The Supreme Court has settled the question as to which among the two Act prevails over the other? RERA or SARFAESI?
The Bench comprising of Justice MR Shah and Justice BV Nagarathna has held that RERA prevails over the SARFAESI and that Homebuyers can move RERA Authority against the bank which took possession of a real estate project as a secured creditor.
The Court's observation came in challenge to one Rajasthan High Court judgment which it confirmed eventually.
The question posed before the Rajasthan High Court was about the authority of RERA to issue any directions against a bank or financial institution which claims security interest over the properties which are subject matter of agreement between the allottee and the developers. The bank had contended that it is not amenable to jurisdiction of RERA since RERA can issue directions only against a promoter, allottee or a real estate agent and not the bank. The petitoners in the case had assailed a RERA Ruling wherein it was had held that bank being an assignee of the promoter, would fall within the definition of promoter and thus due directions were passed.
The High Court had observed that the moment the bank takes recourse to any of the measures under sub-section (4) of Section 13, it triggers statutory assignment of right of the borrower in the secured creditor.
High Court Analysis
The Court while deciding on question of applicability of RERA while SARFAESI Act is also activated, noted that Section 35 of the SARFAESI Act provids that the provisions under the said Act shall have the effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Similarly worded provision giving overriding effect to RERA Act is contained in Section 89. This Section as noted, provides that provisions of the said RERA Act, shall have the effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
Which of the two provisions giving overriding effect to the statute would prevail?
The Court referred to West Bengal State Electricity Board Vs. Calcutta Electric Supply Corpn. Ltd., 2001 Latest Caselaw 636 SC to held that in the event of direct conflict between the two central statutes giving overriding effect to the RERA Act, ordinarily the subsequent legislation would prevail.
"“139. A submission has also been raised that the RERA recognises and protects interests of the lenders and does not in any manner take away rights under any of the existing statutes such as T.P. Act, Debt Recovery Tribunal Act, SARFAESI Act. It is apparent from a perusal of RERA, which is a special Act, that certain rights have been created in favour of the buyers. The provisions of RERA have to prevail. When we come to the question of protection of rights of buyers even if RERA had not been enacted, under aforesaid laws in the facts of the case, a different view could not have been taken. However, there is no dispute that the bankers would have the right to recover their dues from whom and in what manner is the question which we have already answered. The provisions of RERA are beneficial to the home buyers and are intended to insulate them from fraudulent action, ensures completion of the building and it is the duty of the court to protect and ensure the home buyers’ interest and at the same time to hold them responsible for the duties enjoined upon them under the said statute. We are not absolving the home buyers from the discharge of their liability if any. At the same time, they have the right of enforcement of their right for compensation due to undue delay in completion of the project.”
Whether RERA would have jurisdiction in cases where the transactions between borrowers and the banks are completed before enactment of the Act?
Answering as to whether in case if the loan is already availed by mortgaging the property and creating security interest in favour of the bank, in such a case can RERA exercise powers under the Act, the Court made referrence to Section 11 of RERA Act which pertains to function and duties of the promoter.
-Sub-section (4) of Section 11 requires the promoter to perform several acts and obligations. Clause (h) of sub-section (4) of Section 11 reads as under:-
“(h) after he executes an agreement for sale for any apartment, plot or building, as the case may be, not mortgage or create a charge on such apartment, plot or building, as the case may be, and if any such mortgage or charge is made or created then notwithstanding anything contained in any other law for the time being in force, it shall not affect the right and interest of the allottee who has taken or agreed to take such apartment, plot or building, as the case may be.”
In view of the above, the Court noted that after a promoter executes an agreement for sale for any apartment, plot or building he shall not mortgage or create a charge on such apartment, plot or building and if any such mortgage or charge is made or created then notwithstanding anything contained in any other law for the time being in force, it shall not affect the right and interest of the allottee who has taken or agreed to take apartment, plot or building, as the case may be.
The Court opined that therefore the same would be totally unworkable in a case where transaction between the borrower and the bank is completed before the introduction of RERA Act.
"As per this provision the promoter is precluded from mortgaging or creating any charge on apartment, plot or building with respect to which he has executed an agreement for sale. If he breaches this obligation, such mortgage or charge created shall have no effect on the right and interest of the allottee. This provision thus creates a new obligation and corresponding right in favour of the allottee. Such provisions cannot have retrospective effect. In any case as noted, enforcing any such obligation would be wholly unworkable. It would reopen closed transactions between the borrower and the lender. In our opinion therefore RERA Act would have no applicability to the secured creditors where such security interests have been created before introduction of the Act"
The Court analysed SC Judgements and observed that in absence of fraud or collusion the Act cannot be applied retrospectively to the banks and financial institutions in whose favour security interests have been created prior to the enactment of the law.
Does RERA have the authority to issue any directions against a bank or financial institution which claims security interest over the properties which are subject matter of agreement between the allottee and the developers?
The Court referred to the definitions of the terms like "promoter", "assignee" , “real estate agent”, “as to mean”, “means and includes” and others in RERA and SARFAESI Act and upheld the High Court observation.
"For all purposes thus the secured creditor steps in the shoes of the borrower in relation to the secured asset. This is thus a case of assignment of rights of the borrower in the secured creditor by operation of law. In other words the moment the bank takes recourse to any of the measures under sub-section (4) of Section 13, it triggers statutory assignment of right of the borrower in the secured creditor. Till this stage arises the bank or financial institutions in whose favour secured interest may have been created may not be in isolation in absence of the borrower be amenable to the jurisdiction of RERA. However the moment the bank or the financial institution takes recourse to any of the measures available in sub-section (4) of Section 13 of the SARFAESI Act, RERA authority would have jurisdiction to entertain the complaint filed by an aggrieved person."
Conclusion
The Court thus left the parties to pursue individually the cases before appropriate authorities.
Read Judgement and Order Here:
SC Order:
Rajasthan HC Order:
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