Legal Zone

Negotiating Terms

July 2014
To have an equitable balance between the buyer and seller, it is important to know about the non-negotiable agreement and how to overcome it, writes DEEPAK M THAKKAR.

What is a non-negotiable agreement? Do we need to look at the dictionary for the meaning? It is not about money; it is how you plan your approach with the seller. If you don't ask, you don't get. In such a situation you have to negotiate the non-negotiable; it is a one-sided agreement made by builders and developers in the real-estate industry.

Know-it-all
A practical tool that can be useful in the present context is to shortlist the area. Find out how many promoters are there in a given geographical area. There is no single source of information regarding this; it can be ascertained through various sources like the Web surfing, brokers, etc. Buying a flat may be easy but entering into an agreement for buying that flat is not. Before buying a flat, it is absolutely necessary for the purchaser to gather all information with respect to the promoter, his integrity and the legal due diligence. One must be an informed buyer.

The most important instrument a builder has to enter into in the given geographical area is the Flat Agreement. The Government has enacted laws to provide reliefs to flat purchasers against abuses, malpractices and difficulties relating to the construction, sale, management and transfer of flats. However, over time, there was no effective implementation and compliance of the various statutory provisions of these laws. Transparency was the need of the hour and, therefore, the Government seriously considered making a new comprehensive law to regulate and provide the promotion of the construction, sale, management and transfer of flats, residential buildings, and other similar properties. On one hand, this was executed with the aim to protect public interest in relation to the conduct and integrity of promoters as well as other people engaged in the development of such properties. On the other hand, this was aimed at facilitating smooth and speedy construction of such properties. Maharashtra was the first state in taking initiative to legislate Maharashtra Housing (Regulation and Development) Act, 2012, the gazette notification of which is awaited. It is the first state to come up with a real estate regulator. The 2012 Act has given wide powers to the promoter and permitted him to retain rights in FSI and TDR even after conveyance is executed for one or more buildings in a layout, till the entire property is conveyed. This 2012 Act is likely to be the model act for other states in the country.

Liable leads
The Government has suggested the standard model Flat Agreement. However, investors face difficulties when some promoters unilaterally insert clauses favourable to them. When I say this, I mean, unilaterally imposing highly arbitrary, unfair and unreasonable conditions on the flat purchaser through the agreement. I call it an adhesion contract, which heavily restricts one party while leaving the other free. It implies inequality in bargaining power and uses the writing to his/her/their advantage. The clauses in the agreement are inserted to impose direct, indirect, unfair and discriminatory conditions for the purchase of the flat and other services. It may contain misrepresentations and provisions, which gives the promoters unfettered authority and power to violate the rights of the purchaser, for example, a clause containing wrong facts, like buyers have verified and satisfied themselves with regard to the approved plans, title deeds, etc.

Some unfair clauses in the non-negotiated agreement relate to topics like: 

  • FSI or future FSI
  • Carpet area
  • Appropriation and adjustment of application money or earnest money
  • Payment schedule, default and forfeiture
  • Consent to make alteration and modification
  • Permission for fit-outs
  • Right to raise finance
  • Execution of conveyance
  • Formation of organisation or society or association
  • Selling of stilt or parking areas, etc

The real estate industry has associations recognised by the Central and state governments, which provide a common platform for addressing various problems faced by the industry. One such problem was the cartelisation by the Cement Manufacturers' Association (CMA), where the Builders Association of India (BAI) filed a case against CMA and others, before the Competition Commission of India (CCI). Hence, the players in the real estate industry should understand the difficulties of the purchasers and come forward to bring in major reforms. While a proactive approach is required, the sector will have to take up issues such as easy access to credit facilities or home loans, land title certification system, etc with the government, banks and financial institutions for equitable balance between the promoter and the purchaser.

Formal forums
A flat purchaser, who is a victim of the unfair practices adopted by the promoter, may approach the court of competent jurisdiction. The purchaser can approach the following forums: 

  • Civil Court for performance or remedying the breach of the contract
  • Competition Commission of India making out the case of dominant position in the given geographical area
  • Consumer Forum
  • Criminal Court for the offence committed, if any.

A win-win situation
The adaptation of the standard model agreement suggested by the Government from time to time constitutes an important milestone in the development of the building industry. Adapting the standard model agreement to the extent possible as held by the Apex Court will ensure a win-win situation for the promoter and the flat purchaser.

About the Author:
Deepak M Thakkar, Advocate, Bombay High Court is also Partner of Pragna Thakkar and Co.

The versatile lawyer has expertise in a variety of matters such as contracts, real estate, banking and debt recovery, arbitration, mergers, acquisitions and takeovers.

For The Promoter
Dos

  • Identify sources of legal information and seek updated expert advice.
  • Use formal and informal research data to update legal knowledge required for the business compliance.
  • Identify the areas of operations that are likely to infringe laws and seek advice on how to overcome or modify it.
  • Developing and implementing a system where the office has failed to consider the legal requirements.
  • Take forward the concept of land bank which will impact the promoters positively.

Don'ts

  • Adopt a dominant position either directly or indirectly.
  • Suppress the material facts and withhold the documents that may be detrimental.
  • Develop a project which is in violation of the law and opposed to public policy.
  • Commit breach of the terms and conditions of the model agreement that may lead to multiple litigations.

Case 1:
The law laid down by the Apex Court on the issue of stilt parking in the case of Nahalchand Laloochand versus Panchali Cooperative Housing Society is unambiguous. Some promoters openly and without any fear defy the Apex Court's verdict for their personal benefit. In this particular case, the Apex Court says, "Stilt parking space is not covered by the term 'garage', much less a 'flat', and that it is part of common areas." Despite the ruling, some promoters sell parking by inserting clauses to that effect in the agreement.

Case 2:
In the case of Jayantilal Investments versus Madhuvihar CHS, the Apex Court, in the context of the agreement held, "Therefore, every agreement between the promoter and the flat taker shall comply with the prescribed Form V. It may be noted that, in that prescribed form, there is an explanatory note which inter alia states that clauses 3 and 4 shall be statutory and shall be retained. It shows the intention of the legislature. Note 1 clarifies that a model form of agreement has been prescribed which could be modified and adapted in each case depending upon the facts and circumstances of each case but, in any event, certain clauses including clauses three and four shall be treated as statutory and mandatory and shall be retained in each and every individual agreement between the promoter and the flat taker."

Case 3:
Some promoters hesitate to disclose the truth by inserting clauses in the agreement that the flat being sold is free from all encumbrances and marketable. There are some promoters who perpetrate fraud with the purchaser by selling the same flat to two different purchasers or creating security in favour of the banks and financial institutions. In a case before the Bombay High Court, the builder sold the same flat to two different purchasers. The first purchaser had taken loans and advances from the bank. The second purchaser filed the suit in the Court. The bank filed Civil Revision Application (CRA) for dismissal of the suit under Order 7, Rule 11 of the Code of Civil Procedure as the suit being barred. The CRA was allowed by the Court.

CASE 4:
In a case before Competition Commission of India, the issue was whether the promoter before it enjoyed a dominant position in the relevant market. In this regard it was observed that there are several large real-estate developers with an all-India presence. Accordingly, the Commission held that, prima facie, the promoter before it did not appear to be dominant in the relevant market.