Do home-buyers who make down payments towards property purchase to developers ‘lending’ to them? If so, do they have the same rights as banks or other lenders in case of any default? And how would the value recovered from the developer be prioritised between the different people who have claims?

These have been some questions that were talked about in the Real Estate Regulatory Act (RERA) cases and Insolvency and Bankruptcy Code (IBC) proceedings in the past few years.  Given the state of the property market, there have been many cases of financial distress leading to defaults by developers, making these questions very material and immediate ones.

A recent Supreme Court ruling has affirmed the rights of home-buyers versus banks that have recourse to provisions such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.

Double encumbrance

At the heart of the issue is the dilemma that arises out of different entities creating encumbrance on the same property. Take the case of a home-buyer booking a property that is under construction. The payments are made by them with the agreement that the house will be delivered as per specification. The developer typically requires additional funding to complete the construction and would pledge the same project to a bank for availing commercial loans.

Now, consider the case where the developer defaults on payments. The rights of banks in case of non-payment were clear – Section 13 of the SARFAESI Act allows secured creditors to take possession of real estate assets and the management of the defaulting borrower’s business, including the right to lease or sell the asset to be paid back. But this left home-buyers with no recourse, if the developer defaulted on delivery.

Noting this, in 2018, the IBC clarified that payments made by an allottee to a property developer would be deemed financial debt and home-buyers will be considered financial creditors. Also, home-buyers could initiate proceedings under the IBC against a developer. While this allowed buyers a place at the table, it was the banks who had priority over the claims. The contention was also that aggrieved buyers often preferred finding a way to complete the project with a new management rather than selling out.

So, when projects were not delivered, home-buyers sought relief under RERA. But secure lenders such as banks decided to liquidate the asset – as it was within their right to do so with the IBC. This led to cases filed by home-buyers against banks in RERA courts, not just developers. But banks were reluctant to entertain the claims of buyers, noting that they were not the ‘promoters’ of the project.

Seminal ruling

One case of interest was filed in the Rajasthan High Court, over which the Supreme Court (SC) gave a judgement in favour of home-buyers recently. The original case involves allottees of an under-construction residential complex project titled ‘Sunrisers’ by SNG Real Estate in Jaipur, launched in 2014. Many buyers had booked a flat and taken loans to make payments. The developer mortgaged the entire project to Union Bank of India for obtaining a term loan of ₹15 crore. The loan was not repaid and the entire project building was attached by the Union Bank of India and auction proceedings were set in 2020.

Home-buyers filed a case with Rajasthan RERA, which cancelled the auctions proceedings in November 2021. It ordered the bank to hand over the possession of the flat to RERA, which would get the project completed. Union Bank of India challenged this RERA order in the Rajasthan High Court.

The High Court in December 2021 held that RERA had the authority to entertain a complaint by a home-buyer against a secured creditor, if the financial institution takes recourse to any of the provisions under SARFAESI Act. Not just that, the court held that if there are conflicts between the RERA and the SARFAESI Act, RERA would prevail.

In February 2022, the SC refused to interfere with the judgment of the Rajasthan HC over the jurisdiction of RERA. Earlier, the SC had noted — in cases involving Amrapali, Unitech Residential Resorts and Jaypee Associates — home-buyers can file complaints against banks with RERA, in case they take possession of projects and liquidate them. The new order establishes the rights of home-buyers over banks and provides legal recourse through RERA.

Banks beware
Recourse under RERA is open for buyers against banks, if there is IBC proceedings after a developer defaults
Immense clarity

Home-buyers have progressed in the pecking order and gained more clarity over the years and this ruling adds to that in a big way. It hopefully puts an end to banks riding roughshod over the rights of home-buyers by liquidating assets they have claims over and have not defaulted on.

For one, it clearly prioritises the right among the two parties – buyer and bank – that may want different outcomes, even as they hold lien over the same property. For instance, if the project is nearing completion, but the developer has defaulted on payments to the bank, the buyer may prefer to go on the path of completion. Likewise, when there are multiple bidders in the IBC proceedings, buyers may want to choose the one who may deliver the home versus someone who pays a higher price. The preferences of the banks will likely be the opposite.

Still, buyers may want to choose completed homes over under-construction properties, given the many legal wrangles and the iffy state of financial strength for many developers.

The author is an independent financial consultant