal, which the Court admitted. Central to this appeal is a key question: can a Promoter, who has not received payment, be held responsible for refunding money under Section 18 of RERA? Additionally, the appeal raises the issue of whether the case should be remanded to the Appellate Tribunal for further consideration of the Appellant's liability. Both parties presented detailed legal arguments during the hearing to address these questions.

The Appellant's counsel argued against the Appellate Tribunal's order, contending that the Appellant is not obligated to refund any funds to Respondent No. 1, who did not make payments directly to the Appellant. Emphasizing Section 18 of RERA, the counsel asserted that refunds apply only to Promoters who received payments, which does not include the Appellant in this case. Referring to the JDA, the counsel emphasized that the flat in question belongs to Respondent No. 2, who received all payments. Additionally, the counsel cited a MahaRERA Circular dated December 4, 2017 ("Circular"), to support separation of liabilities between Promoters and Investors.

In addition, the counsel contended that the project pre-existed RERA, and therefore, the Appellant's responsibilities were established before the enactment of RERA, releasing the Appellant from any additional obligations. Accentuating that the issue of the Appellant's lack of liability was raised earlier but not conclusively addressed by MahaRERA or the Appellate Tribunal, the counsel suggested for reconsideration of the case. To strengthen the arguments, the counsel supported his viewpoint with legal precedents from several courts.

Respondent No. 1's counsel strongly opposed the appeal, asserting that the Appellant qualifies as a 'Promoter' as defined by RERA. The counsel emphasized the Appellant's listing as a Promoter in the project's registration documents. Emphasizing that direct contractual links with flat purchasers are not necessary for Promoter status, the counsel points out the shared responsibility of all promoters under RERA.

Furthermore the counsel argued that RERA's objective is to safeguard the interests of flat purchasers and prevent promoters from avoiding responsibilities through internal agreements. Consequently, the counsel insisted on holding all involved parties accountable as promoters for refunding payments made towards purchase of flats together with interest.

The counsel further asserted that the Circular, referenced by the Appellant, supports Respondent No.1's position by reaffirming the joint liability of several promoters. The counsel argued that merely submitting written arguments does not mean the Appellate Tribunal must address every point. The counsel cited legal precedents including rulings from the Supreme Court and Gujarat High Court, to strengthen his argument. The counsel urged for dismissal of the appeal.

The crux of this case revolves around the Appellant's obligation to refund payments made by Respondent No.1 to Respondent No.2 for purchasing a flat in the project 'The Nest.' The Appellant contends that, based on the terms of the JDA with Respondent No.2, the flat falls under the share of Respondent No. 2. Consequently, Respondent No.2 issued the allotment letter and received the entire payment from Respondent No.1. Despite possible differences in the payment amounts, all payments were solely made to Respondent No.2. Therefore, the Appellant argued that the Appellant bears no responsibility to refund any amount to Respondent No.1, as the Appellant did not directly receive any payment from Respondent No.1.

The legal maze surrounding 'The Nest' project dives deep into whether the Appellant can be classified as a 'Promoter' under Section 2(zk) of RERA. This classification is crucial, as it carries significant obligations and liabilities.

According to RERA, any person involved in the construction, development, or sale of real estate projects falls under the broad category of a 'Promoter.' This means that regardless of specific roles or ownership arrangements, all parties share joint liability under RERA. Given that the Appellant is registered as a promoter on project registration, disclaiming the status of a Promoter is not an option. Thus, irrespective of ownership intricacies, the Appellant remains bound by RERA's obligations and liabilities concerning 'The Nest' project.

Ironically, the Circular, which the Appellant relies on, serves to undermine its position. It affirms that entities entitled to revenue share in real estate projects, such as landowners or investors, are jointly responsible as promoters under RERA. This means that the landowners and investors must be included in online registrations with MahaRERA and bear the same liabilities and responsibilities as developers. Importantly, the Circular emphasizes that joint liability persists even after project registration. Specifically addressing ongoing projects, it points out that landowners or investors must consciously accept promoter responsibilities under RERA. By opting to proceed with the project and registering under RERA, the Appellant effectively assumes promoter liabilities, thereby losing the ability to disclaim responsibility at a later stage.

The argument by Appellant's counsel regarding Section 18 of RERA does not stand. Section 18 clearly states that if a promoter fails to complete construction of a property, the promoter must refund the amount received from buyers with interest and compensation. This applies even if payments were made to another party. The Appellant, defined as a "Promoter", shares this responsibility with the Respondent No.2. The timing of projects, whether prior to or post RERA, does not change Promoters joint liability.

In essence, the Appellant's attempts to sidestep promoter obligations under RERA are burdened by both legislative provisions and administrative directives, leaving the Appellant firmly rooted in its responsibilities regarding 'The Nest' project.

The Appellant's contention regarding the absence of a direct contract with the buyer holds no ground under RERA. Regardless of direct contractual agreements, entities fall within the purview of promoters and bear joint responsibility for refunding amounts. Consequently, the Appellant requires refunding the sum received for the flat sold to Respondent No. 1. Besides, the failure of the Appellate Tribunal to address the Appellant's objection is immaterial, given the establishment of the Appellant's liability. Legal ambiguities pertaining to refund provisions under Section 18 of RERA and the remand of the case have been clarified, resulting in the dismissal of the Second Appeal. As a result, the Appellant is liable for covering the associated costs. Despite the plea for the suspension of execution proceedings to appeal in the Supreme Court, it is denied in light of the grounds for dismissing the Second Appeal.

To conclude, the effects of this order extend far beyond the courtroom, echoing deeply within the real estate sector. By highlighting the obligation of accountability in transactions and interpreting the legal framework governing refund obligations under RERA. It establishes a precedent that resounds throughout the industry, holding all parties involved accountable as Promoters for refunding payments made towards the purchase of flats, coupled with interest. This landmark ruling not only ensures fairness and adherence to regulatory norms but also promotes trust and confidence among unit purchasers and investors, reinforcing the integrity of the real estate market.

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.

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