Who owns your building land?

A ready possession 2BHK flat was available at a 10% low price at Andheri. The deal was fixed and the money was due the next day. The night before, it was suddenly realized that it was not checked whether the builder owns the building land. Opened the RERA site on the laptop, entered the registration number of the project and started checking. In this regard, it is mainly to be checked whether the land is not a lease hold. Legal title report is not useful because mostly it mentions whether the land is dispute free, marketable & free of encumbrances. After checking for a long time, paragraph number 30 and 31 in the contract letter with the builder were noticed. Both the land and the building were leasehold and being leased for mere 30 years. Next day morning while informing the mediator that the deal has to be cancelled due to this reason, it was realized that he really did not know anything about it. He had bought a flat and a shop in same building. He did not believe anything and strongly insisted on contacting Builder’s Chief Sales Executive in this regard. Finally, the Builder’s Chief Sales Executive, after taking a very tentative approach, accepted that both the land and building were on 30 years lease. Except for one or two flats, all the flats in the building were sold and these flat buyers had formed a whatsapp group. When mediator disclosed this news on whatsapp group, it was very shocking for all these flat owners. None of the flat owners knew anything about it and none of them ever took the efforts to read agreement clause Nos.30 & 31. Some flat owners asked on phone, what is the harm to us due to this issue?
 
When considering what & how the harm is, several points should be kept in the mind :-
 
1. When we buy a flat worth 1 crore, at least 45 to 50 lakh rupees we pay for our share of the land. It means, taking the money worth the freehold land (land with ownership rights) builder is actually providing us leasehold land (rental land). Even if he offers us at 10% less price, but in the end he extracts at least 30 lakh rupees extra. As per wealth tax rules, when the lease period of the building is less than 50 years, it’s value goes down by at least 36%. Andheri land is expensive compared to Borivali land and compared to Andheri land, south Mumbai land is expensive. The main difference in the price of flats is determined by the price of freehold land in that locality. The cost of construction does not vary much and is marginal compared to other costs. That means let the flat in south Mumbai be at Rs.50,000/sqft or in Andheri be at Rs.25,000/sqft, in both the cases, the cost of construction shall be around Rs.3,500 per sqft. The higher the price of the flat on the leasehold land, the bigger the fraud.

2. For leasehold land one has to pay annual rent as per lease agreement. Since 2017, there has been a huge increase in annual ground rent on state government land (MHADA, Cidco, MIDC etc). Now, it has also been arranged that it will be increased every year by linking it to the ASR (Ready Reckoner rates). For private leased land, annual ground rent is payable as mentioned in lease agreement.

3. Terms & conditions mentioned in lease agreement have to be followed. This mainly leads to the many limitations in the redevelopment of the building. If any work is to be done on the building and premises, the permission of the land owner is required.
4. General understanding is that the lease is just a formality & lease period is always extended without much efforts. But actually as per lease agreement we agree to the term that we can be asked to vacate after the completion of lease period. Do you remember the old age home scene in the movie `Munnabhai MBBS’? In that scene, the corrupt official does not extend the old age home lease period at the behest of the builder. In the future, when your lease period ends, it will be in the hands of, then political leaders and government officials, to extend it. In the case of private land, it will depend on the land owner.

5. Even if lease period got extended, the terms & conditions, lease period and annual rent are subject to change. Formerly government lands in Mumbai were offered on 99 years lease tenure and annual rent was only Re.1. But since 2012, The lease term has been limited to 30 years and annual rent has been increased hugely. This will definitely happen in case of private land.

6. In fact, property tax should not be made applicable to the flat owner, at least for land component, since it is not owned by the flat owner. But both, property tax & annual rent, are collected from flat owner.

7. Terms and conditions are subject to change at will & at any time. MHADA has changed the conditions, particularly regarding permission for redevelopment, several times. This has made redevelopments of MHADA lands very difficult.

8. The valuation of such flats also works out to be very low. So, when you need valuation of your flat for Visa formalities to send your son/ daughter abroad and expect to get valuation of flat to be Rs.1 Crore, at your dismay, valuation may turn out to be only Rs.60 lakh if it is a leasehold land with balance lease period of 40 years.
 
This may happen in case of the private land also. Even after many years, the residents of many societies do not know that they are living on the land which is leasehold. In such a case, even getting renewal of lease shall be very difficult task for a private land.
 
Basically, why does this situation occur? Common man has a misunderstanding that whenever a flat is purchased from builder, it is on fully ownership basis, that is, we own the land also. All the clarifications regarding the land are usually mentioned in the first (builder's) agreement. But generally no one seriously reads it. As reflected in the scenario described at the beginning of this article, the tendency of the builder, while selling, is to hide such things. It is also very difficult to check by opening the RERA site, because there is no direct question on RERA web site whether the land is leasehold or freehold. Hence, one needs to peruse proforma of agreement of sale or Form B declarations to get the information on RERA web site, which is very difficult for common man.

Considering all above aspects, while purchasing a flat, check whether the land is leasehold. If it is leasehold, work out whether price of the flat is reduced in terms of balance lease period. Don’t trust builder or estate agent, insist on actual perusal of lease agreement, from it confirm the tenure of lease & work out the balance lease period. When lease period is more than 50 years, the value of such property should be reduced by at least 20% as compared to any adjoining property on freehold land and when lease period is less than 50 years the value of such property should be reduced by at least 36% as compared to any adjoining property on freehold land.

Beware of the fact that builder has not invested in purchasing the land for the project, but is trying to extract that non-invested amount from your pocket and that amount is very huge. Most of the time it is your life time saving.

Redevelopment Agreement Flaws - Article 5

5. Carpet Area

The most important compensation received during the redevelopment project is the additional carpet area. The redevelopment agreement always asks for quotation of this additional carpet area in terms of percentage of carpet area offered above the existing carpet area. This means if the existing carpet area is 500 sqft & the Developer has offered 50% of additional carpet area, then the carpet area provided after redevelopment shall be 750 sqft.  Hence, the determination of final carpet area to be received after the redevelopment is entirely based on the correct recording of carpet area of the old flat. The mode of measurement of carpet area may play major role. If the old flat was measured under MOFA mode & new flat measurements are counted as per RERA mode, then one will get 10% less carpet area because if you put it in simple terms the MOFA mode excludes the internal partition walls whereas RERA mode includes them. If we continue above example, then the flat owner would have received 675 sqft instead of 750 sqft carpet area. Multiply this lost 75 sqft of carpet area with the rate of property in your area & you will know the loss or price paid for the small negligence while signing the development agreement. The concerned lost area adds up to saleable area to increase the Developer’s profit. This is not the only trick to deny you the rightful carpet area when the development agreement neglects to define the carpet area measurement in required details, there are other tricks like adding the areas like flower bed, loft, terrace or measuring the area from brick surface & not from finished plastered surface etc.

Most important but most neglected clause of redevelopment agreement is the mention of procedure for determination of carpet areas of the existing as well as redeveloped flats of the society members. These areas should be recorded under joint measurements, clearly mentioning detailed mode of measurement which shall be applicable for determining these carpet areas & acceptance of the Developer for the same. Initially, prior to preparing project (feasibility) report the PMC surveys & records the existing carpet areas of the flats to be redeveloped but this has to be accepted by the Developer for which the joint measurements with the Developer immediately after signing the redevelopment agreement is most essential.

Different definitions of Carpet Area :-

If we cover the entire flat with a wall to wall carpet along width & breadth covering the entire floor area including that of bathroom, WC & kitchen under the platform, then in simple terms the carpet area can be defined to be total area covered by such carpet.

In general practice the carpet area is defined to be the net usable area within the building excluding the area covered by the walls. Traditionally, Carpet Area (rentable area had also same meaning/ definition) was measured from finished wall to finished wall (plastered & not tiled) surface & included lavatory block, common passages, portion between door jambs (in this, more accurate calculations omitted shutter area), space occupied by kitchen platform. All column projections/ independent column portions more than 300sqcm were deducted. Enclosed balcony counted 100% but open balcony counted 50%. Verandah Otlas with parapet 50% & without parapet 25%.

MOFA (Maharashtra Ownership Flats Act, 1963) neither defines the carpet area nor refers to any other official carpet area definitions. Hence mostly it has been presumed that the MOFA carpet area definition is referred to as the traditional carpet area definition mentioned above. Only mention in this act is through the amendment dt.12 May 2008, which adds clause (n) to subsection 2 of section 3 to mention that the flats shall be sold on the basis of carpet area only and defines the carpet area to be including balcony area of flat.

RERA (Real Estate Regulation Act, 2016) vide circular No.4/2017 dt.14.06.2017 has issued clarifications on definition of carpet area mentioned under RERA Act 2016 vide its section 2(k) defining the carpet area to be excluding balcony area but including the area covered by the internal partition walls of the Apartment.

In short, MOFA includes the balcony area but excludes the internal wall area whereas RERA excludes the balcony area but includes the internal wall area. Both the acts are silent about the details such as whether measurements shall be from finished surface of wall, whether pilasters along the wall shall be included in wall deductions etc.

The acts/ regulations like MOFA, RERA, DC Regulations have mentioned varying definitions of carpet area but all of them lack the required details such as whether walls thickness shall include finishes, columns to be deducted, area within door jambs to be added etc. These details are covered by BIS & NBC.

Bureau of Indian Standards (BIS) & National Building Code (NBC), both have defined the same method of measurement of carpet area & other such areas. These were formulated under IS 3861 in 1966, with first revision in 1975 to include rentable area & second revision in 2002 to add more details regarding verandahs, shafts etc. The methods of measurement have been mentioned in details. To mention some of these details, (1) The walls considered for deduction shall be inclusive of finishes. This means the measurements for carpet area shall be taken from inside of the finished (plastered/ tiled) surface & NOT from brick face (which will be required to be assumed during the physical measurements) as defined by CREDAI (Confederation of Real Estate Developers’ Association of India), (2) All independent pillars shall be deducted from carpet area, (3) Pilasters along walls shall be deducted only if more than 300 sqm in area, (4) Portions at door openings (between door jambs) are not considered to be added.

The shocking revelation of BIS definition under IS 3861 has been, that the term `carpet area’ excludes the area of bathroom, kitchen, store etc. However, the `rentable area’ definition includes all these areas. In other words, the `carpet area’ mentioned in general terms by all the concerned statutory bodies under different acts/ rules/ regulations like MOFA, RERA & even DC Regulations should have mentioned to be the `rentable area’ considering that they have presumably based their reference on BIS / NBC definitions for the terms carpet area & built-up area and the required meticulous definition/ method of measurement of these areas have been mentioned under BIS & NB codes only. BIS has mentioned the term `Plinth Area’ for the area generally referred to as `built-up area’ & it disallows the use of term `super built-up area’ calling it a non-standard terminology. The `carpet area’ has not been defined in all the required meticulous details by the acts/ regulations like MOFA, RERA, MCGM & has mostly been based on popular presumptions. This discordance be brought in consonance with the Indian Standards, else unscrupulous builders may take advantage of such lacunae.

Analysis of RERA definition of Carpet Area :-

RERA is silent on whether the measurement should be taken from finished wall surface or brick face. The builder’s organisation CREDAI (Confederation of Real Estate Developers’ Associations of India) has been propagating separate carpet area definition & has influenced defining of the RERA carpet area, for including the internal wall area. This definition by CREDAI mentions that the measurement shall be taken from brick surface & not from finished surface of wall. This will further swell up the carpet area. In this regard, it should be pointed out that all the government bodies including BIS, NBC & Legal Metrology Department (LMD) have prescribed that measurements shall be taken from finished wall surface only. The redevelopment project involves the actual measurement survey of the building to confirm the carpet area. In such situation, leaving imaginary clearance for wall finishes in measuring the wall to wall dimensions & measuring the wall thickness of internal walls shall be difficult, absurd & will tend to approximation. It is also observed that, in RERA definition, the internal columns (independent or along the wall) are also treated to be internal walls & its area is included in carpet area. Many times, particularly in high-rise buildings, very big RCC shear wall/ columns are provided & these big unusable portions shall be counted in the carpet area.

If we refer to a circular dt.02 Jan 2018 of office of Inspector General of Registration & Controller of Stamps, Maharashtra State, multiplying factor for conversion from carpet to built-up area under RERA calculations shall be 1.1 instead of previous 1.2. This means, where built up area of flat is 1200 sqft the carpet area of flat previously counted under MOFA would have been 1000 sqft but now if counted under RERA, it shall be 1091 sqft. Due to inclusion of area covered by internal walls, the carpet area of same flat swells by about 10%.

Moreover, the old buildings do mostly have balconies and RERA excludes balconies from carpet area definition. Hence adopting the RERA carpet area definition will not be advisable while surveying for the measurement of carpet area of the building under redevelopment.

Mentioning that the measurements shall be considered from finished wall surfaces or from brick surfaces is also essential. The difference in such measurements results substantially on the value of the property considering the property rates in Mumbai. For example, for carpet area of 650 sqft of flat, about 5 sqft of difference is observed in finished surface & brick surface wall measurements. For average property price of Rs. 25,000 per sqft in Mumbai Suburbs, this situation will cost Rs.1,25,000.

Conclusion :-

RERA concept of including internal partition walls in carpet area is justifiable but needs certain modifications. In MOFA concept, let us take example of two flat having same built-up area. If one of them has more partition walls (provided for creating one more room) then it shall have less carpet area than the other. However, if we want to adopt RERA definition in redevelopment agreement it shall need modifications. Firstly, the wall thickness shall be of finished (plastered) walls. Secondly, it should include enclosed balconies (100%), open balconies & pocket terraces (50%) & ground floor verandah/ otlas without parapet (25%). Thirdly, pilaster/ projections, independent columns/ shear walls more than 300sqm shall be excluded from carpet area.

Else, considering all above aspects, the carpet area definition in the redevelopment agreement shall be mentioned to be same as the `rentable area’ as mentioned under clause No.6 of IS 3861:2002. It should be specifically mentioned in development agreement that the carpet area measurement method to establish carpet area of old apartment under redevelopment & to confirm the provision of carpet area of permanent rehabilitation apartment shall be conforming to clause No.6 (rentable area) of IS 3861:2002.

Redevelopment Agreement Flaws - Article 4

4. Termination clause in Redevelopment Agreement

Considering the difference with the usual construction contracts, the areas in which the PMC may err by trying to apply the certain clauses of usual construction contracts to redevelopment projects, are mainly, extension of time (which has already been discussed in articles 1 & 2) & termination of agreement. Many redevelopment projects have been dragged for long durations, because these clauses have not been carefully worded identifying the difference of redevelopment project with normal construction projects. Here it is needed to identify the difference between usual construction project & redevelopment project. In redevelopment project, the developer has to invest heavily even to commence the project, the developer is allowed to accept booking against saleable built-up area, which creates new liabilities on the asset of the society. These considerations complicate the provisions of the normal clause of termination. Hence the termination clause needs to consider to account for the investment made by the developer & amount received by the Developer for the bookings against the saleable area as well as to account for the liability created on Society’s property by the Developer by accepted bookings against the saleable area.

The provisions of agreement should have to be fair & reasonable to all parties involved to stand valid in law. The normal construction contracts usually provide that the breach of any term of contract, insolvency or repudiation by Developer can result in termination of contract with seven days of notice in writing. Consequent to this, the Security Deposit shall stand forfeited & contractor’s material, tools, machinery shall be taken in possession & work shall be continued by the owner at the risk & cost of the contractor. Such a provision shall be unfair & unreasonable to the Developer, in redevelopment project in particular, considering the heavy investment made by the Developer. Such provision is impracticable, considering that the power of attorney for use of Society’s land is held by the Developer using which he would have already created heavy liabilities on Society’s asset by accepting bookings for saleable flats. Sometimes such clause may become unfair to the Society, if the amount received by the Developer through sale of flats is more than the investment made. So the silence of such clauses, on consequences of Developer’s investment, income from the sale of flats by the Developer & procedure of reimbursement/ recovery, as applicable to/from the Developer, shall be a huge error.

The termination cannot be done unilaterally. It has to be in reaction by the one party against the repudiation of contract by the other party. The section 64 of Indian Contract Act requires the refund of the value of work Developer has executed till the date of termination & does not permit the risk & cost action. In light of above, the termination clause for redevelopment agreement requires to be drafted carefully by providing the settlement of the Developer’s reasonable dues during the process of termination by accounting for the Developer’s expenditure on project execution & Developer’s income consequent to the sale of flats.

Hence, the termination clause should mention in every detail, the entire procedure, particularly of accounting Developer’s expenditure & income from the redevelopment project and the ways of refunding Developer’s dues or ways of recovering the due amounts from the Developer, as the case may be, on fair & reasonable terms. In the redevelopment project, the ways of refunding the Developer’s dues shall depend on selection of the options of continuation of the execution of the redevelopment project.

There are mainly two options for continuation of the redevelopment project after termination of agreement with first Developer.

1. Inviting tenders from other Developers for completing the balance project 

2. The Society to undertake the self-redevelopment work for completing the balance work.

The Developers dues/ recovery shall be settled from the accepted offer received from the new Developer. In case of self-redevelopment option the dues/ recovery shall be settled only after audited recommendations to do the same & availability of the amount.

In either of options the mandatory immediate actions consequent to termination shall be to prepare the inventory of materials lying at site & joint measurements of the work carried out by the Developer till date. The Developer shall be required to submit the claim against expenditure made on project & details of income from sale of flats & the same shall have to be got audited by the Chartered Accountant. The power of attorney given in the name of the Developer shall be revoked & hence right of the Developer to sale of flats from saleable component shall be relinquished.

The balance post-dated cheques received against the rent, brokerage & all performance Bank Guarantees shall be returned to the Developer only after receipt of the same from the new Developer appointed to continue the project. However, the reasonable compensation against expenditure for retendering process & any other compensations/ penalties due shall be recovered from the Developer.

The tender for balance work shall be prepared which shall include all required details including the inventory of materials lying at site, joint measurements of the works executed & amount to be paid to the developer, booking against sale of flats from saleable component etc. The tender shall be prepared with the provision that the all other aspects except Developer’s reimbursements shall be fixed same as the agreement with the Developer or projected in such a way that the quotations of quotable items in Developer’s agreement shall not be reduced in any way. Reimbursements of the Developer’s expenditure shall be based on offers made by the new Developer in the accepted tender. The successful tenderer (in self-redevelopment option, the Society) shall have right to accept or reject the works carried out, materials lying at site, sale of flat etc and accordingly the settlement of the dues or recovery from the Developer shall be finalised & paid by the new Developer (or in the case of self-redevelopment, by the Society).

The entire process of termination shall be well defined in the termination clause mentioning all the details of entire process. Some important aspects to be mentioned are as under.

1. The decision of termination should be taken only by the Special General Body of the Society considering the recommendations of the PMC.

2. The Developer shall not be relieved of obligations & liabilities towards the project works carried out till the date of termination.

3. The hardship compensation allowance, displacement compensation, Society’s expenses during redevelopment period, other expenses including establishment expenses, Architect’s & other consultant’s fees and payments against purchase of TDR shall be amounting to the offers tendered by the new Developer, but not exceeding the relative amounts received from / claimed by the developer against each item.

4. The payments of amount paid to government authorities against the licenses/ permissions/ approvals/ NOCs shall be paid in full amounts of receipts submitted, however if any of such payments are against any defaults or penalties or against any irregularities or are payments not required to be paid under normal circumstances, then the same shall not be payable.

5. The final settlement amount to be reimbursed to the Developer, shall be restricted, if required, in such a way, that the Society shall not be at any loss, when considered all the provisions under the agreement.

6. The new Developer (or the Society) may accept or reject the services of consultants appointed by the Developer. The Developer shall be liable to make all payments due to all consultants employed till termination date & to obtain the `No Objection Certificates’ from the consultants whose services shall be rejected for continuation by the new Developer. The final settlement amount shall be paid only after satisfactory settlement of all such issues.

It should be mentioned that the reasons which shall specifically be treated as repudiation by the Developer under this agreement are, non-submission of Bank Guarantees within agreed stipulated period, delay in completion of building work activity beyond approved extended period of completion of any activity as mentioned in approved construction schedule which in turn shall delay the overall completion of building work activity beyond approved extendable period of completion of the redevelopment project, non-payment or submission of post-dated cheques against any compensatory/ due amounts like rents, shifting charges, corpus fund, liquidated damages on scheduled dates.

Redevelopment Agreement Flaws - Article 3

3. Process of Preparing Redevelopment Agreement with Developer

Earlier, in most redevelopment projects the small time builders used to approach the Society secretaries or chairman to offer a proposal for redevelopment & without required technical scrutiny of provisions proposed & with loosely worded agreement the Societies used to handover their premises to such builders, who ultimately used to drag these projects endlessly or redevelop the property with substandard quality of work & materials, many times indulging in FSI violations, without obtaining occupation certificate & without payment of compensations promised.

Govt Directive 79(A)

After receiving complaints from members of such Societies the Govt of Maharashtra, appointed a study group & on the basis of its report, introduced directives on 3^rd January 2009, under section 79(A) of Maharashtra Co-op Societies Act for redevelopment of building of co-op housing society. These directives have framed the regulations for redevelopment of buildings of co-operative housing societies. These regulations provide guidance regarding, convening meeting for redevelopment decision, appointment of PMC (Project Management Consultant), responsibilities of PMC, scrutiny of tender, selection of Developer, agreement to be entered into with Developer etc.

PMC’s Role

PMC’s role in the redevelopment project is pivotal considering, PMC’s responsibilities, i.e. preparing Project (Feasibility) Report, prepare tender forms and invite tenders, scrutinise tenders & prepare comparative statement, guide the Society to enter into agreement with the selected Developer. PMC’s services can also be continued to monitor the actual construction work till completion of the building & rehabilitation of members. However, this article is limited to the role of PMC till finalising the Developer in the redevelopment project where redevelopment is planned to be carried out by engaging the Developer, who is expected to offer the alternate permanent accommodation with certain additional area free of cost to the Society members. The PMC’s role for monitoring the Developer’s construction work till completion of project & PMC’s role for self-redevelopment projects shall be discussed separately.

Why do we need Project (Feasibility) Report?

Here, it should be particularly noted that, the PMC activities i.e. preparing Project (Feasibility) Report, Tender form & converting tender into agreement, are interlinked & interdependent. At very initial stage the PMC has to prepare the Project (Feasibility) Report. The function of Project (Feasibility) Report is thought to be only to gauge the feasibility of the project. Whereas, it is actually to be used prepare the tender form (which in turn shall be converted as the redevelopment agreement) to freeze the requirements mentioned in tender form, of expected Corpus Fund/ Hardship Allowance & other compensatory amounts such as shifting out & shifting in charges, rent of temporary alternate accommodation including broker’s charges considering the rent escalation of 10% per year for redevelopment duration considering allowable extension period. These figures are assessed by the PMC after accepting the suggestions / recommendations of members of the society and entered into Project Report to gauge the feasible free additional carpet area expected to get to members of the society. Based on this Project Report data, all these compensations are fixed (not to be changed) in tender by keeping open either additional free carpet area or corpus fund (choice based on suggestions / recommendations of members of the society) for quotation and freezing all other compensations while inviting the tender. This means, the tenderer developer has to quote only for the offer of either additional free carpet area or corpus fund, which is essential to make the tenders transparently comparable while scrutinising & preparing comparative statement. The directives under section 79(A) has also mandated this requirement under its para 8(c). This is required particularly considering that the additional free carpet area has to be expressed in percentage above the existing carpet area owned by each member of society & all other compensations/ requirements can be expressed in certain amount.

Where PMC may err in calling quotations?

It has been observed that many PMCs, who are habitual of inviting item rate construction contracts, err on this aspect by inviting quotations for each & every compensation/ requirement, which makes such tenders incomparable at the time of making comparative statement. This error also reflects the ignorance of PMC about the uses of Project Report. It was pointed out to me that, some PMCs make this error knowingly, so that, the absence of transparency in comparison & scrutiny of tenders allows them to recommend (push?) the selection of their favourite Developer(s).

Here, it is also to be remembered that, the compensation of rent is to be based on suggestions of the members of the society and are generally based on the rate of rents in adjoining area of the society building. If such aspects are kept open for quotation, the lower rent rate offer will not be acceptable by the society & higher rent rate will ultimately influence final total offer. The rent amount can never be made quotable in comparable format considering that the rents have certain escalation every year, includes brokerage & has to be offered till the rehabilitation, which can extend beyond mentioned time period. Hence, the rent amount requires to be estimated in Project Report on above basis considering certain buffer period of allowable extension & needs to be mentioned in tender on` per month’ basis with escalation details per year including brokerage per year & mentioned to be payable till the rehabilitation of the society members in permanent alternate accommodation.

Tender to be converted into the Redevelopment Agreement

Since all the details i.e. all the requirements, quantities, available provisions, terms & conditions, specifications etc are required to be mentioned in the tender to get the correct quotation from the tenderer, the tenders are always in the format of the contract agreement & at the time of the acceptance, the tender is converted into the contract agreement. Usually the building construction contract agreements are prepared, invited & concluded by Architects/ PMCs. Hence preparing Redevelopment Tender & finally converting it to Redevelopment Agreement has also been the responsibility of PMC. The govt directives 79A, recognise this ability of PMC & hence do not prescribe for any requirement of legal adviser in this aspect. Though many societies tend to hire legal adviser for preparing redevelopment agreement which is not required considering that the tender document is itself to be converted into redevelopment agreement. Hiring both entities i.e. PMC as well as legal adviser to prepare the redevelopment agreement may cause the possibility of creating contradictions in tender & redevelopment agreement which may favour the Developer in case work goes in dispute. At the most the redevelopment agreement can be got vetted from the legal adviser to ascertain its legal validity particularly regarding clauses like termination of agreement, liquidated damages etc. Also the legal adviser can be hired to prepare the draft of the power of attorney to be given to the developer to represent the society while carrying out the construction & the agreements of the members individually with the developer for the permanent alternate accommodation. However, the power of attorney, should be carefully worded, particularly not allowing the developer to use it to mortgage the property/ society land to raise the capital. The format of both these documents shall also be made part of the tender document to avoid any dispute at later stage. It should be mentioned that, if any term(s) mentioned in these documents contradict with the contents of the redevelopment agreement in any way, the terms mentioned in redevelopment agreement shall always supersede & hold good in such circumstances.

Redevelopment Agreement Flaws - Article 2

2. Permissible Reasons for Delay in Project

It is a normal practice in the contracts to allow the delays under the reasons generalised as `Force Majeure’ (French word meaning `Superior Force’), which meant to be arising out of the events beyond control of the performer, making performance impossible, impracticable, illegal or inadvisable. These provisions cover the reasons such as, natural disasters (floods, earthquakes, storms, hurricanes etc.) which were used to be referred as `act of God’, as well as man-made disasters such as war, civil commotion, fire damage etc. But mentioning of `Force Majeure’ as the permissible reason can attract claims under many other reasons, since meaning of terms impracticable, inadvisable & even impossible can be interpreted in multiple ways. Hence it is required to be more specific by meticulously listing the reasons instead of mentioning word `Force Majeure’.

The reasons permitted for granting reasonable extension of time under the MahaRERA, are the reasons, where completion of building shall be delayed on account of (i)war, civil commotion or act of God; (ii)any notice, order, rule, notification of the Government and/or other public or competent authority.

The redevelopment projects where saleable area exceeds 500sqmt or 8 apartments the RERA (Real Estate (Regulation & Development) Act, in Maharashtra it is called `MahaRERA’) shall be applicable, except where the Society plans self-redevelopment & not intending to sale area exceeding 500sqmt or 8 apartments or where the building for rehabilitation component is separated from saleable component. The project where RERA is applicable, the redevelopment agreement has to mention same reasons, although provisions should be made that the exercise of rescheduling the construction schedule & asking to deposit the post-dated cheques for extended period at the time of granting extension shall be performed as described in previous blog on `extension of time’. In my opinion the same reasons should also be provided in the projects where RERA is not applicable.

MahaRERA at draft stage had included some more reasons i.e. non-availability of steel, other building material, water or electric supply, but subsequently deleted them in final notification. I remember, I did object to this draft provision then, because I thought that these reasons should be well defined, else such ambiguity shall be the source of corruption. Firstly, the essential part of these reasons has aptly been covered under MahaRERA mentioned reasons (i) & (ii). Also, the reason of non-availability of material needs to be defined within certain framework to which the sanctioning authority can refer. This framework should consist of the terms such as geographical area specified for procurement of material, acceptable proofs/ documents supporting the efforts made at appropriate time to procure the material, minimum number of suppliers who should have been approached for material procurement, any other terms allowed for acceptance of such claim by the authority. Even after such meticulous definition there is every chance that the false claim can be made about non-availability of material & passed by a corrupt official interpreting suitably by finding some loophole. The tenderer is always supposed to make quotations foreseeing the normal escalations, plan the procurement sufficiently in advance with due process & considering the risk factors involved. Hence, the escalation in amount, if any, due to the failure of the tenderer for the reasons not covered under MahaRERA mentioned reasons (i) & (ii) has to be borne by the tenderer.

Interpretation of acceptable reason for delay, even within the mentioned terms can always be frowned with doubt, since it can be a source of corruption. I shall suggest that the sanctioning authority particularly for accepting the reason for delay be mentioned shall be formed by creating a committee of three members i.e. PMC, Representative of Society & Architect of building & sanction shall be based on a majority decision.

Redevelopment Agreement Flaws - Article 1

1.Delays in Redevelopment Projects; `Extension of Time’ Clause

We own a house in Mumbai after investing a lifetime of our savings and at the time of its redevelopment, place it in the hands of a builder without essential scrutiny & care, just believing on the big dreams he has projected. Many times, this results in decade of wait languishing in some rented apartment, at the most fighting a court case with the builder.

In many cases, builders have got the buildings vacated and demolished. The residents were paid rents for shifting to alternate rented accommodations for first 2-3 years & afterwards the builders have stopped paying any rent, mostly taking advantage of glitches in redevelopment agreement. Under such circumstances, the residents who have migrated to other areas or at different places, staying in the rented accommodations, become totally unorganised & unable to fight the might of the builders & suffer endlessly, at the most, fighting prolonged civil court cases.

We need to stay alert, take care and apply our mind during essential scrutiny of redevelopment project particularly during tendering process. In this series of articles, I aim at providing some important inputs useful in scrutiny of redevelopment project. 

Hi friends, I am Shrikant Chavan, practicing Architect, Civil Engineer, Project Management Consultant (PMC), working in construction industry since last 37 years. Since last about 8 years I have been involved in many redevelopment projects as Project Management Consultant. During this period, I had also an opportunity to study the redevelopment projects in which I was not involved, since on many occasions the people individually approached me for consultations regarding their concerns about such projects. In these cases, the most unfortunate people were the one who were shifted to temporary residence, their building was demolished & after couple of years they have to pay their own rent since builder has stopped paying rent & their project has not even commenced. Some other concerns have been :- 1. Builder had stopped the construction & rent payment due to non-availability of funds, 2. After dragging project for 4-5 years, the builder has expressed that the additional carpet area has to be drastically curtailed considering present recession, 3. Builder has used FSI more than allowed in agreement for saleable component & rehabilitation area has to be reduced. These are all unfortunate cases where these people have to either fight out the prolonged court cases or be at the mercy of the builder & allow him to complete the project at his own conditions, will & wish. There are many others, who have not yet completed the process of finalising the tender for redevelopment of their buildings. These people can use the inputs mentioned in this series of articles.

INPUTS ON VARIOUS ASPECTS OF REDEVELOPMENT PROJECTS

In this series of articles, I will try to offer some inputs, which I have evolved from my last 8 years of involvement in redevelopment projects.  I have many of the time been approached by individual residents of buildings undergoing the redevelopment proposals. These individuals were highly worried & stressed-up considering that the property that they have gained with lifetime of their earnings at stake.  Generally, they were ignorant of the various processes & details involved in these projects. So my inputs are aimed at these people. In this series, I aim at providing inputs on general redevelopment procedure, role of PMC, feasibility report, tender, important clauses like extension of time, termination, bank guarantee etc.

TENDER CLAUSE ON EXTENSION OF TIME

The endless delay in project completion is the main issue in most of the redevelopment projects. So I will first discuss the `extension of time’ clause in this series of articles on redevelopment issues, considering its importance in progress & completion of redevelopment projects. If compared with the normal construction projects where the contractor has no income source from the project work except through routine bills (called RARs i.e. Running Account Receipts) which is controlled by PMC/ Architect, the redevelopment project developer has income source from bookings on saleable component which is not under control of PMC. In redevelopment project, delayed project adversely affect the society members, particularly in timely recovery of their rents from the developer & on other rehabilitation compensations. Considering these differences & taking lessons from the fact that in most of the delayed redevelopment projects the unscrupulous developers have stopped paying compensatory rents to the society members, I am of the opinion that the extension of time clause should be linked to the schedule of construction (bar chart) in such a manner that for delay in each activity, when the construction schedule (bar chart) is rescheduled, if the project completion date shall be required to be extended, the developer should be asked to deposit post-dated cheques for rent & other compensations for the extended period, prior to acceptance of extension with revised construction schedule. To simplify it, suppose the PMC observes during his visit to the site that the activity of completion of work up to plinth level is expected to be delayed by 2 months. He asks the developer to submit his revised schedule with reference to the delays in activities observed during his site visits. When the developer submits the revised construction schedule it reflects that the delay in activity affects the overall completion of the project & the project shall be delayed by 2 months. The project which is to be completed in 24 months shall now take 26 months to complete. The developer has already handed over to the members of the society the post-dated cheques for initial 24 months. So now, prior to getting sanction for the revised construction schedule & extension of time, the developer shall have to hand over the two month’s post-dated cheques for 25^th & 26^th month. The developer has to deposit these cheques & get the revised schedule & extension of time sanctioned reasonably in advance of the concerned ongoing activities so that the revised schedule is not disturbed in anyway. The failure on the part of the developer to comply with this requirement shall be treated refusal of performance by the developer & hence such breach may result in revocation or suspension of power of attorney and/ or termination of agreement. Here, it is needed to remember that the agreement to be valid in law should be fair to all parties involved in agreement & many times the normal termination clauses tend to be unfair to the developer in the redevelopment agreement particularly if we consider the heavy investment of the builder. Hence on the subject of termination clause, I plan to write a separate article in this series.

The construction schedule is the time-bound schedule of different activities of redevelopment project in bar chart format (specimen listing minimum activities required to be mentioned should be annexed to the redevelopment agreement), mentioning dates of commencement and completion of each major activity, in such a way that the agreed completion of the redevelopment project exactly tallies with the completion shown in the bar chart. This bar chart shall be inclusive of activities such as, preparation of draft plans by the Developer’s Architect, approval by the Society of draft plans, submission of proposal to municipal authority, applications for permissions/ NOCs to different statutory/ government bodies as applicable, obtaining of IOD/ commencement certificates/ all other necessary permissions/ NOCs, vacating the existing accommodations of society members & shifting them to their temporary accommodations, demolition of existing buildings, major construction activities including foundation, work up to plinth, each slab-wise structural/ RCC work, masonry work, windows, doors, internal & external plaster, waterproofing of toilet/ bath room floor, roof terrace floor, basement, internal finishing work (including door & window fixing, kitchen platform work, flooring, skirting, dado, fixing of fittings & fixtures & all internal amenities each as separate activity),  internal & external painting, underground & overhead water tanks, , internal & external plumbing, sewage disposal system, internal & external electrification, water supply system, lift installation, firefighting  system, area drains, open space development, compound wall and other miscellaneous works up to obtaining occupation certificate & rehabilitation of society members. The bar chart shall be in the format as approved by the PMC, wherein the PMC shall have authority to insist on indicating any activity as a separate activity in the bar chart & to insist on indicating the work force & tools & plants to be employed on the work for each activity each day. This bar chart shall also indicate the scheduling of samples for approval & procuring the required materials.

I have observed, generally in the redevelopment agreement that, apart from initial about 24 months of period of completion the extension of 6 months to 1 year is allowed & for any further delay it is the developer is held liable to pay certain amount per day as liquidated damages. In the absence of very specific terms in redevelopment agreement particularly the details of actions to be taken in such situation, nobody can question the developer till these periods are over for the further rent amount & in the end after 2 or 3 years the developer stops to pay abruptly & these unorganised society members can even not meet the builder. The society is at mercy of the builder or at the most enters into a long drawn civil court case. In the court the team of builder’s lawyers easily find out the escape routes / loop holes in such loosely worded ambiguous redevelopment agreement.

Here, somebody may bring out that, now the RERA provisions can discourage the builder from delaying the project. It is true that the RERA provisions have made the builders more alert particularly regarding timely completion of the project. But since the RERA do not provide for the rent & other compensations of the redevelopment rehabilitation component, the society members won’t get the required protection in this aspect under RERA.

Linking construction schedule to the extension of time on basis of each activity has many benefits :- 1.The main benefit is that the members will be assured of getting rent for their temporary accommodation well in advance,

2.The project shall be planned more realistically & responsibly,

3.It will bring clarity about the entire project,

4.The actual work progress shall be closely monitored,

5.It shall provide more control in hands of the society to handle the work progress systematically,

6.It shall  instill fear in builder’s mind from the beginning of the project that, if he delays at any stage or activity, he will have to face consequences immediately,

7.Delay in any activity shall also be publicised & may affect, on getting booking on saleable component.

In next article I will offer inputs about the different reasons to be permitted for the delay i.e. for extension of time limit.