Long term agreements of lease to fall under the purview of the Act

While there were multiple schools of thought in respect of applicability of the Act to lease transactions, the same has been put to rest by the judgment of the Hon’ble High Court of Bombay in the case of Lavasa Corporation Limited vs. Jitendra Jagdish Tulsiani and Ors.^[1] wherein it has been held inter alia that long term leases shall fall within the ambit of the Act. On a perusal of the terms of the agreement of lease entered into between the parties, the Hon’ble High Court of Bombay observed that it was apparent that such an agreement was, in its real purport, an agreement of sale. It was further observed that the very fact that more than 80% of the entire consideration amount was already paid and the lease premium agreed was only of Rs.1/- per annum, including the clause relating to the period of lease of 999 years, are self-speaking to prove that, in reality, the transaction entered into by the parties is an ‘Agreement of Sale’ and not an ‘Agreement of Lease’; though it is titled as such. Therefore, it can be noted from the one can ascertain The aforesaid judgment of the Hon’ble High Court of Bombay makes it clear that the real intent of a document cannot be tested on the basis of mere nomenclature of such document and only upon a whole and complete reading of the entire document can the real intention of the parties be ascertained. Further, it was held that by volunteering to register itself under the Act, the appellant had surrendered itself to the jurisdiction of the Adjudicating Authority established under the Act.

Requirement of registration of the project under the Act

Section 3(2)(a) of the Act provides a clear interpretation on the aspect of registration of a real estate project with the Authority thereby stating inter alia that a real estate project is not required to be registered in case the area of the land proposed to be developed does not exceed five hundred square meters or the number of apartments proposed to be developed does not exceed eight inclusive of all phases. The said provision was examined in detail in a judgment passed by the Maharashtra Real Estate Appellate Tribunal in the case of Geetanjali Aman Constructions and Ors vs Hrishikesh Paranjpe and Ors. wherein the interpretation of word “or” used in clause (a) of Section 3(2) of the Act was taken into consideration and it was observed that “or” is to be read disjunctively and not conjunctively as conjunctive reading would make legislative intent redundant and would amount to changing the texture of the fabric which is not permissible in law. As a principle of interpretation of statues, in case the words used by the legislature are unambiguous and clear and are inclined to suggest only one meaning, it is imperative that only that meaning is given to such words.

Change of plans

Section 14 of the Act inter alia restricts the promoter from carrying out any additions or alterations in the sanctioned plans, layout plans and specifications of the buildings or common areas without taking prior written consent of at least two-thirds of the allottees other than the promoter. In the case of Dattaprasad Kamat vs. Lalitkumar Jain, the promoter had failed to take prior consent of the allottees for the subsequent change in plans pursuant to execution of the agreement between the parties and in light of the same, the Authority placed reliance on Section 14 of the Act and directed the promoter to provide to the allottee the booked flat as provided in the agreement. Therefore, the promoter is bound by the contractual obligation to construct the flat as planned and agreed upon between the parties. Further, in the event the sanctioned plans or the layout plans are amended due to change in the existing development control regulations, the prior written consent of at least two-third allottees would still be required to be obtained by the promoter.

Other important issues and observations

Multiple bank accounts

Lately, various developers have succumbed to the practice of opening multiple designated bank accounts for a registered project owing to the fact that at times there might be multiple lenders in the same project although the developer might register the project at one go. However, Section 4(2)(l)(D) of the Act read with the Frequently Asked Questions uploaded on the website of the Authority clearly states that there cannot be more than one designated account in respect of a real estate project or the registered phase of a project. Further, the application form on the website of the Authority for registration of the real estate project also contains only one provision for creation of the designated bank account. Therefore, developers need to be vigilant of the aforesaid practice in order to avoid any penalty being imposed by the Authority in this regard.

Adherence to timelines by promoters

The financial institutions/funds extending facilities to developers for the construction and development of real estate projects, need to be watchful, while conducting due diligence in respect of such developers, of the timelines that has been agreed between the developer and the flat buyers in the project. An occurrence of breach of such timelines agreed between the parties may have a significant impact on the cash flows in the project and in such an event, the same would then be required to be captured in the commercial understanding between the financial institution and the developer in order to ensure that the investment made in the project of such developer is secured at all times.

Change of promoter

The Authority has, vide its Circular No. 24 of 2019 dated 4^th June, 2019, revised the procedure to be followed in the event of a voluntary or an involuntary transfer or assignment of the rights and liabilities of a promoter to a third party in a real estate project. In the case of a transfer initiated by the promoter, it is mandatory to obtain the consent of the Authority along with the approval of two-third allottees in the project. Further, in case of a transfer which is initiated by a third party like a financial institution by way of enforcement of security, the promoter is required to inter alia inform the Authority and all the allottees in the project in accordance with the procedure prescribed therein. In light of the aforesaid, it is pertinent to ensure that the loans advanced by financial institutions and the charge/s created on the project are, at all times,  disclosed on the website of the Authority by the promoter in order to prevent any impediments in the process of enforcement of the security.

Footnote

[1] 2018 (6) Bom CR 172

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