VIRUS SHAKES “REAL ESTATE” FOUNDATION

April 23, 2020 yazdi1 Comment

The Real Estate sector in India has been experiencing a downturn for quite some time. Severe liquidity crunch has plagued this sector and so have policy reforms, legislations and structural changes. These issues were merely the tip of the iceberg, as the Covid – 19 virus opened up a new front for the real estate sector.

Propelled by the burgeoning crisis, the Confederation of Real Estate Developers Association of India (“CREDAI”) requested the Ministry of Housing and Urban Affairs to include Covid -19 as a condition of force majeure under Section 6 of the Real Estate (Regulation and Development) Act, 2016 (“RERA”) and that loans by real estate developers should not be classified as Non-Performing Assets in case of default on interest or principal repayment.

Force Majeure under RERA

Section 6 of RERA provides that if an event of force majeure (i.e. a case of war, flood, drought, fire, cyclone, earthquake or any other calamity caused by nature affecting the regular development of the real estate project) occurs, then on an application made by the promoter, the authority after considering the facts of the particular case (including that there was no default on the part of the promoter) can extend the registration for not more than one year.

It can be argued that Covid – 19 could possibly be included in “any other calamity caused by nature” in the explanation to the section. It is pertinent to note that Ministry of Finance, Department of Expenditure Procurement and Policy decision vide its office memorandum dated 19^th February, 2020 clarified that the disruption of the supply chain as result of the spread of corona virus should be considered as a case of “natural calamity” and force majeure clause may be invoked.

The above section merely enjoins a delay in the performance of the contract and does not release the developer from its contractual obligations. The above section also makes it abundantly clear that facts of each case would be considered separately, and decisions taken. The period of extension in the case of Covid – 19 could possibly be not more that 3 to 4 months.

Various remedial steps taken by statutory and regulatory authorities to alleviate the difficulties of the Real Estate Sector

Ø The Maharashtra Real Estate Regulatory Authority vide an Order dated 2^nd April, 2020 inter alia relying on section 6 of RERA, extended the period of validity for registration of MahaRERA Registered projects where completion date, revised completion date or extended completion date expires on or after 15^th March 2020 by three months. Further, the time limits of all the statutory compliances, which were due in March / April / May was also extended to June 30, 2020.

Ø The Karnataka Real Estate Regulatory Authority vide a circular dated 4^th April, 2020 extended the period of validity for registration of K-RERA Registered projects where completion date (including revised completion date) expires on or after 15^th March 2020 by three months. Further, the time limits of all the statutory compliances, which were due in March / April / May was also extended to June 30, 2020.

Ø The Uttar Pradesh Real Estate Regulatory Authority on 14^th April, 2020 has decided to extend by three months the date of completion of the projects where the date of completion is between March 15, 2020 and December 31, 2020.

Ø The Reserve Bank of India (“RBI”) vide a press release dated 27^th March, 2020 has directed all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. Further, in respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions have been permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 1, 2020. It has also been clarified that moratorium/deferment provided will not result in asset classification downgrade.

As per the statement of the Governor (RBI) dated 17^th April, 2020, it has been decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm will exclude the moratorium period. Further, the RBI allowed non-bank financial companies to extend the date for commencement of commercial operations (DCCO) for loans given to commercial real estate by additional one year, over and above the one-year extension permitted in normal course, without considering it as restructuring. Banks had been directed to provide similar relief earlier.

Ø The Securities Exchange Board of India vide a circular dated 23^rd March, 2020 has extended the due date for regulatory filings and compliances for Real Estate Investment Trusts and Infrastructure Investment Trusts for the period ending March 31, 2020 by one month over and above the timelines, prescribed under SEBI (Infrastructure Investment Trusts) Regulations, 2014 (InvIT Regulations) and SEBI (Real estate Investment Trusts) Regulations, 2014 (REIT Regulations) and circulars issued thereunder.

Relaxation on Construction activities

By an Order dated 15^th April, 2020, the Ministry of Home Affairs has issued detailed guidelines for allowing certain additional activities to be undertaken from 20^th Aril, 2020 in non – containment zones (containment zones are required to be demarcated by the respective States and Union Territories) across India, subject to all preparatory arrangements with regard to social distancing being implemented. One of these additional activities include certain construction activities which are as follows:

Ø Construction of roads, irrigation projects, buildings and all kinds of industrial projects, including MSMEs, in rural areas, i.e., outside the limits of municipal corporations and municipalities; and all kinds of projects in industrial estates.

Ø Construction of renewable energy projects.

Ø Continuation of works in construction projects, within the limits of municipal corporations and municipalities, where workers are available on site and no workers are required to be brought in from outside (in situ construction).

Each State and Union Territory in the country will decide in which areas and to what extent the above activities can be allowed. However, this may relieve some pressure from the real estate sector. It remains to be seen whether real estate hotspots like Mumbai, Delhi and Bangalore will be permitted to allow construction activities considering that they are Covid-19 hotspots as well.

As can be seen from the above discussion, the situation with respect to Covid -19 is dynamic, and the real estate sector paradigm is bound to change as a result. Therefore, we will keep you updated in case of any further decisions, measures, notifications by the Government and other authorities with respect to the real estate sector.

We trust that the above update is helpful for you. If you require any further clarifications, please feel free to contact us.

Zerick Dastur <zerick@zdlegal.com>

Impact of RERA on Redevelopment and Self Redevelopment

November 17, 2019November 17, 2019 yazdiLeave a comment

An interesting article by Ramesh Prabhu in the November 2019 issue of MSWA’s Housing Society Review

Click Here for Impact of RERA on Redevelopment

Another interesting article by S Parthasarathy in the above issue on the same topic

Click Here for RERA updates

Housing society is promoter for redevelopment of its buildings

April 16, 2018 yazdiLeave a comment

Kamlesh Bhuvan CHS in Chembur had entered into a redevelopment agreement with Mahavir Enterprises for redeveloping its dilapidated building. There was also a tripartite agreement between the society, each member and the builder for allotment of flats in the re-developed building. It was agreed that each member would get additional space of 20% in the new building. The society also took a bank guarantee of Rs 50 lakh from the builder.

However, the builder defaulted in handing over possession of the flats on time and also failed to pay compensation for alternate accommodation for the period of delay. A member of the society Padam Chandiramani, filed a complaint before the Additional Mumbai Suburban District Forum against the builder—Mahavir Enterprises—through its partners D Gala and K Shah as well as against the housing society.

The builder contested the complaint. He stated that the keys to the flats of all the original 12 members, including Chandiramani, had been handed over to the society but the society had failed to hand over possession to its members. He argued the society had an obligation to ensure that all its members would get possession of the flats within 24 months, but had failed to do so. The society did not care to contest the case.

The forum held that the builder as well as the society were jointly and severally liable to put Chandiramani in possession of her flat, and ordered delivery of the flat within two months. Additionally, the builder was also ordered to pay compensation at the agreed rate of Rs 25 per sq ft per month along with 10% interest. Further, litigation costs of Rs 5,000 were awarded.

The builder and the society challenged this order in appeal. The state commission observed a co-operative housing society would come within the ambit of the definition of a promoter, developer and builder as it has promised it give possession of flats to its members in the redeveloped building.

Accordingly by its order delivered on April 12 by Justice A P Bhangalae for the bench along with Usha Thakare the Maharashtra State Commission modified the order passed to apportion the liability between the builder and the society If held that the builder would be liable to pay Rs 25 per sq ft to Chandirarmani for the period of delay till the date of handing over keys to the society, and thereafter, the society would be liable to pay the same amount of compensation for its failure to put Chandiramani in possession.

Jehangir Gai

(The author is a consumer activist and has won the Govt. of India’s National Youth Award for Consumer Protection. His e-mail is jehangir.gai.columnist@outlook.in)

Click Here for the full order

DAILY CLINICS PROGRAMMES in Mumbai

September 9, 2017 yazdiLeave a comment

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Can’t tax redevelopment payment to flat owner

August 28, 2016August 28, 2016 yazdi1 Comment

ITAT: Can’t tax redevelopment payment to flat owner

Compensation received by a flat owner of a cooperative housing society , from a redeveloper cannot be taxed in his hands, according to a recent order of the Income-tax Appellate Tribunal’s (ITAT) Mumbai bench.

The ITAT noted this compensation was towards the hardship which the flat owner would face owing to the redevelopment. It held such compensation to be in the nature of a “capital receipt“, which “is outside the scope of income that can be chargeable to tax“. In other words, such compensation cannot be subject to income-tax.

This landmark order, whi ch relates to the I-T implications for a flat owner, will help taxpayers facing similar litigation. Management committees of co-operative societies, especially in Mumbai, will also find it easier to persuade their members (flat owners) to agree to undertake redevelopment, as I-T-related anxieties will ease. However, the ITAT held that another sum of money rece ived by the flat owner for payment of rentals while the redevelopment work was ongoing would not be taxed only to the extent it was actually utilised for rent payments. Any surplus would be treated as `income from other sources’.It would be added to the taxable income of the flat owner and the applicable I-T slab rate would apply (for income above Rs 10 lakh, the current rate is 30% plus surcharge and cess).

Jitendra Kumar Soneja had received a sum of Rs 22 lakh as compensation from the redeveloper and also another sum of Rs 8.55 lakh for paying rent as he had to vacate his flat while the redevelopment work was ongoing. Both these amounts were credited to his bank account.

As he was unable to satisfactorily explain the reason for not disclosing this sum of Rs 30.55 lakh in his I-T returns for the concerned financial year 2006-07, the I-T officer treated it as `undisclosed income’ liable to I-T. Having lost the case at the Commissioner of I-T (Ap peals) level, Soneja appealed to the ITAT.

Soneja’s counsel submitted to the ITAT that Rs 22 lakh was received as compensation owing to the hardship caused to the taxpayer on account of redevelopment. It was received as a corpus fund, which was a capital receipt and was not taxable. The ITAT took note of this contention and the fact that the compensation relates to a flat, which is a capital asset.

The ITAT did not agree with the views of the I-T department that such compensation was the flatowner’s share in the profits earned by the redeveloper. “One has to see what is the nature of income in the hands of the receiver and not the payer (redeveloper),“ ITAT held.

Going a step further, ITAT stated that while the compensation was a capital receipt and not taxable, it would be reduced from the cost of acquisition of the flat. This would have a tax impact, in case the flat (or rather the redeveloped flat) was subsequently sold.

Capital gains, on which capital gains tax is levied, is the difference between the sale price and the cost of acquisition (or purchase price).If the cost of acquisition is lower, it would result in a higher capital gains base and thus a higher incidence of capital gains tax.

As Soneji had incurred a rent expenditure of only Rs 6.80 lakh as against Rs 8.55 lakh received for this purpose, the balance of Rs 1.75 lakh was held liable to I-T.

Lubna Kably Mumbai:

http://epaperbeta.timesofindia.com/Article.aspx?eid=31804&articlexml=ITAT-Cant-tax-redevpt-payment-to-flat-owner-28082016001099

Redevelopment Alert # 2. Well-Drafted Agreements Don’t Protect Flat Owners

May 29, 2016May 29, 2016 yazdi1 Comment

29^th May, 2016, Mumbai: If the Development Agreement is well drafted, then flat-owners are safe, right? Well-drafted contract documents protect the flat-owners if the builders don’t honour the contract, right? NO, WRONG! A well-drafted agreement doesn’t give you automatic protection; it gives you the LEGAL RIGHT TO FIGHT to dismiss or penalize a non-performing builder… but you will definitely have to wage a legal battle, and your society will be your enemy, not your supporter. Why?

REASON NO. 1: NO SUO MOTU ENFORCEMENT. Law enforcement agencies and courts are not required to actsuo motu to defend your individual legal rights. Therefore, you have to go to great lengths to convince enforcement agencies and/or courts that (a) you have a certain right under the contractual agreement (b) your right has been violated and (c) you (and not just your society) are a party to the contract. Each of these points have to be proved by you, otherwise your complaint is summarily dismissed. Enforcement agencies and courts are not sympathetic to you; at best, they are indifferent, and at worst, they are biased in favour of builders.

REASON NO. 2: FLAT OWNER IS NOT A PARTY IN DEVELOPMENT AGREEMENT. You, the flat-owner, are not the “society” within the meaning of the law. Only the society i.e. the managing committee and more particularly, the office-bearers, have authority to enforce the contract signed with the builder, because the society has signed the contract with the builder.

REASON NO. 3: SOCIETY IS THE LEGAL OWNER OF YOUR FLAT. The law does not recognize you as the “owner” of your own flat; the cooperative housing society is the collective owner of the entire building and compound, and you are only enjoying your flat by virtue of being a member. Therefore, in the eyes of the law, you generally have no “right” to go to court for the enforcement of a contract between the society and the builder.

REASON NO. 4: POLITICS IS NECESSARY. You can only derive your “legal right” with the support of the society. Therefore, you should earn a “political right” to speak and argue. If you are alone or in a tiny minority, or if you are easily silenced, then you have no political right, even if what you say is 100% true. To get justice, you must gather support from other members. If the society’s office-bearers are unwilling to impose penalties, invoke the bank guarantee, or cancel the builder’s contract, then you, the ordinary members, are mostly powerless. Getting the builder dismissed by the society is a political battle rather than just a judicial battle. This battle has to be fought in general-body meetings, and in the minds and hearts of the office-bearers and general body members.

REASON NO. 5: REDEVELOPMENT IS INHERENTLY UNSAFE. A housing society entering redevelopment is like an out-of-control passenger bus with an alcholic driver drinking vodka. Even if everything is perfect at the start of the journey, things can go rapidly downhill at any turn. As a passenger, you may clearly see things going wrong, but you are not in a position to turn the steering wheel or press the brakes.

THE CASE OF KUNDAN APARTMENT, JOGESHWARI EAST

There are many lessons to be learned from the experience of Kundan Apartment, a small building with 15 members in Jogeshwari East, stuck since 2010 due to non-performance of Tanna Developers. Tanna Developers (or Tanna Realtors as per this website) is a partnership firm headed by managing partner Pathik Tanna and represented by Chartered Accountant Jignesh Tanna.

Without verification of Tanna Developers’ credentials or following 79A Guidelines, the society appointed Tanna Developers in 2010. Tanna applied to MCGM’s Building Proposal Department and got the IOD (Intimation Of Disapproval) in October 2010. And after that, the builder just froze. No actions whatsoever. Zero. So, five of the 15 flat owners, in view of the builders’ continuous non-performance over six years, want to oust them.

Redevelopment is inherently painful, like getting your teeth pulled without anesthesia!

CLAUSES FAVOURABLE TO FLAT-OWNERS

1) Kundan Apartment’ LOI says: “redevelopment work shall be completed within 18 months from the date of IOD/Commencement Certificate. On failure the Letter Of Intent shall stand withdrawn and the developer shall not be entitled to claim anything from the society.” Another clause says, “TDR shall be purchased in the name of the society, and upon termination of the Development Agreement/MOU, the said TDR shall be the property of the society”. Read para h of LOI:

2) Stamped and registered DA upholds these clauses. DA confirms that terms and conditions are “more particularly recorded in the Letter Of Intent and the Memorandum Of Understanding”. Read para Y of DA .

3) DA says that “Society… will hand over vacant and peaceful possession of all their respective tenements to the developers… within 15 days from the date of Commencement Certificate.” Read para 3A of DA.

4) Bank guarantee mentioned in DA is Rs 50 lakhs – less than market price of even one flat. DA says that bank guarantee can be invoked by society “on demand without demur and enforceable on the certificate of the said society to the concerned bankers that the developers have not completed the construction within the total period of 24 months…” Read para 23 of DA.

WHY THIS IS GOOD FOR FLAT-OWNERS

a) The society has the upper hand and the contract is subject to a tight deadline. The clauses clarify that Tanna may suffer major losses due to dismissal, forfeiting the cost of TDR, permissions, sanctioned plans, incomplete construction etc. Tanna will not be entitled to claim anything from the society.

b) The 18-month deadline for redevelopment is repeatedly stressed. The bank guarantee can be revoked if the builder does not complete the building in 24 months.

c) DA specifies that society members will give vacant possession only after the Commencement Certificate (CC) is received.So flat owners are still in possession of their own houses – a huge relief.

LOOPHOLES FAVOURING THE BUILDER

a) Development Agreement defines the deadline as 18 months from the date of “IOD-CC”. The loophole is that IOD-CC is not a single certificate of permission, IOD (Intimation Of Disapproval) and CC (Commencement Certificate) are two separate permissions. The builder is required to fulfill dozens of conditions specified in the IOD in order to get CC. Tanna Developers, who failed to perform the necessary actions to procure the commencement certificate, can argue that because they did not get CC, the 18-month clock has not started ticking till date.

Counter-argument no. 1: Whose duty is it to fulfill the IOD conditions and procure the CC? The builder’s. The builders’ non-performance has resulted in their not getting CC… and therefore, they cannot use non-arrival of CC as an excuse.

Counter-argument no. 2: The validity period of the IOD is two years. Tanna Developers was supposed to get CC before the IOD expired on 18^th October 2012. He did not get CC, but if we take the last date of IOD validity, and count 18 months from there, the deadline for completing the redevelopment would expires in April 2014. Since they hadn’t even commenced redevelopment on that date, they breached the contract, and LOI automatically stands withdrawn.

But only five of the society’s 15 members are speaking up against the builders. As a whole, the society has no political will to hold the builders accountable!

b) The society cannot invoke the bank guarantee because Tanna Developers have not furnished the bank guarantee till date, six years after signing the agreement. Far from telling him to furnish the amount, the managing committee held a meeting in 2015 where it agreed to the builder’s demand to reduce the bank guarantee to Rs 21 lakhs! Unless the society i.e. managing committee, certifies that the builder has failed to meet contractual deadlines, nobody else has the full legal authority to say so. Thus, the Tanna Developers may go on delaying with the managing committee’s blessings!

BUILDER HAS HIJACKED SOCIETY’S RECORDS!

Kundan Apartment has a huge problem. With the connivance of the elected managing committee, the builder has seized control of the society’s entire records from 1978 till date — bank account books, minutes books, share register, nomination register etc, society registration certificate, bye-laws… the whole bundle! Therefore, unable to submit the society’s records for inspection, the managing committee was dismissed by the Deputy Registrar of Cooperation in February 2015, and an administrator was appointed. The dismissed managing committee still did not hand over its documents to the administrator. In July 2015, the Deputy Registrar passed orders for search-and-seizure of the documents from the managing committee members, and requested police force for this. In October, the managing committee handed over a tiny fraction of the records and the administrator wrote to Jogeshwari Police Station that their assistance was not required. Then the Deputy Registrar developed amnesia. In response to correspondence from the dissenting society members, he started asking, “What documents? In whose custody?”

Three of the five members opposing the builder were briefly appointed by the Deputy Registrar as the Authorized Committee. Despite their best efforts, the missing papers did not emerge. Within three months, elections were ordered to be held, and the former managing committee is back in the driver’s saddle on current date. So, without the society’s essential records, how to go to court? The society and its members are handicapped.

CURRENT STATUS

While they were in the Authorized Committee, the dissenting members served Tanna Developers a Legal Notice that pointed out that as per the clauses of the DA, LOI etc, their contract automatically lapsed in April 2014, upon expiry of the maximum allowable period within which the construction was to be completed. It can of course be argued that the Authorized Committee is not the elected managing committee of the society, and cannot serve such a notice. But it can be argued on the other side that the words “On failure, the Letter Of Intent stand withdrawn and the Developer shall not be entitled to claim anything from Society” have an automatic effect, and therefore, no fresh resolution or even legal notice of the society was needed to give effect to these words.

At present, neither side is talking to the other. In this atmosphere of mistrust and vengefulness, the residents of Kundan Apartment are anxiously awaiting another monsoon that will drench its cracked RCC beams, columns and plaster. The elected managing committee, which covers the structure with tarpaulin in some monsoons, seems inclined to allow the building to get thoroughly soaked this year, as if to say, “If you don’t want Tanna Developers, we can all go to hell”.

The sad story of Kundan Apartment will not end until the society pulls itself from the grip of this builder, unites its 15 members and calls for fresh tenders from its redevelopment.

ISSUED IN PUBLIC INTEREST

By Krishnaraj Rao

9821588114

krish.kkphoto@gmail.com

Legal Awareness Seminar – Redevelopment, Tenanted Properties & Deemed Conveyance

ImageOctober 29, 2015 yazdiLeave a comment

Implications of VAT/Service Tax on Redevelopment

January 15, 2015 yazdi1 Comment

Whether all receipts in the hands of the Society/ its individual members shall be net of Vat and Service Tax Responsibility/ liability of Society/Its Members towards the same for services rendered to it by professionals/consultants.

Ans. As Society is not providing any Services to the Developer, the Society is not liable to pay Service Tax or VAT on any of the payments receipt by the Society in the form of reimbursements or Corpus Money or Compensations, etc. If the Society is making any payment of Fees to the Professionals or Contractors, then the Society is liable to pay Service Tax @10.3% to the Professionals and Service Tax or Vat to Contractors on such a payment. The professionals and the Contractors would in turn pay the same to the respective Central Government or State Government as applicable.

Responsibility/ Liability towards stamp duty.
Responsibility/Liability of the Society/its individual members towards Stamp Duty, if any, in transition from surrender of existing premises to the Develop to the occupation and registration of the Redevelopedpremises
Ans. Normally, in the cases of Redevelopment, the Stamp Duty and the Registration Charges on surrender of the existing premises to the Developer for the purpose of Redevelopment would be paid by the Developer. Whereas, when the Individual Members receives the Redeveloped Premises from the Developer, he is liable to pay Stamp Duty and Registration Charges on the same. The Stamp Duty payable would be on the cost of construction of the present area of the Premises and on the market value for the extra area received as per the Ready Reckoner Value published by the Government of Maharashtra every year on 1st January.

Click Here for the original story from Accommodation Times

Income Tax Exemption on Tenants under Redevelopment

January 10, 2015January 9, 2018 yazdiLeave a comment

Where a tenant is provided accommodation in the new building on ownership basis, the value of accommodation for the purpose of determining the capital gains shall be the fair market value of the tenancy rights transferred and the cost of acquisition being ‘Nil’, the entire value will be subject to capital gains. However, since the tenancy rights are exchanged for the ownership of a flat, it can be considered as purchase of a residential house by investing the full value of consideration received on surrender of tenancy rights and the tenant would be entitled to claim the reinvestment benefit available under section 54F, subject to compliance of the certain conditions stipulated therein. However, serious difficulties may arise where new premises received in lieu of surrender of tenanted premises are commercial premises, since in such cases the tenant shall not be able to claim the reinvestment benefit available under section 54F as the reinvestment is in a property, other than a residential house. Hence, extreme care should be taken while drafting the agreements so as to ensure that the tenant does not end paying huge capital gains tax on the basis of market value of the tenanted premises upon surrender of tenanted premises for the commercial premises. In such a situation, it is advisable for the tenant to pay nominal consideration to the landlord i.e 120 month’s rent for acquiring ownership rights in the commercial premises.

Click Here for the detailed explanation