Promoter and Allottee: The Contractual Relationship

The Author, Harshit Batra is an Advocate and RERA Consultant practicing Pan India. His areas of expertise include RERA litigation, compliance and advisory work, Dispute Resolution and Criminal laws.

In the world of real estate, the promoter and the allottee have a professional relationship between them that is established through contractual liabilities by execution of the agreement for sale. The Real Estate (Regulation and Development) Act, 2016 (hereinafter referred to as the “Act”) mandates the execution of an agreement, which acts as a promise to sell an apartment/plot/building, as the case may be, in the future, and guides the conduct of the parties involved through terms and conditions set through consensus between the parties.

What is an Agreement for sale?

In the context of transfer of an immovable property, an agreement for sale is a legal document executed between the vendor and the vendee for a future sale of an immovable property. It sets out the conditions, as set by the parties upon consensus or through standard practice, that shall be obliged by both the buyer and the seller. The execution of the agreement ensures the future sale or property and transfer of rights, duties, and obligations in the immovable property from the seller to the buyer, if the conditions specified in the agreement are met with.

A misconception speaks considers no that the execution of the agreement for sale results in the transfer of rights in the property at the time of execution of such agreement, however, the same does is untrue. While an agreement for sale establishes a relationship for a future transaction; an agreement of sale establishes a relationship for a present transaction. In both the circumstances, the rights are not immediately transferred and are only affected upon the execution of a sale deed.[1] The difference between an agreement for sale and the sale deed can be seen as under:

The Transfer of Property Act, 1954 generally deals in such transactions involving immovable property and it has been clarified that the agreement for sale does not create any right, title or interest in the property under Section 54 of the Transfer of Property Act, it creates an interest in the property by operation of second paragraph of Section 40 of the Transfer of Property Act and this right prevails by operation of Order XXXVIII, Rule 10 CPC.[2] However, for the purpose of this article, we shall stick to the provisions of the Act and the interpretations therein.  

The aspect of an agreement for sale is covered in section 13 of the Act which is as under:

Section 13: No deposit or advance to be taken by promoter without first entering into agreement for sale:

(1) A promoter shall not accept a sum more than ten per cent. of the cost of the apartment, plot, or building as the case may be, as an advance payment or an application fee, from a person without first entering into a written agreement for sale with such person and register the said agreement for sale, under any law for the time being in force.

(2) The agreement for sale referred to in sub-section (1) shall be in such form as may be prescribed and shall specify the particulars of development of the project including the construction of building and apartments, along with specifications and internal development works and external development works, the dates and the manner by which payments towards the cost of the apartment, plot, or building, as the case may be, are to be made by the allottees and the date on which the possession of the apartment, plot or building is to be handed over, the rates of interest payable by the promoter to the allottee and the allottee to the promoter in case of default, and such other particulars, as may be prescribed.

Varied aspects with respect to the agreement for sale, as required under Section 13 of the Act are discussed as under:

1. Contents of the Agreement

The purpose of the execution of the agreement for sale is to recognize the rights and duties of the buyer and the seller. The agreement has to be such that covers all such rights and duties, the method, conduct of carrying of their respective obligations, the due dates, etc. Such agreement should satisfy the requirements of Section 10 of the Indian Contract Act, 1872. Additionally, they should satisfy the requirements of section 13(2) of the Act and hence should necessarily mention the following:

• Particulars of construction
• Details of EDC-IDC
• Due date of delivery of possession
• Manner of payments
• Rate of interest to be paid in case of default
• Any other particular, as may be prescribed.

Considering the general law in question, if any such agreement satisfies the pre requisites stated in the Indian Contract Act,1872, it possesses no contractual problem. If we shift the focus to the specific law dealing in real estate transactions, i.e., the Act, it has to be seen that the rules under the Act of respective state real estate regulatory authorities (hereinafter referred to as the “RERA”) provide for a model agreement for sale. This model agreement provides a guiding base to the agreement for sale to be executed between the promoter and the allottee. Various states like Maharashtra, Andhra Pradesh, Goa, Madhya Pradesh, Telangana, Tamil Nadu, Himachal Pradesh, Uttar Pradesh, etc. provide for a model agreement. The parties may stick to the same agreement but may also choose to differ from them same, if consent of both the parties has been acquired.[3] This aspect of consent is highly essential, not only does it form the very basis of the contract law, but in real estate, where the promoter enjoys a more dominant position over the buyer, presence of consent in execution of the agreement also upholds the fundamental of equality as guaranteed by Article 14 of the Constitution of India. The apex court[4] upholding Article 14 had observed that …this principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable Clause in a contract, entered into between parties who are not equal in bargaining power. Whenever the parties attempt to deviate from the model agreement, the terms which may be accepted cannot be arbitrary or unreasonable. For the aspects covered in the Act, the same have to be upheld and adhered to, by the parties; however, the parties have the liberty to deviate from the same if such subject matters have not been considered in the Act. Any deviation made should not be arbitrary, unreasonable, and unlawful. The apex court had descried the execution of such arbitrary, unreasonable, and unlawful agreement to be an instance of unequal bargaining power. The instance, as described in the language of the court: …It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of Rules as part of the contract, however unfair, unreasonable and unconscionable a Clause in that contract or form or Rules may be. In another recent judgement of the apex court[5] it was held that …6.7. A term of a contract will not be final and binding if it is shown that the flat purchasers had no option but to sign on the dotted line, on a contract framed by the builder.

Thus, the content of the Agreement has to be such that is not prejudicial to a party at the cost of another and should also not deviate from the law, as set under the Act or the respective state rules and regulations.

2. Execution of the Agreement

Section 13 of the Act mandates the execution of the agreement for sale at the inception of the relationship between the builder and the buyer. As per the general law, there is no restriction in there being oral contracts, however, the Act requires the agreement for sale to be written and entered into between the promoter and the allottee. Non-execution of such an agreement for sale amounts to violation of section 13(1), for which a penalty can be charged under section 61 of the Act. In a case where no agreement had been executed between the parties, the MaharRERA directed the parties to execute an agreement.[6]  

Another scenario to imagine is where no agreement has been executed between the parties. Even in such circumstances, recourse to RERA can be taken by the aggrieved party. The allotment is evidenced by other communications between the parties or transactions etc.

3. Registration of the Agreement

Section 13(1) requires the agreement for sale to be registered as per the law for the time being in force. The general law on registration, i.e., the Registration Act, 1908 does not require mandatory registration of an agreement for sale but of a sale deed since the latter is the document affecting the actual transfer of rights and interests. The specific law dealing in real estate, on the other hand, sets this as a mandatory requirement. Section 89 of the Act ensures the applicability of the Act over other laws. Before the coming of the Act in force, the Patna High court had rejected the relief sought by the aggrieved for reasons including non-registration of the agreement for sale.[7]

However, as practical practices go, before RERA, even when the agreement has not been registered, the aggrieved may still approach RERA for redressal or any grievance. This practice differs from one state to another. For instance, in Haryana and UP, the parties may approach the RERA or the Adjudicating Officer, as the case may be, even if the agreement for sale has not been registered. Such cases are admitted and adjudicated on merits by the authority, on the other hand, some other states like Maharashtra have also directed the parties to register the agreement for sale.

4. Advanced Deposit

Section 13(1) of the Act specifies that the promoter is not entitled to take more than 10% of the cost of the apartment, plot, or building as the case may be, before execution of the agreement for sale. This threshold of 10% is often considered to be the earnest price which can be forfeited by the promoter in case of cancellation of the unit by the allottee and the same is in form of a penalty, however, the absence of a provision for forfeiture of earnest amount, it is not wrong to comprehend that the Act does not direct the same and hence cannot be done under the Act. This line of reasoning may be observed by some RERA. The majority, on the other hand, allow forfeiture of 10% of the cost of the apartment, plot, or building as the case may be[8] in case of cancellation by the allottee, for no fault of the promoter. This is done to ensure equality between both the promoter and the allottee, as, the continuous payments by the allottees are key to running the real estate sector effectively.  

This advance amount deposited by the allottees is accepted to be more than 10% if the agreement predates the implementation of the Act, however, restricts the threshold for agreements executed after the implementation of the Act.

5. Prospective Effect

The Agreements executed before the coming of the Act in force do not have any bearing on compliance of the model agreement as given by state RERAs as long as the fundamental requirement of lawfulness of the agreement is obliged with. It is for this reason, the Act has a prospective effect on the aspect of agreement for sale.[9] The Act, in its definition of the agreement for sale does not exclude the agreements entered into between the promoter and the allottee prior to the coming of the Act into force and hence covers both the pre-RERA as well as the post-RERA agreements.[10] Thus, Section 13 of the Act is applied only to the prospective agreements between the promoters and the allottees.  

In a case where the agreement for sale was entered into between the parties prior to the coming of the Act into force. The project was an ongoing project, i.e., was not completed at the time of implementation of the Act and had not attained any completion certificate. It was observed that the rights of the parties will be governed by the provisions of the Act and the Rules made thereunder. However, the terms and conditions of the agreement will still be taken into consideration with respect to the matters for which there is no specific provision in the Act or the Rules and the same are not in-consistent to the provisions of the Act or the Rules.[11]

References:

[1] Durgawati Devi v. UOI SLP( C) 37479/2016