What you should know if your developer defaults on bank loan repayment?

Banks can repossess the flat you booked over builder’s default, but there are regulations that cover your back

What you should know if your developer defaults on bank loan repayment?

In late 2018, two real estate companies issued media statements on consecutive days for a similar reason – to allay fears that they had defaulted on loans from banks and NBFCs. On October 23, Piramal Enterprises said it refuted “all baseless rumours of any sort/form that have been floating around with respect to its real estate loan portfolio companies.”

A day later, Vatika Ltd, a real estate company based in Gurgaon, likewise sought to assure their financiers and consumers that “every lender is well protected through escrow accounts”, which it said “demonstrated (its) strong cash flows”. The company also expressed confidence about meeting its FY19 sales targets.

This raises a pertinent question: why would you – as a consumer (buyer of a real estate property) – be affected if the developer of that property defaulted on repaying loans taken from financial institutions? Like any other business, builders also take bank loans to finance their projects; however, what if the developer is unable to pay back the borrowed amount? Would that affect the fate of the property that you have booked?

Related: Real estate bill, 2016  

RBI Guidelines

When a developer takes out a loan for a project – say an apartment block with multiple flats – then, as per guideline of the Reserve Bank of India (RBI), each sale can take place only after the lending bank/ financial institution issues an NOC saying it has no objection. There may be multiple lenders; NOCs are required from each. 

Fraud is not entirely impossible; in early 2018, the Central Bureau of Investigations booked a case against two developers in Zirakpur, Punjab, accusing them of “diverting the loan amounts and submitting exaggerated valuations in collusion with the valuers in respect of two securities, selling the house flats without obtaining authorisation from the complainant bank” which had “first right over the properties.” 

So, in case the builder suppresses this fact, you may have a problem, as you run the danger of getting saddled with a defective title without the lender’s NOC. It is advisable to get a lawyer to check all property-related documents before finalising the purchase, and ensure that the property is free of mortgages and it has clear titles.

Related: 5 reasons to go for home loan refinance 

Lender’s Rights

Then again, it is possible that despite following RBI guidelines on keeping the buyer posted on the project’s mortgage status, the developer ends up defaulting on clearing his loans. In that case, the lending institution is within its rights to stake claim on the property, as was the case with the Zikarpur project cited earlier.

However, there is little cause to start thinking you have lost your property overnight. The lender has to go through the stipulated proceedings, starting with announcing the loan default by the builder. This is the first formal signal to the developer that the lender has begun the repossession process, even while keeping the door open for a settlement. The promoter is not stopped from continuing with the construction, or handing over the property to the buyers. 

A showdown can be avoided if the builder provides personal or corporate guarantee to meet his loan repayment obligations and maintain project ownership. But if there is no headway, the lending institution can start the process of taking physical possession of the property.

Where You Stand

Your agreement with the builder may not be enough to establish your ownership, but you will be on safe ground as long as your papers are in order and stamp duties paid. However, you may be in for some protracted legal wrangling, if the project is still under construction, and the Real Estate (Regulation and Development) Act 2016 (RERA) comes into play. 

Experts point to Section 7 and Section 8 of the Act to warn legal of complications. Section 7 empowers the regulator for the real estate sector – the Real Estate Regulatory Authority, set up under the RERA Act – to take the following measures:

  • Revoke the registration of the developer and the association of allottees (buyers);
  • Appoint a new developer to complete the project.

Related: When is it a good idea to take a top up home loan? 

Thus, the lending institution is within its rights to sell the incomplete project to another developer on fresh terms, so its investments can be recouped. The project may take a new look, as the new developer may have to find additional buyers to recover its own investments.

Section 8 allows the buyer – i.e. you – the first right of refusal on the manner in which the project is completed. Experts say that considered along with the provisions of Section 7, it is this that could lead to some degree of conflict: between the buyer’s right of first refusal of the revamped project and the rights of the lender to enforce its mortgage and sell the development rights to a third party. However, on the whole, there is enough legroom to protect your interests, experts say.

Related: How to be on the right side of debt 

End Words

What RERA has done is secure the buyer at various levels in the real estate sector: registration process, alterations and additions, disclosures in advertisements and promotions, transferring of rights, timely possession, quality of material, spelling out carpet area, spelling out essential documents, bankruptcy and post-handover liabilities.

As defaults by promoters can lead to transfer of property rights, let us consider how you are protected. Before RERA, builders would often transfer projects to another developer without informing the people who made bookings, and also refusing to deal with them for breach of promises made on the grounds that all they were not associated with the project any longer. 

Post-RERA, this harassment for the homebuyer is a nightmare of the past. The Act has prescribed the process to be followed in case of project transfer: investors, buyers and the regulator have to notified and names and ownerships updated on documents. Unless this is done, the original developer will not be relieved of their responsibility towards buyers.  

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