Understanding the evolving jurisprudence of Real Estate laws

In an order dated February 14, in the matter of Union Bank of India v. Rajasthan Real Estate Regulatory Authority & Ors etc, the Supreme Court concluded that the authority under the Real Estate Regulation and Development (RERA) Act, 2016 will have jurisdiction to entertain a complaint by an aggrieved person against a bank which is a secured creditor, if the bank takes legal recourse to Section 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act).

While doing so, the apex court upheld a landmark judgment passed by the Rajasthan High Court wherein it was held that banks and financial institutions (FIs) would step into the shoes of the promoter as ‘Assignee’ under Section 2(zk) of the RERA Act, once they take recourse to the SARFAESI Act and take possession of the project premises.

Thus, the Court held that in case of a conflict between RERA and SARFAESI, the former would prevail.

It is a big relief to flat purchasers whose flats are mortgaged by the developer/s with banks/FIs which have taken steps under the SARFAESI Act. In such cases, the RERA authority has jurisdiction to decide these issues and give the homebuyers priority over the banks/FIs. This will give flat purchasers some hope to fight against financial giants.

The Supreme Court has confirmed that:

“(iii) As held by the Supreme Court in the case of Bikram Chatterji & Ors. v. Union of India & Ors., in the event of conflict between RERA and SARFAESI Act, the provisions contained in RERA would prevail.

(iv) RERA would not apply in relation to the transaction between the borrower and the banks and financial institutions in cases where security interest has been created by mortgaging the property prior to the introduction of the Act unless and until it is found that the creation of such mortgage or such transaction is fraudulent or collusive.

(v) RERA Authority has the jurisdiction to entertain a complaint by an aggrieved person against the bank as a secured creditor if the banks take recourse to any of the provisions contained in Section 13(4) of the SARFAESI Act”.

The Supreme Court has gone a step further and clarified the above ratio with the following caveat:

“However, it is clarified that para 36(v) reproduced hereinabove shall be applicable in a case where proceedings before RERA Authority are initiated by the home buyers to protect their rights.”

However, in our opinion, there are a few issues which may continue to trouble the innocent flat purchasers in their fight for their homes. The homebuyers will be made to fight against the developer who has not completed their projects, and has created a mortgage or charge over their flats.

There are a couple of classes under which the banks/FIs create charge on a project:

(i) Project finance, where the banks have first charge over the receivables from the flat purchasers and to secure the same, mortgage/charge is created on all or most of the flats. These flats can be sold by the developer after issuance of a no-objection certificate (NOC) from the banks/FIs.

(ii) Mortgage of some or more flats in a project as security against the loans availed by the developer.

- If the charge/mortgage is created prior to the sale of flats, then NOC of the flat purchaser is needed or else it would amount to fraud.

- If the charge/mortgage is created after the sale without the NOC of the flat purchaser, it would amount to fraud.

- If the charge/mortgage is created with the NOC of the flat purchaser, it may not amount to fraud, but the same will be governed by the contract between the developer and the flat purchaser

(iii) Mortgage/project finance is created by granting a fresh alternative security other than those lying in the project/flats to be constructed.

In our opinion, even if the mortgage/charge is created in the aforesaid circumstances and there is a default, the banks/FIs who are secured creditors have a statutory right under SARFAESI to recover their dues by initiating action under Section 13 and 14 of the SARFAESI Act.

The following are the issues, in our opinion, which may continue to trouble the flat purchasers:

a) The authority under RERA may not have jurisdiction to decide the validity or invalidity of a mortgage created by a registered instrument, as the same will be in the domain of a civil court/Debts Recovery Tribunal (DRT).

b) The RERA authority may not have jurisdiction to entirely set aside the action taken by the bank/FI under Sections 13(2), 13(4), 14, read with relevant rules and regulations under the SARFAESI Act.

c) There is a statutory remedy (appeal) under Section 17 of the SARFAESI Act which grants liberty to any person (including an aggrieved flat purchaser) being aggrieved by the steps taken by a secured creditor under the SARFAESI Act to file an appeal before the DRT.

d) The RERA authority may not have power to set aside/revise/modify a registered mortgage or charge created in favour of the bank/FIs or adjudicate the issue, of fraud as the same will be the domain of DRT/civil courts as the case may be.

e) The authority does not have power to sit in appeal or set aside orders of physical possession under Section 14 of the SARFAESI Act. The only remedy is appeal under Section 17 of the SARFEASI Act to the DRT.

In our considered opinion, with due respect, flat purchasers may continue to be aggrieved and their never-ending woes of fighting with developers and now, the banks and Financial Institutions, who also have a first right as a secured creditor, over the mortgage assets as per general law. However, through this judgment, innocent flat purchasers will surely get priority over banks and FIs.

Tushar Gujjar is a Solicitor and Partner at SL Partners.

The aforesaid views are personal in nature and the sole opinion of the author.