Supreme Court grants ‘Substantial Justice’ to Real Estate Developers in Noida & Greater Noida- Slashes Interest Rate on delayed payment to Authorities

The Powers of the Apex Court are ‘Supreme’. The concept of ‘Complete Justice’ enshrined in Article 142 of the Constitution gives the Apex Court wide amplitude ‘couched with elasticity to meet myriad situation’. Recently, the Apex Court in the case of Bikram Chaterji & Ors vs Union of India & Ors in Writ Petition (Civil) No. 940/2017 on 10-06-2020 & 10-07-2020 granted much needed relief to the Real Estate Developers in Noida/Greater Noida by drastically reducing the incidence of penal interest, much against the Contract/Agreement and directed the Noida & Greater Noida Authorities to link the penal interest for delayed payment to State Bank of India’s marginal cost of lending rate (MCLR) from January 2010. This benevolent order, passed to do substantial justice to the Real Estate Developers, will not only reduce the burden on builders but enable them to clear their pending dues and also help in obtaining completion certificates from the Noida and Greater Noida authorities.

It is pertinent that as per the Lease Agreements penal interest works out to over 20% which is impossible for the Builders to bear especially when the Real Estate Sector is facing exceptional recession in this sector since 2013. It is noteworthy that the current MCLR of SBI is around at 7.3%. The Court has ruled that the builders are required to pay 25% within three months and all the balance dues within a year. The Noida and Greater Noida authorities have been directed to work out the dues within a period of one month.

As a result of this benevolent order, it seems likely that most of the projects would be able to clear their dues and get a completion certificate. The order will reduce the liability caused because of the exorbitant rate of interest and the companies will be able to invest money in completing construction work and hand over flats to buyers.

While dealing with the problem faced by builders in Noida and Greater Noida, the SC bench said that high rate of interest was one of the reasons for the companies not being able to complete the projects as buyers have been waiting for over a decade to get possession of their flats. Although the order is directly applicable only on Noida and Greater Noida Authorities but it would have wider implications as the court made SBI MCLR as a benchmark for rate of interest. It is common knowledge that all the District Development Authorities & State Housing Boards charge hefty interest for late payments of its instalments. The said Judgement would pave way for identical relief if they can make out a similar case.

The court rejected the plea of the authorities for prospective implementation of new rate of interest and said it would be applicable to all lease-holders from January 1, 2010 onwards. The Authorities vehemently pleaded that reduction in the agreed & contracted rate of interest would lead to “existential problem” and would “ruin” the authorities. But the court observed that the builders were unable to clear the dues because of high rate of interest and after its order builders would come forward and make the overdue payments and the authorities would also gain because they would otherwise get nothing because the projects would be doomed.

The Court dealt in length with issue of payment of interest on the outstanding dues by the Noida and Greater Noida Authorities. It was pleaded on behalf of the Developers that following economic recession in the last decade, the entire real estate sector has gone downwards and facing acute financial crunch and is fighting for its survival. It was also brought to the notice of the Court that majority of the projects were incomplete and there were various litigations against the developers which had resulted in huge financial crisis and due to the pathetic condition of the real estate sector the projects could not be delivered to the prospective buyers.

It was further pleaded that due to recession the developers have not been able to receive the requisite amount on time from home buyers resulting in slow down/halting of the development work of the projects. It was also asserted that both the Authorities are levying excessive interest and penal interest and the cost of the allotted land has doubled from its originally price fixed at the time of allotment over a period of time and due to considerable delay in the completion of the projects, the cost of completion of the projects has increased manifold due to delay and escalation in cost of building material and labour. The attention of the Court was also drawn to the fact that the Bank rates of interest have also consistently come down substantially during this intervening period but the Authorities have not only maintained the old rate of interest but enhanced them. It was submitted by SBI MCLR (Marginal Cost of Funds based Lending Rate) rate of interest for the last three years has been between 7% – 8% and therefore the rate of interest being demanded by the authorities is arbitrary, illegal and unrealistic. Accordingly, it was prayed to reduce/waive the said interest.

It was also submitted that the Developers are not in a position to pay their dues especially in view of the continuous Lockdown due to COVID 19 pandemic because the entire real estate industry has come to a grinding halt causing further financial losses and damages to the real estate sector. It was also prayed that in view of the unprecedented crisis in the real estate sector the timeline for completion of projects may be extended by one more year.

The Court was concerned that the rate of interest being charged by the authorities is not only excessive but also arbitrary. The Court observed thus:

“The rates of SBI MCLR is reduced to 7.45 % in the year 2020 from 8.95% in the year 2016. It is clear that the Noida and Greater Noida Authorities, on the outstanding dues, are realizing the dues from all such projects, interest at exorbitant rate such as 15% per annum with half-yearly compounding and in addition are also realizing penal interest on the amount as fixed from time to time.

……. Thus, it is apparent that more than 60% of projects have not been able to come up so far. We have also noted that the Noida and Greater Noida Authorities did not take the step of termination of leases for various reasons. A large number of home buyers have been waiting now approximately for the last 8 to 10 years or more for completion of houses. It is not in dispute that the real estate sector has suffered a setback at present. It contributes to the GDP of the country. As a large number of projects have not come up, at the same time, Noida and Greater Noida Authorities have not been able to realize their dues from such projects which are being piled up for the last several years, at the same time interest of home buyers has intervened. Even on the plots where the land was allotted from 2005 onwards, the projects have not been completed so far, though the buyers have paid their money. The Noida and Greater Noida Authorities are not issuing completion certificates to such projects and they are not able to realize their outstanding dues. For various reasons, constructions have not been completed, including due to diversion of funds. There is a failure to comply with the obligation to the home buyers whose money has been invested in the partially constructed structure and partial dues have been paid to the Noida and Greater Noida Authorities.”

The Apex Court granted Relief to the Developers with an intention to make the projects viable & workable so that the same are completed and handed over to the homebuyers, who were eagerly waiting for their dream homes. The Court held thus:

“It cannot be disputed that the rate of interest, on which agreements were entered into, has gone down by now. The present lending rate is much below and the RBI has taken several steps to revive the economy. In such a scenario, it would never be possible to make payment of interest at the rate fixed by authorities and also a penal interest to be realized by concerned authorities. The home buyers are not able to obtain fruits of the investment and are deprived of legal title of the flats.”

Refuting the arguments put forth by the Authorities, the Court observed:

“It was also argued by the learned senior counsel that even if the builder may have factored the valuation of price, including interest on the cost of the land, the lease deed and the authorities will remain unaffected. A prayer was made that the authorities may be given liberty to recover their amount of interest from the builder at the contractually agreed rate under the lease deed. It was lastly and rightly pointed out that the Court can fix a reasonable rate of interest. Considering the present scenario, we feel that the aforesaid submission is justified.

Considering the current state of real estate, the projects are standstill, and in order to give impetus to such housing projects and mainly considering plight of home buyers and as pointed out by Noida and Greater Noida Authorities that 114 plots were allotted from 2005 onwards, most of projects are incomplete; we direct that rate of interest on the outstanding premium and other dues to be realized in all such cases at the rate of 8% per annum and let the Noida and Greater Noida Authorities do a restructuring of the repayment schedule so that amount is paid and Noida and Greater Noida Authorities are able to realize the same.”

The Authorities were not satisfied with the interest [email protected]% fixed by the Apex Court and on 10 July, during further hearing submitted that the order dated 09.06.2020 passed with respect to 8% interest be made prospective and should not be applicable retrospectively from 01-01-2010. It was also pointed out that the Government has specified the rate at the SBI Lending Rate which works our 8.5%. The Court was unimpressed but instead of interest rate @ 8% it rightly applied SBI MCLR and concluded as under:

“After hearing learned counsel for the parties, we are of the opinion that SBI MCLR Rates to be applied uniformly to all the lease holders. Their past dues as well as arrears to be worked out accordingly. In case any adjustment is to be made, let the adjustment be made accordingly and the current dues also to be worked out at the SBI MCLR Rates. Future dues be also worked out at the SBI MCLR Rates, which may be fixed. Remaining order is not modified. The only modification made is about the rate of interest.”

The ‘humane’ touch in the Apex Court judgement is indeed welcome. The MSME sector is the worst affected due to acute recession followed by the Covid-19 pandemic. They are the largest employment generators, contribute to GDP in a big way and account for half the exports but due to economic conditions are on the verge of collapse. Majority of them will not be able to pay their bank loan instalments, once the period of moratorium expires next month. It is apt time for the Apex Court to ‘suo motto’ consider a Bail Out Package for them for the survival of the much neglected micro, small & medium enterprises.

Inder Chand Jain

M: 8279945021

E-mail: [email protected]

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April 2021