Defining the liability of Promoter and Co-Promoter in Real Estate Projects

Section 18 of Real Estate (Regulation and Development) Act, 2016 (“RERA”) stipulates that the developer has to provide refund and/or compensation to a buyer if the developer fails to complete the project or is unable to give possession of the premises as mentioned in the agreement.

The extent of a co-promoter’s liability had been a subject of dispute.

In a landmark judgment pronounced on February 26, 2024 in Wadhwa Group Housing Private Limited (“appellant”) versus Mr. Vijay Choksi and SSS Escatics Private Limited (“respondents”), Justice Sandeep V Marne of the Bombay High Court held that the co-promoter will be equally liable to pay refund if possession of flat is delayed.

The Hon’ble Court went on to hold that the scheme of Real Estate (Regulation and Development) Act, 2016 does not limit or define the responsibilities of various promoters in different areas. Therefore, even if liability regarding different structures of the Project is stipulated in the Joint Development Agreement, the same shall not have any impact.

This ruling of the Hon’ble Bombay High Court marks an important development.

(i) Under the terms of Regulation 33(10) of the Development Control Regulations, 1991, respondent no. 2, SSS Escatics Pvt. Ltd, initiated a project called "The Nest" on land bearing CTS No. 196 (Part), located at Ganesh Chowk, Bhavans Camp, DN Nagar, Andheri (West), Mumbai, as part of a Slum Rehabilitation Scheme.

(ii) Respondent no. 2 and the appellant signed a Joint Development Agreement in which they committed to working together to develop the project.

(iii) In accordance with the aforementioned Joint Development Agreement, appellant and respondent no. 2 divided the built-up area for sale to customers.

(iv) Respondent no. 1 reserved a 2,385 square feet three-bedroom apartment in the project for the agreed upon sum of ₹ 2,65,35,000. A sum of ₹1,20,00,000 was paid by respondent no. 1 as partial consideration following which a Letter of Allotment was issued by respondent no.2. 

(v) The project was an ongoing project on the date of enforcement of RERA and was therefore registered by the respondent no.2 under Section 3 of the RERA. The appellant was also declared as a “Promoter” of the project. 

(vi) Respondent no. 1 contended that the stated date of completion was unilaterally and unauthorisedly changed to March 31, 2020. Furthermore, respondent no. 1 contended that, although the area of the flat he had reserved was 2,385 square feet, an incorrect area was shown on the Maharashtra Real Estate Regulatory Authority website.

(vii) Respondent no. 1 filed a complaint with the Maharashtra Real Estate Regulatory Authority in accordance with Sections 12 and 18 of the Real Estate (Regulation and Development) Act, 2016 requesting a refund of ₹2,62,35,056 along with interest, costs, and compensation.

(i) The appellant before the Maharashtra RERA authority claimed that the project was being developed under a joint development agreement and both the parties, that is, the appellant and respondent no.2 had their own respective entitlements. The appellant further contended that the subject flat came to the share of the respondent no.2 who accordingly agreed to sell the same to the respondent no.1 for consideration.

(ii) The appellant contended that the order passed by the Appellate Tribunal was erroneous in law and that the appellant cannot be held liable for the refund of the amounts paid by the respondent no.1 as the respondent no.1 has not made the payment of any amounts to the appellant. It was contended that according to Section 18 of the RERA, the refund can be directed to be paid only those promoters who have received the amounts from the allotee. It was stated that the flat agreed to be purchased by the respondent no.1 falls under the purview of the entitlement of respondent no.2 and due to which the respondent no.2 alone issued the allotment letter and received the entire consideration amount from the respondent no.1.

(iii) Respondent no.2 while relying upon the circular dated December 4, 2017 of the Maharashtra RERA contended that the liability of one promoter cannot be imposed upon the other promoter. 

(iv) The respondent no1 contended that the appellant is covered under the definition of the term “Promoter” within the meaning of Section 2(zk) of RERA and that the application made to Maharashtra RERA for registration of the project, the name of the appellant was reflected as a “Promoter”. Further, it was contended by respondent no.1 that the Explanation under the Section 2(zk) is clear and evident that all the promoters are jointly liable under RERA.

The following substantial questions of law were framed for the Hon’ble Court to decide:

(i) Whether a promoter who has not received any consideration from an allottee can be made liable for giving refund with interest under Section 18 of the Real Estate (Regulation and Development) Act, 2016?

(ii) Whether on account of non-decision of the point about the liability of the appellant to refund the amount by the Maharashtra Real Estate Regulatory Authority Appellate Tribunal, an order of remand is warranted?

(i) The first issue was dealt extensively by the Hon’ble Court. The Hon’ble Court held that if the party decides to continue with the joint venture after Real Estate (Regulation and Development) Act, 2016 comes into force, they must accept the responsibility as a promoter. They can leave the joint venture before the project is registered if they wish to absolve themselves of any liability as a promoter. Therefore, when an investor such as the appellant decides to maintain their involvement in the joint venture, they do so with full knowledge and are subsequently officially registered with Maharashtra Real Estate Regulatory Authority as the promoter of the project. In doing so, it accepts all of the liabilities together with its joint venture partner. It can no longer be asserted that the joint venture exists solely for the purpose of profit sharing and not for the purpose of liability sharing.

(ii) As a result, the promoter is obligated by Section 18(1)(b) to compensate the flat purchaser for the money they were paid. The second respondent, who is the other promoter, and the appellant are both jointly accountable for the money to be refunded because they fall under the description of "promoter."

(iii) The objective behind enactment of Real Estate (Regulation and Development) Act, 2016 must be borne in mind. If this narrow interpretation of Section 18 is approved, developers would then have the authority to intentionally accept payments into one promoter's account and then use the other promoters' fictitious claim that they are not liable for those payments to escape paying interest or receiving a refund.

(iv) RERA is applicable to ongoing projects as well. Therefore, in determining the joint liability of promoters under Section 18, the account in which funds are received is irrelevant.

(v) The argument put forth by the appellant regarding the lack of privity of contract between it and the complainant is completely erroneous. According to the definition of "promoter" in Section 2(zk) of the Real Estate (Regulation and Development) Act, 2016, even individuals or organisations that a flat buyer does not enter into a contract with are covered by the definition. Consequently, an agreement between each promoter and the buyer of the unit is not required. The issue is one of indoor management between the promoters. The buyer of the flat is not expected to be aware of the specifics of the agreements reached between more than one promoters.

(vi) Regardless of whether they have a contractual relationship with each other or not, all promoters become jointly accountable with respect to flat purchasers who make claims regarding real estate projects. This is the scheme of the said Act and a promoter is not released from their obligations under it just because they do not have a contract with them.

(vi) With regard to the second issue, the Hon'ble Court was of the opinion that the Appellate Tribunal refrained from delving into the issue of the appellant’s liability to refund the amount to the complainant, presumably due to the fact that the appellant is also encompassed within the definition of the term 'promoter' and bears joint liability for the obligations and responsibilities stipulated in the Real estate (Regulation and Development) Act, 2016. The Hon'ble Court observed that it is true that the Appellate Tribunal should have documented some conclusions regarding the issue. Nevertheless, as the matter was being resolved in this appeal, the Hon'ble Court found no need to remand the appeal for the technical reason that the Appellate Tribunal neglected to record its conclusions regarding the same.

(i) The Hon’ble Court ruled that the appellant is liable to pay compensation to respondent no. 1.

(ii) Throwing light on Explanation to Section 2(zk), the Hon’ble Court observed that the Section defines "Promoters" and holds them jointly liable for the duties and obligations outlined in RERA or the Rules and Regulations made thereunder. This includes anyone who builds or converts a building into apartments or develops a plot for sale. Moreover, the appellant's name was registered as "Promoter" at the time the project was registered. Therefore, the appellant cannot deny that it is the promoter of the project.

(iii) The appellant's obligations and liabilities under the RERA, its Rules and Regulations will not be released simply because the aforementioned flat is part of the second respondent's share as stipulated in the Joint Development Agreement. This is so because the said Act does not limit or define the responsibilities of various promoters in different areas. For all purposes under RERA, its Rules, and Regulations, the liability is joint.

The judgment can be construed to be a significant and ground breaking development in the RERA jurisprudence and will have practical implications on the future relationships between a promoter and co-promoter (investor/ joint venture partner).

Significantly, the Hon’ble Court has, in this matter, held that regardless of whether a promoter and a co-promoter have a contractual relationship with each other or not, all promoters become jointly accountable with respect to flat purchasers who make claims regarding real estate projects. This is the scheme of RERA and a promoter is not released from their obligations under it just because they do not have a contract with them.

The Hon’ble Court has effectively concluded the argument by stating that a promoter who has not received any consideration from an allottee is also equally liable to refund the amount paid by the allottee along with interest thereon under Section 18 of the RERA.

Effectively, from the purchaser’s liability perspective, both the promoter and co-promoter (investor/ joint venture partner) are now equal in the eyes of law with respect to any liability to the flat purchasers/ allottees notwithstanding any contractual understanding between them. The joint development/ joint venture model has been a popular and instrumental tool until now, in undertaking and effective completion of real estate projects.

In future and going forward, this structure/ model will have to be restructured and formulated with more care and caution taking into consideration the implications of the judgment.

This judgment is yet another addition to the expansive role and ambit of RERA to protect the interests of flat purchasers/ allottees. It prevents the promoter or any investor in the role and capacity of a promoter from avoiding its obligations under the agreements entered into with the flat purchasers/ allottees on the ground of lack of privity of contracts. The joint venture partner/ co-promoter of a project can no longer assert that the joint venture exists solely for the purpose of profit sharing and not for the purpose of liability sharing. A joint venture partner or an investor can no longer escape or evade liability of a promoter under RERA and they will be jointly liable and responsible to pay refund to the flat purchasers/ allotees along with the promoter.

About the authors: Sirisha Sampat is a partner at SNG & Partners. Roshni Basu is a legal intern at the Firm.