It is not always a
setback for property buyers because the project may get completed faster.
AMIT SHANBAUG
Last month, the State
Bank of India (SBI) took over a housing project in Kolkata because the
developer had defaulted on repayment of dues to the tune of Rs. 176 crore. The Teen Kanya project was
promoted by the Bengal Shelter Housing Development, a joint venture in which
the state housing board has 49 % stake. Therefore, its repossession by the SBI
has come as a shock for the 400 odd
families that have invested in the project.
Most of the buyers
had put money in the project because the state housing board was involved. The
project is only half complete and the investors are now contemplating legal
action to safeguard their investments.
The incident brings
into focus the RBIs (Reserve Bank of India) decision to stop builders from
offering 80 : 20 schemes. Under these schemes, the buyer services only 20
% of the loan for the property while the
developer / builders pays the interest on the balance till the property is
ready. The RBI warned that if the developer / buillder defaults on the interest
payment, the buyer would suffer because the home loan was in his/her name.
What are the options
available to a buyer if a lender repossesses a property due to default in
payment Legal experts and housing professionals contend that the lender does
have first right over the project.Let us look at the issues involved.
When can a lender
take over a real estate project?
When they take a
loan, developers / promoters need to provide personal or / corporate guarantee
& other securities. These securities are called mortgage to lender. In case
of real estate developers, the security is the property being developed.
If a developer
defaults on repaying the instalments towards principal or / interest and the guarantor also fails to
fulfill his commitment, the bank has every right to take over the project from
the developer, says Mr. Shobhit Agarwal, Managing Director, Capital Markets,
Jones Lang LaSalle India (JLL India).
What are the legal
options before the property buyer?
According to Vinod
Sampat, a Mumbaibased lawyer who deals with property cases, the buyers need to
first verify when the property was mortgaged to the bank. Many a times, the
developer/promoter has the title to the plot of land & takes a housing loan from the financial
institution to fund the construction of the housing project. In that case, the
land and its original documents are kept as mortgage with the bank against the
home loan, he says. The bank then issues a no-objection certificate to the
developer for the sale of flats in the project to recover its loan.
All the clauses are
mentioned in the agreement the home buyer signs with the developer / promoter.
One must read all the clauses at the time of booking the property, he adds.
However, a developer
/promoter can not mortgage the project after he / she has sold off the
apartments.If he has done so,it amounts to cheating and a criminal case can be
filed by the buyers against him.When the investor is already the owner of the
property, how can the developer mortgage it to another party
The buyers ownership
rights are protected in this case, says Mr.
Sampat. However, if the developer / promoter had mortgaged the property
before the flats were sold, the buyer will be in a soup. Therefore, it is vital
to check the property documents carefully to see whether the property has been
mortgaged to a bank. Now you know why banks insist on seeing all the property
documents before they disburse a housing loan.
Does repossession
mean trouble for property buyers?
On the face of it, it
appears that repossession of the property will hurt the interest of the
property buyers. However, if the construction has got delayed because the
builder was facing a cash crunch, then repossession by the lender actually
benefits the buyer. The funding issue could get resolved because after taking
over the project, the lender would want to sell it at the earliest to recover
its dues.
The bank can either
sell the property to another developer or / appoint a contractor and complete
the project. Either way, the buyer may get possession of the purchased property
quickly, adds Mr. Agarwal.
mr. Ram Sangapure, GM
at the Central Bank of India (CBI),explains that banks take possession of a
property when the developer / promoter defaults on payments for several months
and the loan becomes a non-performing asset.As the lender to the project,the
bank has full right to sell the property to recover its capital, he says. There
is no restriction on the bank completing the project by itself. In case it
finds a buyer for the property, it can even sell it at the under-construction
stage itself. Normally, banks do not want to get involved in construction
activity & just take the project
under their possession. When this happens, all activities come to a standstill,
says Mr. Sangapure.
The bank then
assesses the situation & suggests corrective measures. It can even suggest
a change in the management if it feels that the present management is
incompetent & wont be able to complete the project on schedule, he says.
It could also opt for
a few other measures such as restructuring the home loan, which means either offering more money
against additional collateral or /
increasing the loan tenure.The bank could even infuse fresh funds into
the project if it feels that it would help the project get completed and enable
it to recover its money, he says.
What should the
property buyers do?
The rights of the
property buyer do not change with the
change in ownership of the project. The buyers can opt for paying the remaining
dues to the new owner, in this case the bank, and get possession once the
project is completed. In case a buyer
wants to sell the property, there is no restriction on doing so.
If the buyer has
taken a home loan for the property, he needs to ensure that his /her EMIs are paid on time.If there is no default
on payment of instalments, he will continue to enjoy all his original rights.
Src: ET Wealth
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