Redevelopment of a Housing Society

This query is : Resolved 

12 April 2010

Some of the building have approached us for redevelopment of our Housing Society. Our committee is going to discuss the subject with the builders in a few days time.

I seek your valuable advice on the points / clauses that we have to be carefull in the redevelopment agreement

raj kumar makkad (Expert)
12 April 2010

Redevelopment is the most happening thing in Mumbai and other metros today, and very logically, for vacant un-encroached land is hardly available. Besides, society buildings generally have clear titles.

At the same time, a number of societies have old and dilapidated buildings that need redevelopment. The cost of demolishing and reconstructing such buildings is often beyond the reach of these societies and flat owners. This is why many societies are willing to negotiate with builders, too.

Typically, as per the terms of agreement entered into between the two, the builder demolishes the old building and undertakes fresh construction in its place, and gives the original occupants flats of the same size or bigger size as mutually decided. The builder seeks to recover his investment and obtain profits from using the balance/additional floor space available to the society and by enhancing the aggregate FSI (floor space index) through the mechanism of transfer of development rights (TDR), whereby the available FSI could go up from the existing '1' to the purported '2'.

But, while entering into such high-value transactions, society members should exercise caution. It is easy to sign a redevelopment pact and vacate the premises, but before signing such a pact, the residents should ensure that they can return to the premises within a stipulated time. The members should also realise that builders are equal beneficiaries and desist from taking any hasty decision.

The society should be careful in drafting the redevelopment agreement and not leave the same to the developer. The terms and conditions of the agreement should legally and practically take care of the interests of the society and each of its members, and ensure that a default by the other party is unfavourable to him only. Otherwise, given the slow moving and judicial process in the country, it may not be easy to get the terms legally enforceable without unreasonable suffering.

This is important, as 154 buildings were constructed without utilising TDR in Mumbai alone, with the conniving parties fully aware that they were playing with the lifetime savings of flat buyers. It has also been observed that many builders abandon projects without obtaining the occupation certificate, after having sold off the units.

After signing the redevelopment pact, residents have to vacate the premises and hardly have any control over the project. They have to wait for the builder to give them repossession of their flats. While drafting a pact, one needs to visualise every possible setback and provide answers and remedies against possible eventualities, so that the builder's interest in completing the project continues till the end.

Major laws required to be kept in mind include the Transfer of Property Act, 1882, Registration Act, 1908, Indian Contract Act, 1872, CRZ laws, State laws like Maharashtra Ownership Flats (Regulation of Promotion of Construction, Sale, Management and Transfer) Act, 1963, Maharashtra Co-operative Societies Act, 1960, stamp duty laws, development control rules, environmental law, tree laws, municipal laws, slum redevelopment scheme, etc.

If there are serious legal flaws in the scheme and these are noticed halfway, they can jeopardise the redevelopment and the consequences can be severe as what the law does not permit cannot be done either by the builder or by the society.

The bank guarantee, which the builder is made to give, should be drafted simultaneously, along with the redevelopment agreement. The draft of the bank guarantee should be simple and not tied up with conditions. In a nutshell, it should state that except for calamities like floods, earthquakes or a war, the reconstruction will be completed in the specific time, or at the very least, within the grace period. Failing this, the guarantee would be invocable. The bank guarantee should be irrevocable even if the builder fails to pay or honour any of the cheques of rent for alternative accommodation. If alternate accommodation is provided by the builder, it should be on key-to-key basis - that is to say, the key of the alternate accommodation may be exchanged for the key of the reconstructed flat.

As far as possible, the redevelopment pact should be executed on 'as is, where is' basis, and the builder should satisfy himself about the title of the society upon the property and about the availability of FSI, balance FSI and eligibility to additional FSI. This is necessary in view of complexities involved and the office bearers signing the covenants of title and eligibility may not be aware of the concerned laws and regulations.

To ensure that the builder completes the reconstruction project, he should be permitted to sell his portion of additional construction only in proportion to the construction for the existing flat owners being completed. If the builder is allotting additional area per flat, stamp duty and registration procedures must be completed since an unstamped and unregistered document is not enforceable in law. Every detail pertaining to the construction specifications, construction and material, amenities should be specified in the redevelopment pact. Anything that is vague will work against the interest of society members.

Under the redevelopment agreement, a lump sum amount running into a few crores is given to the society. But then, the builder sells his part of the units and new members get admitted, which means that the new members will also be entitled to a share of these funds of the society. To avoid such a situation, funds received should be distributed to members or credited proportionately to their individual accounts.

In case of collectorate land, transfer of development rights in such land would attract a premium on such transfer. The redevelopment pacts in respect of such lands should be entered into only by taking cognisance of the terms and conditions upon which such land has been allotted by the MMRDA.

Although it is observed that some society buildings do not have conveyance in their favour, but then these are not insoluble cases as conveyance is a statutory right of the society and the land owner-cum-builder having defaulted in not conveying property to the society cannot take advantage of his own wrong act. Further, in view of the compulsory conveyance bill having been passed in both the houses of legislature of the Maharashtra government and the Act just needing the Governor's signature, the conveyance would become a summary proceeding and the rights of the societies would be recognised by the competent authority disregarding objections by the builder/owner. In view of such a legal position, problem of not having conveyance would no longer be a bigger hurdle.

A question also arises as to whether TDR should be purchased in the name of developer or society. If TDR is purchased in the name of the society, it is a better step, as it would ensure that it is used for your society's project only. It is one of the steps to safeguard interests of the society. Stamp duty provisions relating to TDR transactions need to be complied with. Allotment of parking spaces to existing and would-be members needs to be sorted out within the framework of MOFA, 1963 and by-laws of the society. Completion of the construction is linked to completion certificate to be obtained by the builder. Similarly, the bank guarantee should be linked to the completion certificate.

It is imperative for the society to ascertain the I-T liability before entering into the redevelopment pact as this aspect, if ignored, can place the society in a fix thereafter.

Tax aspect is not very important to the developer as for him the entire redevelopment is a part of business activity. But, for the society, signing a redevelopment agreement would have much tax implications. Income tax payable by the society can very well be paid by the builder under a mutual agreement. Although the I-T authority will have a right upon the society, it can be paid by the builder. Care may be taken to ensure that the builder does not default after agreeing. In practice, there are many deals where the payer agrees to pay money and bears tax liability of the recipient. It is a matter of bargain and negotiation.

The amount received as compensation needs to be distinguished from an amount received as consideration since compensation is not an income and hence cannot be taxable. The tax liability may differ depending upon whether such a transaction is undertaken between the individual members and the builder, or between the society as a whole and the builder. Also, drafting the pact can have implications about tax liabilities.

A member getting an amount for payment of actual rent for alternate accommodation during construction period is compensation and hence not an income liable to tax. In such a case, it does not make any difference whether the money is directly paid by the builder or is paid through the society. Service tax would be attracted on the redevelopment pacts on that part of the agreement under which the developer gives reconstructed property to the society or to the flat owners.

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