RERA liability of Land Owner/Society in Development Agreement

Adv. Bharat Agarwal
Adv. Sanjuna Sudhakaran

Society / Land Owner as “Promoter” under RERA

Introduction:

The Real Estate (Regulation and Development) Act, 2016 has fastened huge liabilities on the “Promoter” of a real estate project. In a plain vanilla transaction, a builder is liable as a promoter for any breach of agreement with unit buyer or for delay in the completion of the project. However, the situation is not so simple where the said builder has entered into a redevelopment agreement with the society or a development agreement with the land owner. The issue arises whether such society / land owner is also a “promoter” under RERA? If yes, then whether there is a limitation on such liability? We have analysed the above issues in the light of recent decision by Mumbai High Court and orders issued by the Maharashtra RERA. We believe that the analysis here of the legal position would be applicable to rest of the country too even though the base for discussion is Maharashtra RERA.

Statutory Provision:

1. The term “Promoter” is defined under RERA in section 2(zk).

It means :

(i) a person who constructs or causes to be constructed an independent building or a building consisting of apartments, or converts an existing building or a part thereof into apartments for the purpose of selling all or some of the apartments to other persons and includes his assignees; or

(ii) a person who develops land into project, whether or not the person also constructs structures on any of the plots, for the purpose of selling to other persons all or some of the plots in the said project, whether with or without structures thereon; or

(iii) any development authority or any other public body in respect of allottees of-

(a) buildings or apartments, as the case may be, constructed by such authority or body on lands owned by them or placed at their disposal by the Government; or

(b) plots owned by such authority or body or placed at their disposal by the Government;

(C) for the purpose of selling all or some of the apartments or plots, or

(iv) an apex State level co-operative housing finance society and a primary co-operative housing society which constructs apartments or buildings for its Members or in respect of the allottees of such apartments or buildings; or

(v) any other person who acts himself as a builder, colonizer, contractor, developer, estate developer or by any other name or claims to be acting as the holder of a power of attorney from the owner of the land on which the building or apartment is constructed or plot is developed for sale; or

(vi) such other person who constructs any building or apartment for sale to general public.

Explanation- For the purpose of this clause, where the person who constructs or converts a building into apartments or develops a plot for sale and the person who sells apartment or plots are different persons, both of them shall be deemed to be the promoters and shall be jointly liable as such for the functions and responsibilities specified, under this act or the rules and regulations made thereunder;

(Emphasis Added for Discussion)

An analysis of the above definition reveals that the term promoter is applicable where the development is being carrying out for the purpose of selling the units. Typically, the society wants homes constructed for self-use and hence grants development rights to the promoter. To remunerate the developer, the society allows such developer to sell the extra flats and recover its cost of construction and profit. Therefore, as far as society is concerned, the objective is not to sell the units.

The sub clause (iv) of the definition talks of the self-redevelopment by the society for its members. The said clause consciously do not mention the phrase “or causes to be constructed” as mentioned in sub clause (i). Hence, the sub clause (iv) cannot apply to a redevelopment agreement.

However, where the land owner is sharing the units with the intention to sell the units, then he will get covered within the definition of the term “Promoter”. To the same effect would be a revenue sharing development agreement. Hwoever, whether there would be any limitation of the liability considering that the land owner is not undertaking the actual work of development but only getting ot developed through another developer? Lets discuss this issue in the light of the recent decision of RERA Tribunal.

RERA Tribunal decision in the case of Udayachal Goregaon CHS Ltd vs. M/s Jaycee Homes Pvt. Ltd, Appeal no. AT006000000010569, Order dated 30/01/2019

Recently, in the above mentioned case, the RERA Tribunal Maharashtra was faced with the question of applicability of definition of “Promoter” to a housing Society which had entered into a redevelopment agreement with a developer. The Tribunal had to decide whether the Society can be treated as a “promoter” under the RERA so as to be fasten the liability towards the new flat buyers of free sale area belonging to the Developer.

Facts of the case:

The Society entered into a Development Agreement dated 15.04.2013 (DA) with the Developer wherein it was agreed that the Developer would redevelop the existing buildings and utilize the additional FSI/ TDR to build and sell the free sale component to third parties. Due to the failure of the Developer to complete the redevelopment within time, the Society terminated the DA in the year 2018. Prior to the termination of DA, third party rights were created by the Developer with respect to the free sale component. These flat purchasers filed a complaint before MahaRERA and impleaded the Society along with the Developer. The complainants agitated that the “Agreement for sale” entered into by them with the Developer are legally binding on the Society too. Therefore, in the event of default by the Developer, it is the society that should complete the construction and handover the flats to the complainants or allow the purchasers to complete remaining construction.

Proceedings before MahaRERA Authority:

Society raised an initial objection on the maintainability of the Complaint against it. The Society pleaded that the complainants had entered into an agreement with the Developer and hence there was no privity of contract between the complainant and the Society. Therefore, it was not obligated towards such complainants. The Society placed reliance upon the decision of the Bombay High court in the case of Vaidehi Akash Housing Pvt. Ltd. vs. New D.N. Nagar Co-op. Hsg. Soc. Ltd. & Ors.[1], to buttress its argument.

Authority’s Decision:

The Authority was not impressed with the argument of the Society and it held that complaints are maintainable against Society. It held that Society is the land owner and the developer is engaged in the redevelopment. Hence both are “Promoter” u/s 2(zk) of the RERA Act and their liabilities are joint. It observed that, by cancelling the DA, the Society regained the control and ownership of the sale component and is thus liable as a Promoter under RERA even to the third party flat buyers.

Questions before Appellate Tribunal RERA:

Dissatisfied by the said order, Society appealed before Appellate Tribunal, RERA. It raised the following questions

(i) Whether the complaint of the purchasers is maintainable against the Society?

(ii) Whether the Society, being the land owner is a “Promoter” under RERA?

Appellate Tribunals Verdict:

The tribunal made the following observation:

(i)Impugned order was an unreasoned order since it was based only on comparing definition of “Promoter” under The Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (MOFA) and RERA. No reference was made to the clauses of the agreement for sale/ allotment letter between the complainant and the promoter.

(ii)No reference was made to circular no. 12 dated 04.12.2017 issued by MahaRera wherein the liabilities and obligations of land owner as “Promoter” was provided in the case of joint development agreements.

(iii)No convincing differentiation in the meaning of Promoter under MOFA and RERA was brought out.

The Tribunal thus remanded the matter back to the Authority for deciding the issue of maintainability afresh after considering the various past precedence and the circulars of the MahaRera.

Acelegal Analysis:

In the decision of Bombay High Court (Vaidehi vs. D.N Nagar), the Court has made the following observation:

(i) If there is no privity of contract of the third party purchaser with the Society, then the Society will not be responsible for any claims made by the third party purchasers.

(ii) No specific performance can be claimed by the third party purchasers of their respective agreement for sale except through Developer.

(iii) DA entitles the developers to construct building/s and sell flats/premises to outsiders as an independent contractor.

(iv) Building constructed by the developer cannot be said to be constructed by the Society within the meaning of Section 2(c) of MOFA (defines the term “Promoter).

(v) The Society, merely being a landowner cannot be treated as a “promoter” and thereby foist the obligations of a promoter on the society in relation to the purchasers.

The above decision was rendered in the context of MOFA before RERA was enacted. However, the view in the Vaidehi case was confirmed by the Bombay High Court in the recent case of Goregaon Pearl CHS vs Dr. Seema Mahadev Paryekar & Ors[2] wherein the court held that obligations of a Developer cannot be treated as obligation of the Society towards the third party purchasers even under RERA. It stated that there will be no liability of the Owner if the owner / society is not made a Confirming Party in the third party flat purchasers agreement between the Developer and the Purchaser. The court clarified that Provisions of RERA do not make any difference either and the definition of “Promoter” is on same lines as of MOFA. Hence, different enactments do not change the legal position vis-a-vis the land owner / society.

To completely understand the extent of the liability of a land owner / society under RERA, its also important to analyse the MahaRERA order dated 11.05.2017 which had coined definition of ‘Co-Promoter’ of real estate Project wherein the land owner / society was included. The said order was replaced when the Co-Promoter order was challenged before Mumbai High Court in a writ petition in the case of Ismail Ibrahim Patel & 6 Ors vs. State of Maharashtra, regulatory Authority, Union of India and Shiv Krupa Enterprise[3] on the ground that the Authority is not empowered to coin a new definition “Co- Promoter” and notify the same in absence of any statutory authority under the Act. The Bombay High Court vide order dated 14/11/2017 disposed of the writ petition thereby permitting the Regulatory Authority to withdraw the Co-Promoter Order and appropriately replace the order within a period of 3 weeks from 14/11/2017 with effect from the same dated i.e 11/05/2017.

As a consequence, vide order no.12/2017 dated 04.12.2017 read with Circular no. 13/2017 dated 04.12.2017 (said “Circulars”) the RERA replaced the earlier order. The Authority withdrew the concept of “Co-Promoter” and provided that any individual/organization entering into arrangement with a Developer and entitled to revenue or area share shall also be “Promoter” and shall be registered as “promoter” while registering the project with MahaRera. It further clarified that the liabilities of such land owner under RERA shall be governed by the contractual relationship between the Society / Land Owner and the Developer.

Extent of Liability:

From a reading of the above circular it appears that the land owners/ investors entitled to revenue/ area share cannot claim that they are not liable at all as “Promoters”. They have to register themselves as promoters and have certain specific mandate for meeting compliances under RERA. However, their liability is neither co-extensive nor co-terminus with that of the Developer. The nature and extent of the liability of Promoter is dependent upon the written agreement which has been entered into by them with the Developer. The obligations of such land owner/ investor will be limited only to the extent as contracted between the parties. Thus the written agreement will play an important role in defining the rights and obligations of the landowner and the Developer.

Another aspect of liability of a land owner / society is to be seen with respect to parties involved in such a transaction. The authors are of the view that the land owner / society is not liable to any party under RERA for the following reasons:

• towards the new flat buyer, the society/land owner would not be liable since there is no privity of contract as discussed above. However, this statement is qualified as ultimately the documentation and the contractual clauses between the society/land owner and the Developer would play an important role.
• Towards the existingtenants, the society would be liable to ensure that all major decisions are taken jointly in the interest of the existing tenants and the redevelopment project. However, since the tenants are not the allottee against consideration, they cannot be a complainant under RERA.
• Towards the developer, the society/Land owner would be liable as provided in the contractual clauses in the development agreement between the parties. However, again RERA do not have jurisdiction to decide the dispute between the land owner and the Developer and hence no complaint would lie under RERA.

Moreover, the obligation to construct and develop the project would invariably remain on the developer and any delay therein not due to the society / land owner cannot make such society / landowners liable under RERA as a Promoter. The courts have been very clear that the obligation to develop is of the developer and it cannot hide behind the definition of the term “promoter” and hold the society / land owner liable.

 Notes: 

[1] (2015 (3) ABR 270)

[2] Appeal from order (Stamp) no. 22143/2019

[3] WP (2773/2017)