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.