Check before you sign redevelopment pact6 min read . Updated: 20 Aug 2015, 07:21 PM IST
A detailed agreement with a builder who has the capacity to execute redevelopment work is the best way forward
In November last year, the floor area ratio (FAR) in Delhi for plots bigger than 750 sq. metres was raised. In July this year, FAR was increased by 60% for construction around mass rapid transit systems such as the Delhi Metro. In Mumbai, too, according to the draft Development Plan 2034, Brihan Mumbai Municipal Corp. (BMC) has proposed over three-fold increase in FAR. Various authorities revise FAR or floor space index (FSI) in an attempt to have more housing space within city limits.
FAR is the ratio of total covered area of construction to total plot size. So, an increase in it means more covered area can be built on the same plot. Local developers and residents or owners of such plots capitalise on these changes by getting into agreements to redevelop. In Mumbai, this is commonly known as redevelopment of housing societies, whereas in Delhi it is called collaboration.
Such arrangements are more prevalent in bigger cities as land cost is higher and developers are able to make a profit even after paying for reconstruction, owners’ rented accommodation and other expenses. In such an arrangement, the number of apartments in the redeveloped property is more than before. Developers take some flats or floors against the cost they incur on redevelopment, sell these and make a profit. House or plot owners do not have to incur any expenses, and they get a newly built house, with more space, and sometimes even monetary benefits.
But the going isn’t smooth always. There are many instances of things going wrong for plot owners. One such is of a co-operative housing society (CHS)—Nalin Malad Apartment CHS Ltd—in Mumbai. Members of the society got into an agreement with a local builder, A & A Shelters Pvt. Ltd, in March 2009 to redevelop their society. They were offered additional space that was nearly 50% more than their existing apartment size, free of cost. As per the agreement, the developer agreed to give possession to all existing members within 18 months from October 2009, with an additional 6-month grace period, i.e., latest by September 2011.
As it happens in most redevelopment agreements, the developer agreed to pay for members’ rental accommodations. Besides, the agreement stated: “The society shall have a lien on three flats and upon receipt of the occupation certificate, these would be released." This meant that the developer could not sell three flats till he got the occupation certificate and gave possession to existing members.
There was a delay clause as well, which stated that the builder would pay 10,000 per day for each day exceeding the scheduled day of completion. The construction started and the new building was made till six floors. Then it came to a halt.
Members held several meetings with the developer but only to get false reassurances that the work will resume soon. After some time, members got to know that the builder had not got the required approvals for further construction, and had also not paid some charges. Members allege that the builder sold even those flats that were under lien, that too to multiple buyers. They also came to know that many other housing societies were facing similar problems with the same builder.
As of now, 22 families of Nalin housing society are living in rented accommodations, paying their own rents as the builder has stopped paying rent since March 2013. Many of them paid or borrowed to get bigger apartments than they were entitled to, and thus, are also servicing a home loan.
“Cost of construction and approvals has gone up in the past few years and now it’s not viable for the builder to complete it (redevelopment) now. We are looking for compensation and handover of our society in whatever condition it is, so that we can get it completed somehow," said Sushil Lata, secretary of the society.
When contacted, Abhishek Ramesh Vyas, managing director, A & A Shelters, said, “In 2010, the development control regulations changed, because of which my cost went up by 6.7 crore. At that point, I was not in a position to invest that much and hence there is a delay".
The builder also blamed the government for changing rules without any prior notice or providing a leeway to those who already have agreements in place. “But I have the required funding now and am negotiating with society members to complete the project," he added.
The Nalin housing society members’ mistake was to not have properly verified the builder’s credentials—completed projects and financial capability—before executing the redevelopment agreement.
But this is not an isolated case. If you or your housing society is planning to get into redevelopment or collaboration with a builder, a few steps of precaution will safeguard you from falling into a trap.
Choosing a builder
Look at the builder’s capacity to execute redevelopment work. “A builder should be able to get regulatory permissions, execute legal documents properly, have financial, development and marketing capability to sell its share of the property," said Gulam Zia, executive director, Knight Frank India. Check for previous projects that have been completed and handed over to owners. Visit some of the completed projects and interact with the residents to know about their experience with the builder; ask them about project completion, quality of construction, legal documents and other aspects. Ideally, give the redevelopment work only to a builder that has a substantial number of successfully delivered projects.
It’s all in the agreement
Once you identify a suitable builder, the next crucial step is to draft an agreement; all your rights depend on how well it has been drafted. It should clearly define all liabilities and responsibilities of both parties. Every entity’s share in the new premises should be stated. “The owner should take care to have indemnity clause, penalty clause, right to call off the deal, outstanding dues, and transfer of deposits/membership of owner’s association in the agreement," said Sumit Jain, national director-residential services of Colliers International India, a global real estate consultant.
Also, remember that redevelopment can be time consuming. Smaller projects may take 18-24 months, but bigger ones, such as redeveloping an entire housing society, takes longer. During this period, typically, the builder arranges for property owners’ accommodation. A clause regarding this should be in the agreement. “The extent and limit for payment of rents must be clearly outlined. Rental escalation cost should be included," said Anuj Puri, chairman and country head, JLL India.
It’s also important to have a clause regarding legal responsibility. “All approvals from regulatory authorities and duty to adhere to rules fall on the plot owner. So, it is important that the owner mentions such a clause, which specifies that the builder or developer will be responsible in case of non-adherence to any rules or non-compliance while rebuilding the complex," said Harsh Pathak, a Delhi-based lawyer.
Even after these steps, if a builder defaults, you may need to seek legal help.
Whom to approach
If a builder does not fulfil its obligations, legal avenues exist. If you are a member of a housing society, you can approach the housing society registrar, which “has the power to investigate such cases," said Pathak. “One can also approach a civil court in case of breach, default, fraud or cheating by developer," he added. Members of Nalin housing society filed a case against the builder in a city civil court a year ago, but made little headway. So, earlier this month, they filed a case in the Bombay High Court to terminate the agreement. They now plan to approach the Economic Offence Wing (EOW).
“If the amount of cheating or fraud exceeds 2 crore, one can approach EOW. However, EOW does not have a separate penal code. Such cases are covered under the same section of Indian Penal Code such as 420 or 421," said Pathak, adding that the Nalin housing society members should pursue the case in high court and request the court to direct authorities to take action.
Redevelopment and collaboration can be a win-win situation for the builder and the plot owner, but you need to be careful before getting into such an agreement. After all, prevention is better than cure.