Handing over stuck realty projects to someone else is not a solution: SC

Supreme Court feels this is an option to help homebuyers but it is not a straightforward solution, writes Aashish Aryan

If the Supreme Court ordered the government to take over delayed real estate projects or handed them over to a reputed builder, it might sound like good news for harassed buyers but experts say it would be fraught with legal and regulatory problems.

Over the past month, the Supreme Court, while hearing two separate appeals, has observed it could take one of these two options as a way of giving relief to homebuyers. “A new builder taking up a new or uncompleted project will face a plethora of legal challenges and obligations regarding buyers’ agreements, state regulatory frameworks and tax or duty compliance,” said Hemant K Batra, chairman, Kaden Boriss Legal.

Unless recovery is made from the defaulting builder, Batra is not sure how the capital inflow would materialise. “No creditor will be forthcoming,” he added. Also, the onus of checking land ownership titles, approvals, and tax or duty issues will be a headache for the new builder. 

On the other hand, such a direction by the top court, if it comes, would act as powerful warning to developers. Homebuyers have suffered for years from builder misadventures or builders who took their money and diverted it into buying land banks instead of building their homes. Experts said if a government agency were to take over a stressed real estate project, some investors might want to exit if prices fell or might want compensation or a refund.  “Under Section 15 of the Real Estate Regulation and Development Act, 2016, the new builder has to take over the obligations of the builder. But the government or a new builder will be chary of doing this,” said  Sudip Mullick, head of Real Estate and Infrastructure, Khaitan & Co.

Batra believes that although the law has been instrumental in checking errant builders, the government should solve the crisis by acting in a way that reduces overlapping jurisdiction and increases builders’ accountability.  Any takeover of a project by the government must focus on completion, said Mullick. “The court will have to take a pragmatic view. There are few developers capable of completing the projects. The challenge will be to ring-fence the claims of homebuyers and contain it legally.” (‘contain it legally.” What exactly does that mean? Or what is being contained? Homebuyers’ claims?) .

Notwithstanding the possible complications, Anuj Puri, chairman, ANAROCK Property Consultants, thinks that a takeover by the government or the National Buildings Construction Company (NBCC) would ease, to a large extent, the apprehensions about financing a project.  “If the NBCC handles the construction of stalled projects, the apprehension of banks towards construction finance would ease as it is a government entity. Most stalled projects have good assets in the form of land banks the NBCC can use to fund the construction costs,” said Puri.

Experts are divided over whether the SC will replace existing developers totally or just hand over the responsibility of completing the stalled projects to someone else. If the latter, the SC will have to appoint the builder as a contractor. In that case, the new builder will look to complete the work at cost and little profit, said experts. Puri highlights the need to put in place internal controls covering financial and operating functions ranging from procurement of land to smooth execution of projects to further mitigate risks. “The principles of good governance are never followed in the real estate sector,” he said. 

His advice to homebuyers: carry out thorough checks on the financial capability of the builder and a legal check too with the help of a lawyer conversant with real estate.