Wg. Cdr. Arifur Rahman Khan & Aleya Sultana & Ors vs. DLF Southern Homes Pvt. Ltd. (Supreme Court)
Delays and defaults are common in real estate development. The Flat buyers are usually left in the lurch where the Developer delays the delivery of the constructed units incessantly. This prompted the government to enact Real Estate (Regulation and Development) Act, 2016. The said Act provides for the adequate compensation in the form of interest in the case of delay by the promoter. Even prior to the said enactment, the Flat buyers would invoke the remedy under the Consumer Protection Act. One such matter reached the apex court. The court has decided some important issues which would also apply to RERA. The said decision in the case of Wg. Cdr. Arifur Rahman Khan & Aleya Sultana & Ors vs. DLF Southern Homes Pvt. Ltd, Civil appeal no.6239/2019, was decided on 24th August, 2020. It lays down that the Courts are not constrained by the terms provided in the builder’s agreement while awarding compensation to the flat buyer.
Facts of the case:
The Flat Buyers (Appellants) had booked residential flats in Developers (Respondents) project known as Westend Heights at New Town, DLF, BTM Extension at Begu, Bengaluru.
The Flat buyers entered into an Agreement for sale (AFS) with the Developer. The clause for schedule for possession indicated that the Developer will “endeavour” to complete construction within a period of thirty-six months from the date of execution of AFS except for force majeure conditions.
The Developer sought repeated extension of time to deliver possession of flat.The Developer failed in its obligation to handover possession of flat within a period of 36 months as stated in AFS.
Nine flat buyers representing the entire group of flat buyers in the project, filed consumer complaints before NCDRC. The complaint was regarding the breach by the Developer to handover possession of flat in accordance with the AFS.
The 9 flat buyers moved an application under Section 12(1)(c) of Consumer Protection Act. The NCDRC by its order dated 21.11.2017 permitted them to file the complaint on behalf of all the flat buyers who were interested in the reliefs. The Supreme Court vide its order dated 28.09.2018 directed the NCDRC to treat the complaints as filed on behalf of all 339 flat buyers and to proceed on merits.
NCDRC divided the group into 6 groups of complainants:
A- Who took possession before filing of complaint
B- Who took possession, executed deed of conveyance during pendency of complaint
C- Who took possession during pendency of complaint but did not execute Deed of conveyance
D- Who settled disputes during pendency of complaint
E- Who sold flats during pendency of complaint
F- Who neither took possession nor executed conveyance deed.
Decision of NCDRC:
NCDRC dismissed the complaints of the flat buyers holding that there is no deficiency of service by the developer. It also held that the flat buyers are not entitled to compensation in excess of what is stipulated in the AFS. NCDRC observed that:
i) The claims of Group A and B were invalid since right in property stood transferred and therefore not within the jurisdiction of NCDRC to entertain such grievance.
ii) Such flat buyers had accepted the services provided by the developer and discharged him of all its liabilities under AFS.
iii) Group C took possession of the flat without protest thereby discharging the developer of its liabilities.
iv) Group D were estopped from pursuing their grievances as they had settled their dispute during pendency of complaint.
v) Group E sold flats during pendency of complaint hence had no subsisting right.
vi) Group F had accepted the delayed compensation but did not accept possession.
NCDRC held that the AFS provided compensation at the rate of Rs.5 per sq.ft of the super area for every month of delay. Since the flat buyers agreed to this, they are now not entitled to seek any amount in addition.
NCDRC held that charges recovered towards tax and interest, for electricity, levy of parking charges is in accordance with AFS and is valid. The club house was also made.
Issue before Supreme Court:
i) Whether the flat buyers are constrained by terms of AFS providing compensation @Rs.5 per sq.ft per month?
ii) Whether a flat buyer be compelled to defer the right to obtain a conveyance if he makes a claim against the developer for delayed possession?
iii) Whether the developer had breached representation held out to the flat buyer?
Contentions of the Flat buyers:
i) Delay in handing over possession of flat by 2 to 4 years by Developers cannot be constrained by the terms of agreement.
ii) Execution of conveyance or settlement deeds cannot preclude flat buyers from claiming compensation, since the emails of the Developer indicated that they did not permit flat buyers to receive possession under protest.
iii) Amenities not provided as per the AFS.
iv) No liability on flat buyers to indemnify the Developer for the demand of interest and penalty raised by tax authorities for failure to deposit tax on time.
Contentions of the Developers:
i. The flat buyers voluntarily executed conveyances/settlement with Developer.
ii. Possession of flats is handed over and the Developer has transferred his right, title and interest to RWA.
iii. Benefit to flat buyers for appreciation in the value of flats.
iv. 145 out of 171 applicants received compensation as per AFS. Allotments were escalation free and the burden of increased costs borne by the Developer.
v. Compensation given to flat buyers in accordance with AFS. Placed reliance on the decision of Supreme Court in DLF Homes Panchkula Pvt. Ltd vs D S Dhanda[1] to state that parties have to give strong reasons to get compensated at more than agreed rate.
vi. Amenities constructed as per AFS and OC obtained on 13.05.2019. Delay was due to the Bangalore Development Authority.
vii. As per the AFS, flat buyers were required to bear tax liabilities including work contract tax. Relied upon Supreme Court in Larsen & Toubro Limited vs. State of Karnataka[2], wherein held that the developer can pass on the liability of interest in final settlement of accounts.
viii. As per AFS, developers are entitled to raise demand on a proportionate basis from flat buyers for electricity charges.
ix. Price of the flat included break up which included parking charges. Reliance was placed on the decision of Supreme Court in DLF Limited vs. Manmohan Lowe[3] wherein it was held that under Karnataka Apartment Ownership Act there is no prohibition upon developers to provide earmarked parking charges in the breakup of the total price of the flat.
Verdict of the Supreme Court:
The Supreme Court set aside the decision of NCDRC. It held that failure of a developer to provide flat to buyer within stipulated period amounts to deficiency and the courts are not constrained to award compensation by the terms of a rate in agreement.
On compensation for delayed possession:
The Apex court relied on various earlier decisions to hold that delay on the part of the developer as provided in clause 14 of the AFS will not provide sufficient recompense to the flat buyers. Thus the flat buyers are entitled to compensation in excess of the amount stipulated in the AFS.
Following observations were made by Court:
i) Breach on the part of the Developer to handover possession within a period of 36 months’ amounts to deficiency of service under section 2(1)(g) of CPA.
ii) Admission of Developer to pay compensation on the existence of delay at @Rs.5 per sq.ft.
iii) AFS is one –sided and unfair contract.
iv) Gross delay in completion of construction.
v) Compensation provided in AFS will not suffice to recompense the purchasers.
In Lucknow Development Authority vs. M.K Gupta[4], SC observed that jurisdiction of the consumer court extends to the award of compensation to alleviate the agony to a consumer.
In Ghaziabad Development Authority vs. Balbir Singh[5], SC held that award of compensation has to be based on finding a loss and must correlate to it.
In Pioneer Urban Land & Infrastructuure Limited vs. Govindan Raghavan[6], SC held that flat purchasers cannot be compelled to obtain possession which was offered almost two years after the grace period had expired. The compensation was awarded at 10% p.a.
SC distinguished the decision of Dhanda (supra) relied by the Developer. In that case the claim was preceded by consent terms which were presented before the court where interest @9% had been granted. The decision also laid down that the award of interest cannot be arbitrary and without nexus to the default which has been committed. Thus, the award of interest at the maximum rate of interest charged by a nationalised bank for advancing home loans was construed to be arbitrary.
On one-sided nature of AFS:
The Court held that it cannot be oblivious to the one-sided nature of AFS drafted to protect the interest of developers. The rights provided to the Developer for default of others are not placed on an equal platform with the rights of the Purchaser.
Execution of Deed of Conveyance by a flat buyer:
The Court rejected the view of NCDRC to hold that the execution of the Deed of Conveyance by a flat buyer precluded a consumer claim being raised for delayed possession. However, the flat buyers who have entered into settlement deeds or have sold their flats have to be segregated.
Liability on Developer to provide Amenities:
The Court held that the Developer is to be held liable for its representation of amenities which was committed. Thus the said issue was considered while computing compensation.
Tax:
The Court accepted the contention of the Developer which required that the flat buyer is required to reimburse their proportionate share of taxes if paid by the Developer. The Court held that there is no deficiency of service for demand of interest payable on tax which was required to be deposited with the revenue.
Electricity:
The Court upheld the findings of NCDRC to hold that charges recovered by Developer are not contrary to the AFS.
Parking:
The Court held that the breakup of the consideration of flat was already provided to the flat buyers, the demand was raised in accordance with AFS and therefore there was no deficiency of service under this head.
Acelegal Analysis:
The recent judgment of the Supreme Court has once again shown the intolerance of courts against the delays and defaults by the real estate developers. The recent legislative attempts like enactment of RERA, treating flat buyers as financial creditors under IBC and decisions of the highest court have repeatedly highlighted that the law is being applied for the benefit of the Flat buyers. The judiciary and legislature both have recognised that the need of a flat buyer is paramount and he cannot suffer for the delays and defaults of developers. In this decision broadly the court has recognised as under:
a) The Developer cannot hide behind the contract with the flat buyer if such contracts are one sided and unfair. The recent amendment in CPA defining “unfair contract” is a legislative footprint on this judicially recognised concept.
b) The Flat buyer will be compensated in a reasonable manner for any delays and defaults in deference to the contract or any specific legislative enactment
c) The Developer cannot suffer for the delays of the planning authority and hence benefit of doubt given to the Developer in such situations.
d) The calculation of interest payable is from the date of default and not from the date of payment by the Flat buyer. This is a major departure from the law being applied by RERA as they are granting interest from the date of payment by the Flat buyer.
e) The rate of interest granted by SC was 6% as against Maximum Rate +2% as prescribed under RERA. Therefore, RERA is offering a better compensation to the flat buyer than the CPA.
f) The liability of taxes cannot be shifted by the Flat buyer on the Developer.
g) Certain contractual clauses on amenities and other services shall prevail and must be enforced like provision of electricity, parking etc.
Conclusion:
The moot point in this decision was the one sided contract between the flat buyer and the Developer. The apex court’s decision revolves around the rewriting of the contract in favour of the Flat buyer. After tjhe advent of RERA much of these one sided clauses have lost relevance as RERA itself provides what is to be provided for. For instance, the clause relating to charging of interest from a flat buyer is now the same as the interest payable by Developer on default. Secondly, RERA statutorily quantifies and provides for interest on delayed possession. Hence, it will be interesting to see how the courts interpret the AFS executed under RERA in the light of this latest decision of the apex court.
[1] 2019 SCC online SC 689
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