Delivery of new flats: Delays can attract high penalty for developers

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In a landmark judgement, the Maharashtra consumer commission has ordered a developer to pay the market value of an equivalent unit for delay in delivery. In a landmark judgement, the Maharashtra consumer commission has ordered a developer to pay the market value of an equivalent unit for delay in delivery.
SummaryRecent court ruling relieves buyers of the risk of being duped by developers.

Even before the real estate regulator is formed, consumer courts are taking the lead in establishing the best practices for the sector. On the most common issues — developers taking more than the time they promised in which to deliver a flat — consumer courts are coming down on the side of the buyers.

This time we examine a recent judgment by Maharashtra State Consumer Disputes Redressal Commission to figure out if it has a wider application for others in a similar situation. The recent judgement puts the onus of delay beyond reasonable limits on the developers and relieves the buyers the risk of being duped by developers when they renege on their promise.

The case

The Maharashtra State Consumer Disputes Redressal Commission, in a judgement on September 13, gave a landmark decision in favour of the buyer Anant Ieetkar. Ieetkar had booked a flat in December 2008 in Kalyan, an extended suburb of Mumbai, and paid approximately Rs 19 lakh to the developer. The flat was supposed to be delivered by September 2010. The project was in limbo for years. Construction had not begun. Ieetkar waited until 2011. Eventually, he filed a complaint with the commission.

In his complaint, Ieetkar alleged negligence on the part of the developer in not handing over possession by the promised date. He asked for delivery of the unit, additional charges for the mental harassment he was put through, and the interest payment as per the agreement. In his complaint, Ieetkar also provided documentary proof of the current market value of the flat from a valuer.

The developer admitted to receiving full payment for the flat and that construction would begin “as soon as possible” after getting requisite permissions.

The commission called this case as the “best example how the developer exploits the prospective purchasers” and ordered the developer to pay the current market value of a flat with the same specification in the same locality, which would be around Rs 60 lakh, in case the unit was not delivered within three months. In addition, the commission also directed the developer to pay Ieetkar Rs 3 lakh as compensation for mental harassment and Rs 30,000 for legal charges.

In its judgement, the commission quoted a judgement from the Supreme Court, which held that “while quantifying the damages, consumer fora are required to make an attempt to serve ends of justice, so that compensation is awarded, in an established case, which not only serves the purpose of re-compensating the individual, but which also at the same time, aims to bring about a qualitative change in the attitude of the service provider”.

According to Uday Wavikar, the lawyer representing Ieetkar, compensating the consumer at the current market value will increase consumer’s trust in the system. “In earlier judgements, consumers were merely granted a certain amount of interest on the principal amount paid. In reality, no amount of interest is enough, considering the rising real estate rates. But with a compensation like this, a consumer can at least consider buying a house in the same area,” says Wavikar.

Consumer forums across the country are lined up with similar complaints against developers. But as the Ieetkar judgement shows, such wilful default on the part of developers would now entail a heavy price.

Some developers agree. “Dedicated execution is of utmost importance to ensure timely delivery,” says Ram Raheja, director S Raheja Realty, a Mumbai-based developer.

“The key factor for delays in majority of the cases is cash flow. The diversion of funds is an unethical practice but it may not be true for all developers. I believe that defaulters should be punished. However, the buyers also have to be very diligent and should ensure they get the documents, especially the approvals checked by professionals,” adds Raheja.

The Checklist

Even as the judgement in this case could inspire more complaints, it is not yet a settled question of law as it can be potentially appealed with the National Consumer Disputes Redressal Commission and finally, the Supreme Court.

Let us take the example of a flat, say 1,000 sq ft in 2007 in Borivali, Mumbai. The going rate then was Rs 6,000 per sq ft. The agreement says the year of possession in March 2010. The developer, however, does not hand over the keys until March 2013 as the work is not complete. When the buyer asks reasons for the delay, he is presented with an option: take back the Rs 60 lakh paid from 2007 to 2010.

The buyer had two choices then. One, he may wait indefinitely for the project to complete, as he has already exhausted his funds. Two, he can take Rs 60 lakh back and look for other options.

This is also not possible as the rates in the area have doubled and he will get a far smaller unit for the same price at that locality. This buyer in this case has lost both the house and time. The developer will sell the same flat to another buyer at the current market value say Rs 12,000 per sq ft and would make Rs 1.2 crore, an extra profit of Rs 60 lakh.

“In some cases, where the buyers are able to exert some pressure, the developers have paid about 10 to 12 per cent interest on the amount refunded,” says R Madan, an advocate who is fighting on behalf of buyers. “However, the interest was calculated from the date of possession mentioned in the agreement till the date of refund. The developers happily paid that interest as it was only for 2-3 years while they used the buyer’s money for 6 years without interest. On the other hand this interest was not substantial for the buyer to match the current market value of another flat in the vicinity,” adds Madan.

In India, sale agreements are usually prepared by the developers. The usual agreement for a standard under-construction project would usually indicate 3-4 years as the time-frame for completion. The buyer is bound to arrange the fund within this period while the developer is bound to keep his side of the deal and hand over the keys on the mentioned delivery date.

It is expected that the developer — being a businessman — must have considered all possible factors while finalising the cost and the time frame for delivery. “He has presumably paid for the land and cleared the legal title before accepting bookings. Otherwise it would amount to cheating,” says Naresh Mehta, a property consultant.

“He must have anticipated the fluctuations in demand, the rate environment and cost of inputs before fixing the price. He is supposed to be aware of the time needed for approvals, procurement of men and material and the construction process before he lays down the delivery date in the agreement,” adds Mehta.

“So, after the agreed date of delivery, the developer cannot justify delay on any of these factors as they are supposed to be factored beforehand. Now, in the absence of any natural calamity, if delay occurs beyond five years, it can easily be called ‘developer made’ calamity,” says Paresh Parekh (name changed), an aggrieved buyer who is preparing to take a legal action against a developer in Panvel.

There are several examples of buyers caught in similar circumstances. If the pecuniary value of one’s complaint is up to Rs 20 lakh, the complaint can be filed with a district consumer forum.

For value between Rs 20 lakh and Rs 1 crore, the complaint can be filed with the state commission and for value above Rs 1 crore, the complaint can be filed with the NCDRC.

Buyers in similar circumstances should consult a professional to build their case and get their due.

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