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.