Profit sharing model

In the case of Mrs. Jesleen Kaur Papneja v. Raheja Developers Limited, a joint development agreement was executed between the developer and the landowner wherein the developer had agreed to develop the land and share profits with the landowner in the ratio agreed under the agreements/memorandum of understanding executed between them. The Hon’ble National Company Law Tribunal, Principal Bench, New Delhi held inter-alia thatthe aforesaid transaction was not in the nature of operational debt. It was observed that there may be a variety of real estate development contracts under different names which can be entered upon which may have a component in the nature of a loan (like collaboration agreements, joint development agreements) the purpose of which is the mutual binding legal relationship in exchange of consideration. It was held that such agreements cannot come under the purview of operational debt and what has to be seen is the real intention between the parties.

In the case of Mukesh N. Desai v. Piyush Patel, the question surrounding the status of landowners as financial creditors under the Code was dealt with. The Hon’ble National Company Law Appellate Tribunal (“NCLAT”) observed that in case of a land owner who is entitled to receive profits in the event of success of a project and receive residual gains, the amount invested in the land cannot be said to be ‘financial debt’ for the purposes of the Code.

The Hon’ble NCLAT further observed as under:

“The MoU entered into is an Agreement of reciprocal rights and obligations. We are of the earnest view that both parties being ‘Joint Development Partners’ who entered into a consortium of sorts for developing the subject land and for any breach of terms of the contract, Section 7 Application filed under the Code would not be maintainable as the amount cannot be construed as ‘Financial Debt’ as there is no sum(s) i.e., owed, assigned or transferred to in compliance of the provisions of Section 5(8) of the Code.”

Built-up area sharing model

NCLAT has also turned down the status of landowners as financial creditors under the Code in cases where landowners had been issued allotment letters for flats/commercial premises under the built-up area sharing model. In the case of Namdeo Ramchandra Patil & Anr. vs. Vishal Ghisulal Jain & Anr, the Hon’ble NCLAT observed that the provisions of Section 5(8)(f) explanation (i) and (ii) make it clear that the pre-condition for a debt being a financial debt is disbursement against time value of money and when any amount is raised from an allotment, such transaction is also covered under Section 5(8)(f) of the Code. The pre-condition for application of explanation (i) of Section 5(8)(f) of the Code is raising of an amount from an allottee, however, the present case was not the case where the amounts had been raised from landowners. Therefore, the landowners were not considered as allottees within the meaning of Section 2(d) of RERA and their claim was not classified as financial debt for the purposes of the Code.

The aforesaid position is also strengthened by the circulars issued by the Maharashtra Real Estate Regulatory Authority stating inter-alia that individuals/organizations like land owners or investors who enter into arrangements with a developer and are entitled to a share of the total area developed for sale are promoters for the purposes of RERA.

The rights of landowners under a development agreement wherein the developer was undergoing corporate insolvency resolution proceedings were also deliberated upon in the matter of Smti. Aditi Bezbaruah, vs Mr. Kamalesh Kumar Singhania, and Ors. The resolution applicant had, under the resolution plan, committed to honour the terms of the development agreement executed between the landowners and the corporate debtor (developer) subject to inter-alia no penalty being payable to the landowners. The Hon’ble NCLAT observed that delay in implementation of development agreements executed between the landowners and the corporate debtor (developer) was due to the inactions of the corporate debtor and the resolution applicant cannot be held responsible for such a delay and consequently cannot be held liable to pay any penalty to the landowners in view of the fact that the resolution applicant is supposed to start on a clean slate. It was further observed that the resolution applicant was bound to honour all the other terms and conditions of the development agreements executed between the parties.

While it becomes amply clear from the aforesaid judgments that landowners have not been categorised as either financial creditors or operational creditors under the Code, a view may be taken that the rights, title and interest of a landowner in the property do not get extinguished by virtue of approval of a resolution plan by the adjudicating authority. This is similar to a scenario where leasehold rights in a property, being title claims/rights, survive the resolution of a corporate debtor pursuant to completion of corporate insolvency resolution proceedings.

While deciding an application made by UTI Employees Sai Samruddhi Cooperative Housing Society seeking rejection of the resolution plan and passing an order initiating liquidation in the matter of IDBI Trusteeship Services Limited vs. Ornate Spaces Private Limited, the Hon’ble National Company Law Tribunal, Mumbai Bench observed that it is trite law that no person can pass any title/rights better than it has.

In view of the above, it may be inferred that the title claims of landowners in respect of the subject property under a development agreement continue to subsist even after the expiry of the period of moratorium instituted against a corporate debtor. The resolution applicant that has taken control of the corporate debtor pursuant to approval of the resolution plan by the adjudicating authority would be obligated to comply with the terms of the development agreement executed between the landowner and the corporate debtor and the resolution applicant will be liable to honour the built-up sharing/profit sharing arrangement as may be contractually agreed under the development agreement executed between the parties.

This article was originally published in Financial Express on 4 December 2023 Co-written by: Bhoumick Vaidya, Partner; Sona Phogaat, Associate. Click here for original article

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