KOLKATA: Last month, the State Bank of India took over a housing project in Kolkata because the developer had defaulted on repayment of dues to the tune of Rs 176 crore. The Teen Kanya project was promoted by the Bengal Shelter Housing Development, a joint venture in which the state housing board has 49% stake. Therefore, its repossession by the SBI has come as a shock for the 400-odd families that have invested in the project.
Most of the buyers had put money in the project because the state housing board was involved. The project is only half complete and the investors are now contemplating legal action to safeguard their investments.
The incident brings into focus the RBI’s decision to stop builders from offering 80:20 schemes. Under these schemes, the buyer services only 20% of the loan for theproperty while the developer pays the interest on the balance till the property is ready. The RBI warned that if the developer defaults on the interest payment, the buyer would suffer because the loan was in his name.
What are the options available to a buyer if a lender repossesses a property due to default in payment? Legal experts and housing professionals contend that the lender does have first right over the project. Let us look at the issues involved.
When can a lender take over a project?
When they take a loan, developers need to provide personal or corporate guarantee and other securities. These securities are called “mortgage to lender”. In case of real estate developers, the security is the property being developed.
“If a developer defaults on repaying the instalments towards principal or interest and the guarantor also fails to fulfill his commitment, the bank has every right to take over the project from the developer,” says Shobhit Agarwal, managing director, Capital Markets, Jones Lang LaSalle India.
What are the legal options before the buyer?
According to Vinod Sampat, a Mumbaibased lawyer who deals with property cases, the buyers need to first verify when the property was mortgaged to the bank. “Many a times, the developer has the title to the plot of land and takes a loan from the financial institution to fund the construction of the housing project. In that case, the land and its original documents are kept as mortgage with the bank against the loan,” he says. The bank then issues a no-objection certificate to the developer for the sale of flats in the project to recover its loan. “All the clauses are mentioned in the agreement the buyer signs with the developer. One must read all the clauses at the time of booking the property,” he adds.
However, a developer cannot mortgage the project after he has sold off the apartments. If he has done so, it amounts to cheating and a criminal case can be filed by the buyers against him.”When the investor is already the owner of the property, how can the developer mortgage it to another party? The buyer’s ownership rights are protected in this case,” says Sampat. However, if the developer had mortgaged the property before the flats were sold, the buyer will be in a soup. Therefore, it is vital to check the property documents carefully to see whether the property has been mortgaged to a bank. Now you know why banks insist on seeing all the property documents before they disburse a home loan.
Does repossession mean trouble for buyers?
On the face of it, it appears that repossession of the property will hurt the interest of the buyers. However, if the construction has got delayed because the builder was facing a cash crunch, then repossession by the lender actually benefits the buyer. The funding issue could get resolved because after taking over the project, the lender would want to sell it at the earliest to recover its dues.
The bank can either sell the property to another developer or appoint a contractor and complete the project. “Either way, the buyer may get possession of the purchased property quickly,” adds Agarwal.
Ram Sangapure, general manager at the Central Bank of India, explains that banks take possession of a property when the developer defaults on payments for several months and the loan becomes a non-performing asset. “As the lender to the project, the bank has full right to sell the property to recover its capital,” he says. There is no restriction on the bank completing the project by itself. In case it finds a buyer for the property, it can even sell it at the under-construction stage itself. Normally, banks do not want to get involved in construction activity and just take the project under their possession. “When this happens, all activities come to a standstill,” says Sangapure.
The bank then assesses the situation and suggests corrective measures. “It can even suggest a change in the management if it feels that the present management is incompetent and won’t be able to complete the project on schedule,” he says.
It could also opt for a few other measures such as restructuring the loan, which means either offering more money against additional collateral or increasing the loan tenure. “The bank could even infuse fresh funds into the project if it feels that it would help the project get completed and enable it to recover its money,” he says.
What should the buyers do?
The rights of the buyer do not change with the change in ownership of the project. The buyers can opt for paying the remaining dues to the new owner, in this case the bank, and get possession once the project is completed. In case a buyer wants to sell the property, there is no restriction on doing so.
If the buyer has taken a housing loan for the property, he needs to ensure that his EMIs are paid on time. If there is no default on payment of instalments, he will continue to enjoy all his original rights.