Adv Aysha Sahla K P, Senior Associate, Alishahz Legal LLP
Introduction
On 14th February 2022, the Hon’ble Apex Court produced a landmark judgment in which banks were brought within the applicability of RERA and also where it is stated that RERA would prevail over SARFAESI Act in the event of conflict and that homebuyers can approach RERA against the bank which took possession of a real estate project as a secured creditor to address their concerns.
Facts and issues:-
In the given case, an agreement was entered into between a developer and the allottees during the year 2014 for a real estate project ensuring completion of the said project within the stipulated time,wherein, the developer had failed to complete the project and handover the possession of the property to the allottees. Later, the one of the allotteesobtained a housing loan from ICICI Bank, and charges were created on the property financed and the same was registered under Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI). Thereafter, the promoters subsequently mortgaged the same property with Andhra Bank which is now merged into Union Bank of India [hereinafter referred to as “Bank”] for availing finance which constituted a fraudulent act, according to the allottees.
Complaints were initiated against the bank before Rajasthan RERA, by the homebuyers to protect their rights.However,the RERA had held that since bank being an assignee of the promoter, it would fall within the definition of promoterand subsequentlycancelled the bank auction by issuing an order.
Aggrieved by the order, the Bank had filed writ petition before the Hon’ble High Court, Rajasthan. The crucial issue posed before the Court was about the authority of RERA to issue any directions against a bank or financial institution which claims security interest over the properties which are subject matter of agreement between the allottee and the developers along with multiple other issues.
The Bank argued thattheRERA could issue directions only against a promoter, allottee or a real estate agent and that the bank does not come under the purview of RERA as they are not in the category of promoters, and RERA cannot stop the recovery process or cancel the bank auction under SARFAESI Act.
The RERA had passed a resolutionearlier delegating powers to decide complaints into single members in exercise of the powers under Regulation 9, whereby the Bank also challenged the validity of Regulation 9 of Rajasthan Real Estate Regulatory Authority Regulations, 2017,(hereinafter called as “Regulation”)which reads as follows:-
“For adjudicating proceedings with respect to complaints filed with the Authority, the Authority may, by order, direct that specific matters or issues be heard and decided by a single bench of either the Chairperson or any member of the Authority”
Additionally, the Bank raised an argument with respect to applicability of RERA to the construction projects which have commenced earlier and where the transaction between the borrowers and creditor are completed before the enactment of the RERA Act.
On the other hand, it would be pertinent to mention the erstwhile judgments of the Hon’ble Supreme Courtwhich the allottees heavily relied, which is,Bikram Chatterji v Union of India where the allottees had contended that in the event of conflict between the RERA and SARFAESI, the provisions contained in the RERA would prevail and the bank being an assignee of the promoter, would fall within the definition of promoter. Moreover, the allottees also relied on the landmark judgment of M/s Newtech Promoters and Developers Pvt Ltd Vs. State of UP and Ors where the Supreme Courtexamined the aspect of delegation of powers in the single member of RERA to decide complaints filed under the Act in respect to the contention of the Bank which challenged the validity of Regulation 9 herein.
Judgment
Considering several decisions of the Apex Court which included the case of M/s Newtech Promoters and Developers Pvt Ltd (supra), even though the context is slightly differentwith the present case, the Hon’ble High Court of Rajasthan held that Regulation 9 of Rajasthan Real Estate Regulatory Authority Regulations, 2017 is neither ultravires the Act nor invalid and held that the delegation of powers in the single member of RERA to decide complaints filed under the Act even otherwise flows from Section 81 of the Act and such delegation can be made in absence of Regulation 9 also. Additionally, the Court relied on the case of Bikram Chatterji (Supra), which it held that in the event of conflict between RERA and SARFAESI Act,the provisions contained in the RERA would prevail.
The Court also observed that banks would be considered as promoters for the purposes of the RERA Act and RERA has the jurisdiction to entertain a complaint by an aggrieved person against the bank as a secured creditor if the bank takes recourse to any of the provisions contained in Section 13(4) of the SARFAESIAct.
The Supreme Court agreed with these conclusions as well and upheld the Rajasthan High Court order and ensured to protect homebuyer’s interests.
Critical analysis
The court has rightly held the above decision which provided relief to millions of home buyers awaiting delivery which ensured that the interest of home buyers will be protected and has preference over the interest of banks. However, the downside of present judgment is that the bank would be under stress and ensure greater cautious while lending the funds to real estate project, which alternatively impact the development of real estate.Moreover, a stringent process shall enforce subjecting to regulatory mechanism for enforcing the recovery proceedings in the event of a real estate builder defaulting in repayment of bank loans and handing over possession of the unit.
Conclusion
(i) Regulation 9 of the Regulations of 2017 is not ultravires the Act or is otherwise not invalid.
(ii) The delegation of powers in the single member of RERA to decide complaints filed under the Act even otherwise flows from Section 81 of the Act and such delegation can be made in absence of Regulation 9 also.
(iii) As held by the Supreme Court in the case of Bikram Chatterji (supra) in the event of conflict between RERA and SARFAESI Act the provisions contained in RERA would prevail.
(iv) RERA would not apply in relation to the transaction between the borrower and the banks and financial institutions in cases where security interest has been created by mortgaging the property prior to the introduction of the Act unless and until it is found that the creation of such mortgage or such transaction is fraudulent or collusive.
(iv) RERA authority has the jurisdiction to entertain a complaint by an aggrieved person against the bank as a secured creditor if the bank takes recourse to any of the provisions contained in Section 13(4) of the SARFAESI Act.