In recent Judgement of Bombay High Court in the matter of A.O Stamp No  22143 of 2019 Goregaon Pearl C.H.S.L. vs. Dr. Seema Mahadev Paryekar & Ors. that  its not a promoter and how this is an erroneous Judgment we shall discuss here.

Let us see first FACTS of the case:  

In an Appeal from Order Appellants  challenged an order passed by Bombay City Civil Court at Dindoshi, Mumbai on a notice of motion. By the impugned order, the Appellant (original Defendant) was restrained from alienating, or creating any third party interest in, the suit flat. This was by way of an ad-interim protection to the Respondents (original Plaintiffs).In the above matter  Appellant had opted for redevelopment of their property, who is a cooperative housing society of about sixty members, who have already handed over possession of their respective flats for redevelopment and are currently said to be roofless. The redevelopment was entrusted by the Appellant society to Respondent No.2 developer (original Defendant No.2) under a development agreement. Under this agreement, the developer was duty bound to complete the project within twenty-two months from the date of receipt of commencement certificate with a three months grace period. The project involved construction of two wings of the new building, Wings A and B. Both wings were to partly accommodate the members of the Appellant society and partly third party purchasers of the free sale component of the project. In pursuance of the agreement, all members of the Appellant society vacated their respective flats by handing over possession to Respondent No.2 developer. Respondent No.2 had executed a bank guarantee in favour of the society in the sum of Rs.5 crores for fulfilling his commitment under the agreement. On or about 17 June 2008, a commencement certificate for construction of the new building was issued by the Municipal Corporation of Greater Mumbai (‘MCGM’) to the developer. Though construction was undertaken in pursuance thereof, it was nowhere near completion even as late as by August 2016, that is to say, even after passage of eight years from issuance of the commencement certificate. In the premises, by their notice dated 16 August 2016, the Appellant revoked the Power of Attorney given by it to the developer for development of the suit property. This was followed by an arbitration petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“Act”) by the Appellant society seeking inter alia appointment of a court receiver for taking over the redevelopment project and completing it. Various breaches on the part of Respondent No.2 developer was alleged in the arbitration petition. These included non-completion of the project within the stipulated period of 25 months, change of plans without the society’s consent and unauthorised construction of two additional floors for which stop-work notice was issued by MCGM. In the meantime, the bank guarantee of Rs.5 crores was invoked and en-cashed by the Appellant society. After various interim orders passed by Bombay High Court on that arbitration petition, finally, on or about 7 July 2017, the parties entered into Consent Terms. Under these Consent Terms, the total liability of the developer was fixed at about Rs.7.62 crores. It was agreed that Rs.2.5 crores would be adjusted, from out of the bank guarantee amount of Rs.5 crores, towards arrears of rent and balance Rs.2.5 crores towards share of profits of the Appellant society. The consent terms provided for completion of Wing A with part O.C. on or before 31 December 2017 with a grace period of three months and completion of Wing B with part O.C. on or before 30 June 2018. The consent terms had a termination clause in the event of breach, if any, on the part of the developer. Post-dated cheques were issued by Respondent No.2 developer in pursuance of the consent terms. Respondent No.2 committed breaches of the consent terms. Not only was construction of A and B Wings not completed within the respective stipulated periods, but even the cheques issued in pursuance of the consent terms were dishonored. This resulted into the Appellant society filing a contempt petition against Respondent No.2. This court passed an order in that contempt petition requiring Respondent No.2 to pay a sum of Rs.5.42 crores in installments, and a bar chart, filed with the affidavit of Respondent No.2, was taken on record requiring completion of construction in accordance with it. Since even this order was breached by Respondent No.2, by their notice dated 9 June 2018, the development agreement and power of attorney were terminated by the Appellant society. Further to this termination, an arbitration petition under Section 9 of the Act was filed by the Appellant, seeking various injunctive reliefs against Respondent No.2. These included a restraint on the Respondent from interfering with appointment of a third party developer and handing over possession of the project to such developer. At the hearing of this arbitration petition, by consent, disputes between the parties were referred to a sole arbitrator, converting the petition under Section 9 into an application under Section 17 of the Act. Even after this reference, there were settlement talks between the parties but nothing came out of those. Finally, by his order dated 17 September 2018, passed under Section 17 of the Act, the arbitrator allowed the Appellant society’s application inter alia allowing the Appellant to appoint a new developer or contractor for completion of the project. Respondent No.2 was restrained from interfering with the redevelopment process through such new developer or contractor. Respondent Nos.3 and 4 herein were appointed as private receivers to facilitate the balance redevelopment; and Respondent No.2 was directed to handover possession of the suit property to these private receivers. The arbitrator inter alia noted the decision taken by the General Body of the Appellant society, which required all its members to be accommodated in Wing B, which was at a much more advanced stage of completion around the time. So far as Wing A was concerned, the Appellant society was to ensure that no third party rights were created in respect thereof by sale of any flat in Wing A to any new purchaser. This was evidently to take care of the claims of Respondent No.2 developer as well as various third party purchasers claiming under him.  This order was carried in appeal under Section 37 of the Act by Respondent No.2. By an order dated 14 December 2018 passed by this court, the appeal was rejected. The learned Single Judge of this court, who heard the appeal, was of the view that the arbitrator’s order was well-reasoned and fully justified. Being dissatisfied, Respondent No.2 carried the matter in a Special Leave Petition (‘SLP’) before the Supreme Court. The Supreme Court, by its order dated 21 January 2019, rejected the SLP. At that stage, considering the fact that some of the flat purchasers under Respondent No.2 developer had also challenged the order of the arbitrator passed under Section 17 of the Act, by a separate order dated 21 January 2019, the court, whilst rejecting the SLP of these flat purchasers inter alia observed that though it found no ground to interfere as the SLP of the developer against the very same order had been dismissed, the third party purchasers were given liberty to approach the arbitral tribunal and seek appropriate remedies, if so advised. (Respondent No.1 herein is also a flat purchaser in the free sale component under Respondent No.2 developer, having the same interest as the flat purchasers, who approached the Supreme Court by their separate SLP.) The flat purchasers thereafter approached the arbitrator by an application seeking modification of his order dated 17 September 2019. The arbitrator, after hearing the parties at length, by his order dated 27 February 2019, rejected the application made by the free sale component purchasers, requiring inter alia Respondent No.2 developer to circulate the order to all third party purchasers with whom flat purchase agreements or other contracts were entered into by the developer. It is in the backdrop of these facts that on or about 30 March 2019, Respondent No.1 herein filed her own suit for specific performance of her agreement for sale with Respondent No.2 developer (agreement dated 8 June 2015) before the City Civil Court at Dindoshi. On her ad-interim application, the City Civil Court passed a temporary injunction, restraining the Appellant herein from alienating or creating third party interest in the flat allotted to Respondent No.1 by Respondent No.2 developer in B Wing of the new building. Being aggrieved, the Appellant moves this court by the present appeal from order.

Following Points noted by the High Court before passing Judgment:

  1. after more than twelve years of entering into a development agreement and after more than eleven years of having surrendered their flats in the old building, sixty members of the Appellant society are still in pursuit of their new accommodations in the redeveloped building.
  2. The new developer or contractor is expected to complete the construction of B Wing and house all sixty members of the Appellant society in flats therein. Balance construction of Wing B is expected to be financed from out of twelve flats, which are comprised in Wing B over and above the sixty flats to be allotted to the members of the Appellant society.
  3. The resistance of Respondent No.2 developer as well as third party purchasers claiming flats in the free sale component of the redevelopment project under the developer, to completion of balance construction by the Appellant society in accordance with the order of the learned arbitrator, has been repelled right upto the Supreme Court.
  4. The question is, in the backdrop of these facts, should the project now be halted, since any restraint on third party rights in respect of flats in Wing B at the instance of a purchaser of free sale component under Respondent No.2 developer is but likely to inevitably result into halting of the project, or should it be permitted to go through. The answer appears to be an emphatic “no”.
  5. The entire scheme of the arbitrator’s order, which has stood the scrutiny of courts right up to the Supreme Court If this scheme has been sustained by all courts including the Supreme Court, there is no reason why it should now be disturbed at the behest of a third party purchaser, whose arguments anyway have already been considered by the Supreme Court, though not at her instance, but at the instance of other purchasers similarly placed as her.

Observation of Court:

  1. At the hearing of this petition, court did inquire of learned Counsel appearing for Respondent No.1 whether specific protective orders should be passed in her favor reserving for her a comparable flat in Wing A of the new building. Learned Counsel, after taking instructions from his client, declines to accept the offer. Learned Counsel insists on protective relief being extended to his client in Wing B alone, since, according to him, balance construction of Wing A is not on the immediate horizon and may take some time. Learned Counsel submits that it is Wing B, which is to be completed in the first instance in accordance with the orders of the learned arbitrator. Learned Counsel submits that since commitment made to his client by Respondent No.2 developer was in respect of a flat in Wing B, he would insist that his client be protected by reserving a flat for her in Wing B and not in Wing A. The court is informed that apart from Respondent No.1, there are various other flat purchasers, with whom Respondent No.2 developer had entered into agreements for sale in respect of flats in Wing B. If the case of Respondent No.1 is treated as a test case and other flat purchasers, who are similarly placed as her, jump into the fray, one can only imagine what the fate of this project would be. The project, after all, has been judicially formulated and has stood judicial scrutiny right up to the Supreme Court; it cannot be allowed to be jeopardized in this manner. Balancing of equities demands that it would rather be in the interest of justice that the project be allowed to go through with all flats for members of the society being provided in Wing B, the few additional flats in Wing B being treated as free sale component for financing the balance construction of Wing B, and protective reliefs be extended to Respondent No.2 developer and all third parties claiming under him including Respondent No.1 herein by injuncting the society from creating third party rights in the whole of Wing A.
  2. In the premises, the impugned order of the trial court deserves to be quashed and set aside and substituted by a suitable protection in favour of Respondent No.1 vis-a-vis Wing A as in the case of other similarly placed flat purchasers. This relief, as noted above, has already been granted by the arbitrator by accepting a statement to that effect from the Appellant society. That, in my opinion, should adequately protect the interest of Respondent No.1 just as it does the interests of other similarly placed flat purchasers.

Law made applicable:

Real Estate (Regulation and Development) Act, 2016 (‘RERA’). Relying on these provisions and in particular, the definition of “promoter” contained in Clause (zk) of Section 2 thereof, learned Counsel submits that the Appellant society is one, who has caused to be constructed a building consisting of apartments for the purpose of selling apartments to other persons and as much as Respondent No.2 developer, it must be treated as a promoter of the project under the provisions of RERA.

Observed by Court while Analyzing the Law:

This court, in its judgment delivered in the case of Vaidehi Akash Housing Pvt.Ltd. vs. New D.N. Nagar Co-op. Housing Society Union Ltd., has  considered a more or less similarly worded definition of “promoter” in Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (“MOFA”) in the context of a similar development agreement, where the landowner society had terminated the agreement on account of breaches of the developer and third party purchasers claiming under the developer had claimed that the society should be treated as a promoter and be asked to complete the project. This court held that there was no privity of contract in such a case as between the society and third party purchasers claiming through the developer. If, for any justifiable reason, the development agreement is terminated by the society and the developer is unable to obtain specific performance of the development agreement as against the society, no third party purchaser claiming under the developer can likewise seek specific performance against the society.  While applying the ratio of  Vaidehi Akash, Bombay High Court in this matter observed as follows:

It is submitted that the Society can at any rate be said to have caused the building of flats to be constructed for the purpose of selling the same, and as a person, who causes such building to be built, is as much a promoter as a person who sells premises in such building.

The Society is the owner of the property and has entered into an agreement with the developers, i.e. Vaidehi, for redevelopment of its property. The redevelopment envisages construction of the Society’s building to accommodate its members and also construction of building/s of flats/premises to be sold to outsiders. The agreement authorizes or entitles the developers to construct such building/s and sell flats/premises therein to outsiders. Such authority or entitlement is to the developers’ account and in their own right, and as an independent contractor. If in exercise of such authority or entitlement, a building is constructed by the developers, it cannot be said that such building is caused to be constructed by the Society within the meaning of Section 2(c) of MOFA.

Held:

Any other interpretation would lead to anomalous consequences, which could never have been contemplated by MOFA. The owners of lands entering into agreements for sale or development agreements with promoters/developers would be held as being subject to all liabilities of a promoter, such as liability of disclosure of plans and specifications, outgoings etc. under Section 3 of MOFA, entering into agreements in accordance with Section 4, giving possession of flats and suffering the consequences of Section 8, forming co-operative societies of flat purchasers under Section 10, and so on. This would be plainly inconceivable.  Prima facie, thus, there is no case to treat the Society, who is merely in the position of an owner vis-a-vis the third party purchasers, as a ‘promoter’ within the meaning of MOFA and foist the obligations of a promoter on the Society in relation to the purchasers.”

The provisions of RERA do not make any difference either. RERA has been introduced to establish a regulatory authority for regulation and promotion of the real estate sector and to ensure sales in the sector in an efficient and transparent manner and to protect consumers of the sector. The definition of ‘promoter’ in RERA, for our purposes, is on similar lines as MOFA. Section 18 of RERA, on which strong reliance is placed by learned Counsel for Respondent No.1, requires promoters to discharge their obligations and provides remedies for the purchasers, without prejudice to the purchasers’ other rights, in the event of the promoters’ failure to discharge the obligations. Section 19, which follows, entitles the allottee to obtain possession of the flat or apartment. Any grievance of the purchaser under RERA is redressed by the regulatory authority appointed under it. None of these provisions either make the owner of the freehold or leasehold interest in the land, who enters into a development agreement with a developer (who, in turn, enters into flat purchase agreements with third parties on the basis of such development agreement), liable for complying with the obligations of the developer under RERA. In fact, if at all there is any doubt in respect of the position of landowners vis-a-vis development projects registered under RERA, particularly where such landowners are entitled to a share in the total revenue generated from sale of apartments, the same has now been clarified by Maharashtra Real Estate Regulatory Authority that only such individuals / organizations would fall within the definition of ‘promoter’ in RERA, on account of being landowners, as would be specified as such at the time of on-line registration with the Authority. It is nobody’s case that the Appellant society is such specified promoter in the on-line registration. Besides, grievance, if any, in this behalf must be addressed to the regulatory authority thereunder, and not to a civil court. There is, thus, no merit in any of the submissions of learned Counsel based on RERA.

Shruti Desai’s Views and Analysis:

The judgement has a wide ramification. This will affect interest of Free Sale component buyers and their rights which are bestowed upon them by Law. It appears that the parties did not pointed out MahaRera- Circular 12 of 2017 of which operating part is under:

Whereas, keeping in view the overall purpose, object and the intention behind enacting the said Act, more particularly various duties, responsibilities and obligations imposed thereby upon the MahaRERA so as to inter-alia bring in (i) maximum transparency in the real estate sector and resultantly to promote it (ii) awareness about the provisions of the said Act and educate general public about nuances of it, it is found requisite by the MahaRERA to issue appropriate clarification and/or explanation, for the better understanding, working and implementation of the said Act and the Rules framed thereunder, as also for the removal of doubts, if any and if at all, in regard to the aforesaid definition of the term ‘Promotor’ contained in the said Act.

Whereas, during the online registration process, especially for on-going projects, it was observed that several developers (who actually obtain building permissions and construct) of the real estate project, have entered into arrangement with individuals/organizations like land owners or investors, by which the said individuals/organizations are entitled to a share of the total revenue generated from sale of apartments or share of the total area developed for sale which are also marketed and / or sold by such individuals /organizations.

Whereas, a careful consideration of the aforesaid definition in the light of the true object and purpose of the said Act leaves no manner of doubt that such individuals/organizations are also covered and clearly fall within the aforesaid definition of the term ‘Promoter’ and as such are Promotors within the meaning of the said terms for the purpose and for the implementation of the said Act and all the rules framed thereunder. They are therefore jointly liable for the functions and responsibilities specified in the Act in the same manner as the Promoter who actually obtains building permissions and carries out construction. Whereas, for the ease of filing online registration application and for the benefit of the consumers it is necessary to distinguish and / or identify whether such Promoter is the land owner, investor or is actually obtaining the building permissions for carrying out the construction and is in fact carrying out construction. Therefore, it is directed that (2) Though liabilities of such land owner Promoter or investor Promoter shall be as co-terminus with the written agreement / arrangement governing their rights in the real estate project, for the purpose of withdrawal from the designated bank account of a real estate project, the obligations and liabilities of all such Promoters shall be at par with each other. (3) A copy of the written agreement or arrangement between Promoters (whether landowner or investor) which clearly specifies and details the rights and shares of each Promoter, should be uploaded on the MahaRERA website, along with other details for public viewing. (1) Such individuals/ organizations who fall within the aforesaid definition of the term ‘Promoter’ on account of being landowners or investors, shall be specified as such, at the time of online registration with MahaRERA. (4) Such landowner Promoter and investor Promoter should also submit declaration in Form B of Maharashtra Real Estate (Regulation and Development) (Registration of Real Estate Projects, Registration of Real Estate Agents, rates of Interest and Disclosures on website) Rules, 2017. (5) Further each such landowner Promoter or investor Promoter, who is entitled to a share of the total area developed, should also open separate bank account for deposit of 7 0%o ofthe sale proceeds reahzed from the allottees of their share. This circular shall replace the MahaRERA Order No MahaRERA/L Al32l20l7 dated 1 lth May, 2017 and shall be effective from 1lth May 2017

In view of the above circular, the affected party that is Free Sale Component buyers must go in Appeal to Supreme Court and get corrective orders as this order will seriously affect the rights of Free Sale Flat Buyers and will give an instrument to builders to go into termination route to defeat rights of the Free Sale Component buyers.

Moreover this will dispirit and discourage flat buyers and to buy such flats and would create serious panic in the Real Estate market.

Shruti Desai

Mumbai

29th October, 2019

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