Buyers, banks on the same side

The Supreme Court’s verdict placing the interests of homebuyers above those of banks when a business fails to repay bank loans and surrender possession is welcome. It upholds the decision of the High Court of Rajasthan to hold banks liable under the Real Estate (Regulation and Development) Act (Rera), if legal action is taken against them by landlords. The law allows a buyer to claim reimbursement of the amount paid as well as compensation for the interests of a developer who defaults and delays possession of the property. And if the buyer wants the house and not a refund, the developer must pay interest for each month the buyer is late until the buyer takes possession. The court rightly held that in the event of a conflict between the Rera and the recovery procedure under the Securitization and Reconstruction of Financial Assets and Enforcement of Collateral Act (Sarfaesi), the former will prevail.

Banks lend to property developers. When a bank grants a loan to a promoter for, for example, a residential project, the project is mortgaged to it. The developer advertises the project and collects money from buyers who, in turn, take out loans from banks against the mortgage of their apartments. Whenever the developer sells parts of the project, he is supposed to deposit the sale proceeds with the lending bank, which releases the charge on the property sold to the buyer. But the system doesn’t seem to work that way. Project financing must ensure that home buyers are free from any encumbrances created for the construction of their apartment.

The court held that claims against banks can be brought before the Rera if the lending bank has taken possession of the project as a secured creditor, following the default of the promoter. Quite rightly, the bankruptcy code treats homebuyers as financial creditors. Rera and Sarfaesi must be interpreted consistently to protect owners’ interests and ensure that banks collect their claims from defaulting developers. Builder’s bankers and homebuyers must be on the same side rather than either-or.