The enactment of the Real Estate (Regulation and Development) Act, 2016 (RERA), and the Insolvency and Bankruptcy Code, 2016 (IBC), were welcome reforms and well-received by stakeholders in the real estate industry including lenders and homebuyers. While the biggest beneficiaries of the RERA remain allottees and homebuyers, lenders were also happy and welcomed the enactment as it put in place checks and balances from the lenders’ perspective, ensuring completion of the real estate projects, enabling sales and hence the repayment of loans to lenders. The IBC on the other hand was also modified to include specific provisions to include homebuyers as creditors and hence enabled them to participate in resolution proceedings against real estate developers.
Homebuyers and lenders have been at loggerheads for some time now over recovering their respective properties and debts from defaulting real estate developers. While the judiciary has recently been sympathetic to the homebuyers as has been reflected in some recent judgements, the lenders have always been in a better position owing to the security over real estate projects created in their favour. Lenders have also had the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI) to safeguard their interest, while the RERA was enacted to protect the interests of homebuyers. The most recent dispute between the two groups also arises from these two enactments.
In the case of Union Bank of India v Rajasthan Real Estate Regulatory Authority, the High Court of Rajasthan analysed the situation of a lender being categorised as a promoter under the RERA on the enforcement of a security interest by the lenders pursuant to the SARFAESI, and held that a lender that has enforced security interest under SARFAESI would be treated as a promoter for the purposes of RERA. Therefore, the homebuyers could apply to the RERA and initiate proceedings against such a lender.
The high court relied on various matters in coming to its judgment. One of the aspects that the court analysed in detail was the rights of lenders under section 13(4) of the SARFAESI, which include taking over possession of the secured assets, taking over management of the business of the borrower, the appointment of any person to manage the secured assets and the ability to require any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay to the secured creditor so much of the money as is sufficient to pay the secured debt. The court held that the rights under section 13 (4) are all in the interest which originally vested in the borrower and therefore, on the enforcement of security interests, the lender steps into the shoes of the borrower. The court further held that this is thus the assignment of the rights of the borrower to the lender by operation of the law.
The court also analysed the definition of promoter under the RERA and concluded that the definition not only includes the entity that constructs or causes to construct the property but also its assignees. The court further relied on the judgment of the Supreme Court in the case of Bikram Chatterji v Union of India, in which it was held that in the event of conflict between the RERA and SARFAESI, the provisions contained in the RERA would prevail.
The judgment could have far-reaching consequences as lenders that are banks and financial institutions are wary of being categorised as promoters under RERA. While it should be noted that the judgment of the high court could be appealed to the Supreme Court, which seems very likely, for now the arguments seem to have tilted in favour of the homebuyers. The orders of the courts, including the Supreme Court, have stressed the importance of protecting the interests of homebuyers and lenders need to be mindful of this at various stages including the enforcement of their security.
Aditya Vikram Dua (left) is is a principal associate and Aniket Sawant is a senior associate at SNG & Partners
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