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All about trust deficit in the real estate market, absence of disclosure standards and uniform contract and other matters

In mature real estate markets, sellers are made to sign a Disclosure Form that contains a clause penalising the seller if it is later discovered that he knowingly lied about or concealed significant facts.

Rakesh Mehra was promised nothing less than the moon for an under construction property in Greater Noida when he visited the project site. The sales team offered a deal that was hard to resist. He was told that all that he needs to do is make an advance payment of Rs 2 lakh right away.

The underlying verbal commitment was that if he ever wished to exit after the due diligence and/or unavailability of a unit of his choice in the given property, the advance payment made by him would be fully refunded. Later, he was advised by his lawyer that he should not invest in the property as the developer had dues pending with the Greater Noida Industrial Development Authority. But when he informed the sales team of the developer about his inability to go ahead, they deducted Rs 50,000 from the booking amount.

This is not a stray incident. Srikanth, another buyer, had a similar experience with a Gurugram-based developer when he wished to sell his much-delayed under-construction property due to a medical emergency in the family. The developer refused to transfer the property in the name of the new buyer. He instead offered to buy back the property at the same price that he had booked the apartment. The only choice before Srikanth was to either forget about any appreciation or go in for a costly and lengthy litigation.

The woes of homebuyers do not end here. In several cases across the Delhi-NCR property market, builders don’t even make an upfront payment when they buy back at the discounted rates. They are silent on the term sheet of repayment and insist that once the unit is resold, then only would they refund the earlier buyer.

What is even more worrisome is the escalation clause that the builders often invoke mid-way and threaten to halt construction due to input cost price hike. Today, when the input cost hike is a real challenge confronting the sector, this clause is back in the reckoning not just as an exception but the rule. A poor home buyer who somehow manages to pay both the rent and the EMI is suddenly asked to shell out a few additional lakhs of rupees.

Needless to say, the genesis of all these real estate malpractices lies in the ‘Unfair Contract’ that the builders conveniently get away with. The violation of settled principles of law is seldom challenged by the cost conscious buyers who are apprehensive of lengthy and costly litigation. The Supreme Court in a recent judgement has also pointed out the buyers’ travails when it comes to lengthy and expensive legal battles against the builders.

Advocate Nirmit Srivastav, who is handling many cases of unfair contracts against builders calls it a disease of the housing market. He suggests that whenever there is any kind of discrimination against the home buyer and the builder is placing himself on a higher pedestal, it is an unfair contract.

“Under Section 47 (1) (2) of the Consumer Protection Act, if an unfair contract has been executed, the buyer can get it declared null and void. The power to declare it null and void lies with the State Consumer Commission, if the total sale consideration is less than Rs 10 crores. If the consideration is higher than Rs 10 crores, the buyer can approach the NCDRC. The builder may also have to pay a penalty and adequately compensate the buyer, at the rate of 15%-18%,” said Srivastav.

The real problem is that buyers are kept in the dark about the terms and conditions of the contract till they make a sizeable payment to the builder. The Builder-Buyer Agreement is mostly never showcased and by the time the buyer gets a copy of the contract he is in the vicious cycle of payment and/or compromised refund.

The Supreme Court has categorically called for a uniform Builder Buyer Agreement to ensure uniformity in the real estate contracts across India. It has been argued before the Supreme Court that the builders use arbitrary one-sided agreements that do not place customers at an equal footing, which violates Articles 14, 15, 21 of the Constitution of India.

The irony is that even when the project is delayed or possession is denied for whatever reasons, in most of the cases local police find its hands tied to register an FIR against the builder due to arbitrary clauses of the agreement.

In an ideal scenario the police should immediately file an FIR against criminal conspiracy, fraud, cheating, criminal breach of trust, misappropriation of property and violation of corporate laws. It also violates one’s fundamental right to life and livelihood. The issue has come up before the Supreme Court multiple times and till date it is in the corridors of official uncertainty.

The only way the real estate market in India can ‘clean up’ its act is through an institutional mechanism of disclosure standards. What precisely are disclosure standards? Is it different from RERA documents uploaded by the builders? In most matured economies of the world, there is a specific ‘Disclosure Form’ that a seller has to sign. It contains a clause that penalises the seller if it is later discovered that the seller knowingly lied about or concealed significant facts.

Disclosure Standards are definitely different from the present declaration under RERA where each State has its own set of RERA rules. Disclosure Standards are more like the stock market transparency index where the attached Risk Factors are clearly defined. It is all about the buyers’ awareness with the product disclosure, land disclosure, pricing disclosure, price fluctuations, legal and/or future legal issues etc.

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Ravi Sinha is CEO, Track2Realty.
first published: May 14, 2022 08:27 am