On Tuesday, the Competition Commission of India (CCI), India’s antitrust body, imposed a penalty on the country’s biggest real estate firm, DLF Ltd, for treating homebuyers unfairly. Key complaints included increasing the number of floors, changing the size of the apartments and project delays.
While the order is good news for buyers who booked flats in the DLF projects concerned, the case points to the bigger problem of lopsided builder-buyer agreements that favour developers in the largely unregulated real estate market. The CCI also took note and was critical of the agreements that favour builders but not buyers. In an earlier report on the matter, the director general in charge of investigations at CCI had said: “The company has taken shelter of the agreements executed with the allottees, terms and conditions of which are heavily loaded in favour of the company.”
In a scenario where most builders draft agreements on similar lines, as a homebuyer you need to sift through the pages of terms and conditions and know what you are signing off in favour of the builder. Here are three clauses that can mean trouble for you in the future. Watch out for them when signing an agreement with your builder.
Most agreements mention that the area of the apartment can increase or decrease, depending on market conditions and architectural changes, and the price will be subject to change accordingly.
This clause can create problems for you in the absence of any regulation or uniform practice, especially when the project is nearing completion. Take Vijender Sharma, a Delhi-based management consultant, who bought a three-bedroom house in BPTP Ltd’s Park Elite Floors project in Faridabad in May 2009. He was surprised when he got a letter from his builder demanding an additional Rs2.99 lakh. He is among the 3,100 homebuyers who have got similar demand of Rs3-5 lakh. What’s problematic in the deal is the fact that carpet area, the actual living space you get, has not changed. The super built-up area, including common spaces such as parks, clubs, lifts and others, has increased.
And what does BPTP say? In an email response to our queries, the builder said: “Due to lack of detailed design development drawings at the time of launch, tentative areas are communicated to the buyers and final area is measured at the time of completion which may vary from project to project.”
BPTP is not alone in doing so, there are several others as well. For example, another New Delhi-based real estate firm, RG Group, had asked for extra payment for its residential project, RG Residency, when the company found that the built-up area increased during the construction phase.
Says Ajit Krishnan, sector leader of infrastructure and real estate, Ernst and Young, a consulting firm, “The concept of built-up and super-built-up area in the sector and what the builder chooses to include or exclude is still not clear because there isn’t any uniformity in the practice.”
What you can do: Though the clause is very much a part of the agreement, you can approach the consumer court if you don’t agree with the change. Says Sunder Khatri, a Delhi-based lawyer practising in the Supreme Court and who handles property-related lawsuits, “Consumer courts usually favour the buyer rather than the builder. While you go to the court, you should continue paying the instalments ‘under protest’. This means, while making your payments, you should send the company a letter and an email mentioning that the payment is done under protest. The letter should have an acknowledgement card which proves the communication between the buyer and the builder.”
Delivery timeline clause
The agreement will rarely mention the exact month in which project completion is expected. It is usually a timeline that varies from builder to builder. For instance, the delivery month may be two years from the start of construction or three years from the date of signing the agreement.
If the apartment delivery is calculated from the “start of construction”, it may be difficult to find out the exact date or month when the construction actually starts.
Ideally, the builder-buyer agreement should be signed at the time of booking. But that is not what happens in practice. Developers usually do not sign the agreement until the buyer pays 10-20% of the total amount. The booking amount is taken on the basis of the “application form”. Says Delhi-based real estate consultant Pradeep Mishra, “The process of filling the application form, payment of 10-20% of the amount, sanctioning of loan may take a month’s time.” Only after receiving this amount will the developer sign the builder-buyer agreement.
On top of this, recent agreements contain a new clause, saying that market uncertainties can delay the project by another six months. This is usually known as the grace period. “About 99% of the builder-buyer agreement in the market has this grace period clause,” says Alok Gupta, CEO, Karan Bull Infratech, a Noida-based real estate firm.
During the grace period, the developer is not bound to pay any penalty to the buyer or to the bank or to the local government authority. “Usually, the developer puts this grace period to buy time for his approvals and sanctions from the government,” says Vivek Seth, managing partner, Vsquare Development Co. Ltd, a Gurgaon-based real estate firm.
What you can do: Ask for the exact date/month of completion at the time of signing the builder-buyer agreement and ensure that is mentioned in the agreement. If the project is to be completed in phases, the date of completion for each tower or phase should be clearly mentioned in the agreement.
Holding or fit-out period
It is the period during which the builder offers you to take possession of your property. For a commercial property this is called the fit-out-period and is of three-six months. For a residential project, it is known as holding period and lasts 15-45 days. There is no regulation on how long this period should last.
The builder uses this period to provide finishing touches, such as fitting the windowpanes or polishing the woodwork. “The builder also uses this time to complete certain formalities such as obtaining a no-objection certificate from the government and registration of sub-lease deed,” says Sumit Bansal, joint managing director, Innovative Infradevelopers, a Gurgaon-based real estate company.
However, what is often hidden from you are the holding charges and penalty you may have to pay if you are unable to pay the remaining amount and claim possession within the specified period. The builder will charge Rs50-75 per sq. ft per day in the first month after the expiry of the fit-out period. Subsequently, the builder will raise the penalty to Rs100-150 per sq. ft per day in the second month. You may have to pay as much as Rs200 per sq. ft per day in subsequent months. Compare this with a penalty of Rs5-7 per sq. ft and Rs25-30 per sq. ft every month, for a residential and commercial project, respectively, that you are entitled to if the developer delays the project.
“Apart from this penalty the developer will charge you a certain maintenance fee till the time you do not move into the apartment,” says Gupta.
Failure to take possession for several months may result in cancellation of your booking. Also, the developer may not return the amount paid till then, apart from levying a cancellation charge.
What you can do: To avoid paying hefty penalty, you can negotiate with the builder to lower the rate of penalty in the builder-buyer agreement. Also, arrange the remaining amount when the project is nearing completion. In most payment plans, you need to pay 5% of the total value of the property at the time of taking possession.
Illustration by Shyamal Banerjee/Mint
Madhurima Nandy contributed to this story.