[By Aman Saraf]
The author is a student at the Government Law College, Mumbai.
Through a recent decision in Deepak Chowdhary v.PNB Housing Finance Ltd. & Ors, the Haryana Real Estate Regulation Authority (“HARERA”) delivered a significant order vis-à-vis the status of lenders (especially banks and Non-Banking Financial Companies (“NBFC”)). It affects those lenders that take over a development project in the event that the original developer is unable to repay his debts to a financial institution.
Such financial institutions will now assume the status of a promoter under the Real Estate (Regulation and Development) Act, 2016 (“RERA”), thus making them liable to protect the rights of allottees. Further, the lenders are not permitted to auction and sell the project or land, as the case may be, without first obtaining the consent of two-thirds of the allottees as well as a Real Estate Regulatory Authority. This Order will have far-reaching consequences for all the financial institutions that are a source of “bailout credit” to real estate development agencies.
In the author’s opinion, the decision of the HARERA is flawed with a glaring contradiction – the scope of lenders and promoters are fundamentally different and any effort to create an overlap renders the Order vulnerable to future challenges. Consequently, the direction passed by the authority mandating certain approvals from the allottees and HARERA before selling the land/project creates an inherent conflict between the RERA and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”). According to the author, the erroneous reading of RERA and the obstruction of the financial institutions’ ‘right to enforce securities’ under SARFAESI call for a review of this decision.
Lenders and Promoters: The Conflict
HARERA, through its decision, has deemed lenders as promoters via Section 2(zk)(i) of RERA, by which a promoter is defined as “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”. HARERA has placed reliance on the term ‘assignees’, stating that lenders that takeover projects from the developers in essence transform to assignees of the developers as they ‘cause the construction’ of the project.
Firstly, a bank or a non-banking financial institution that advances a loan cannot be said to have caused the construction of the project in question. The purpose behind extending a loan to a developer in distress is to lend and generate interest on the same, not to construct the land and project – construction still remains the onus of the developer. In Bikram Chatterji v. Union of India, the Supreme Court held that if the real estate business has to survive in India, the builders must be answerable and liable to the homebuyers, authorities and the bankers. Further, in Ferani Hotels Private Limited v. the State Information Commissioner, Greater Mumbai, the Apex Court held that a major public element of RERA is of “making builders accountable to one and all.” This clearly emphasizes the fact that promoters and lenders can under no circumstance be considered as overlapping.
Secondly, the definition of ‘assignment’ is the transfer of either the whole or part of any property, real or in action or in rights. This by no means translates to the inclusion of banks as assignees of the promoter – a loan cannot automatically impose the obligations of a borrower on a lender. Should this logic be accepted, banks will have to step into the shoes of each and every individual that borrows monies from them.
HARERA also used the argument that the developer in effect assigns his rights to the lender by way of mortgage loans, thus bringing the transaction under the purview of an ‘assignment’. This line of reasoning is based on an erroneous reading of the law, as Section 11(4)(g) of RERA expressly states that the payment of mortgage loans is an obligation of the promoter. This clearly portrays the fact that the title of promoter does not transfer to a lender.
Thirdly, it must not be forgotten that Section 2(d) of the National Housing Bank Act, 1987 reaffirms the true purpose of house financing companies that turn lenders in such situations – entering into transactions of providing housing finances. A cumulative reading of this Act as well as the regulations of the Reserve Bank of India shows that lenders are categorically separated from promoters.
Lastly, it must be noted that had the legislature intended to include lenders within the scope of promoters, there would have been no separate provisions mandating the disclosure of mortgages, liabilities, interests etc. by the promoters, like section 4(2)(l)(B) of RERA . Section 4(2)(b) also calls for a detail of all past real estate projects carried out – a clear indication that lenders such as banks were not envisaged to come within the scope of a promoter. Furthermore, Section 15 of RERA expressly deals with the transfer of a promoter’s rights to a third party. This section clearly states that such a transfer is based on the caveat that the intending promoter does not take any extra time to complete the real estate project. A simple interpretation of this indicates that the legislature could not have deemed banks and NBFCs as suitable parties to complete the project. As held in Nathi Devi v. Radha Devi Gupta, the main interpretative purpose of Courts is to ascertain the true intent of the legislature. Therefore, the words ‘causes to be constructed’ and ‘assignee’ cannot be read in isolation but must be realigned with the remaining provisions of RERA to determine the intention of the Act.
Section 9(d) of SARFAESI provides that the relevant company can take the requisite measures for the enforcement of their security interests. Should banks and NBFCs be considered as lenders under RERA, it would constitute a direct overlap and conflict between the two acts.
MahaRERA, via a circular dated 8.11.17, has divided the procedure of transferring the status of a promoter to a third party into two different avenues. First – when the transfer is being initiated by a promoter, the promoter must seek permission of two-thirds of the allottees as well as the concerned authorities. Second – when the transfer is being initiated by a third party like financial institutions for the enforcement of security, no such permission is required. There is simply an obligation to notify the concerned authorities and allottees of such a transfer.
Further, it is more important to note that HARERA itself issued a circular to the same effect. In both the above circulars, when the process of transfer of the promoter’s rights occurs, the banks and other financial institutions simply act as an intermediary to facilitate the process. By no means do the financial institutions assume the role of the new promoter while simply enforcing their securities by following SARFAESI.
It would be important to note that any hindrance to the enforcement of securities by financial institutions goes against the very spirit of SARFAESI. By way of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, the legislature has added Section 26E to SARFAESI which mandates that irrespective of any other law in force, the debts due to secured creditors must be given utmost priority. This clearly places financial institutions on a higher pedestal. In Xander Finance Pvt. Ltd. v. Trivesh Pooniwala, the Maharashtra Real Estate Appellate Tribunal actively recognized the right of the financial institution as a mortgagee for enforcement of securities. Any registered mortgage deed in the favor of a financial institution is enough to grant the financial institution the right to recover its loan under Section 13 of SARFAESI concerning the provisions of enforcement.
In an attempt to safeguard the rights of allottees by mandating two-thirds permission for financial institutions to dispose of lands/projects to recover their loans, HARERA has erroneously classified lenders as promoters. This decision will have significant implications with regards to the interplay between SARFAESI and RERA, making itself vulnerable to several challenges. However, it must be recognized that there is some element of ambiguity with regards to the conflict between the rights of allottees and financial institutions. It is imperative that the Supreme Court steps into the matter and strikes an effective balance between the two sides of the spectrum. This resolution must be done in a manner that not only helps protect the rights of allottees for which RERA exists, but also must promote the right of financial institutions to enforce their securities. Nevertheless, in the author’s opinion, the classification of financial institutions or lenders as promoters is not the answer.