Flat Buyer’s Right To Claim Compensation For Delay In Handing Over Possession

[Ashish Singh is an Advocate and Former Managing Associate at L&L partners and Megha Shaw is a 4^th year student at NUJS, Kolkata]

Delays in handing over the possession of flats has become a rampant practice in the Indian real estate industry, due to which numerous innocent home buyers are being penalized. Such home buyers are not only left in the lurch without delivery of possession of their flats on time, but they are also being forced to pay EMIs due to the non-delivery of possession of the flats. Hence, the vital question that arises is whether the home buyers ought to continue to suffer due to the inordinate delay caused by the developers in handing over possession of the flats?

This post analyzes the decision of the Supreme Court of India in DLF Home Developers Ltd. v. Capital Greens Flat Buyers Association, wherein the Court came to rescue of, and ignited a ray of hope, amongst the flat buyers. In the said judgment, the Court has come down heavily on the developers, and it directed that even if the developers have given exit offers to the flat buyers, the flat buyers would still be entitled to claim compensation from the developers on account of delay in handing over the possession of the flats.

Factual Background and Contentions

In the present case, DLF Home Developers Ltd. has assailed the judgment passed by the National Consumer Disputes Redressal Commission (‘NCDRC’), granting relief of compensation and refund of money to the homebuyers. In the said appeal, DLF sought that they should not be asked to pay any additional compensation apart from the contractual rate of compensation (Rs 10 per square foot per month) as agreed in the Apartment Buyers Agreement (‘ABA’). In addition, DLF also denied the obligation to refund the club and parking charges as directed by the NCDRC.

DLF contended that the delay was caused due to force majeure events beyond their control, and hence they should not be made liable to pay additional compensation to the flat buyers. They submitted to the Supreme Court that delay in the approval of the building plan as well as stop-work orders given due to the fatal accidents invoked the force majeure clause. Further, they relied on Wing Commander Arifur Rahman Khan and Aleya Sultana v. DLF Southern Homes Pvt Ltd and argued that they are not liable to refund the parking and club charges. They submitted that since the flat owners were given exit offers on account of delay caused by the developers, it would bar the flat buyers from seeking compensation later, as they have forgone the chance of claiming a full refund of the amount along with the interest rate of 9%. Moreover, the buyer’s agreements provide compensation of Rs 10 per square foot per month towards compensation. Hence, it was contended that the relief of seeking compensation at the annual rate of 7% by NCDRC on account of the delay by the developer is erroneous and, thus, should be set aside.

The respondent Flat Buyers Association that the NCDRC, after detailed deliberation, had rightly rejected the force majeure defence. It argued that the exit offers and contractual rate of compensation did not compensate the flat buyers sufficiently. Hence, additional compensation at the rate of 7% was rightly awarded to the flat buyers, along with compensation at the contractual rate as stipulated in the ABA.

Judgment & Analysis

The Supreme Court dealt with the two major issues in this case: firstly, whether there was a force majeure event that caused the delay in handing over possession to the flat buyers; and  secondly, whether the flat buyers are entitled to compensation in addition to the contractual rate of compensation when exit offers were given to them on account of delay.

On the issue of force majeure events, the Court observed no substantial evidence was produced to prove that delay was caused due to force majeure events as claimed by DLF. The Court further stated that delay in the approval of building plans is a very common phenomenon in the real estate industry, and the developer should have taken such delays into account while deciding the period of delivery of the possession to the flat buyers. Even the stop-work orders were given because of the fatal accidents caused due to the negligence of the developer while constructing the project. Therefore, the Court held that there was no force in the defence of invocation of force majeure clause raised by DLF.

On the second issue of seeking additional compensation, the Court held that the mere fact that the developers had given exit offers to the flat buyers along with the interest rate of 9% would have no bearing on deciding whether such flat buyers, who did not opt for such exit options, would be entitled to claim compensation. In the present case, the Court held that where a genuine flat buyer has purchased a flat intending to shift into the flat, and not just as a financier or an investor, then a mere refund or an exit offer would not exempt the developer from paying additional compensation for the delay. A refund of the entire amount along with a 9% interest rate is not a just compensation for a genuine buyer who continues to remain in the contract to fulfill his or her dream to get possession of the flat. Hence, an additional compensation at the rate of 6% should be provided annually.

While deciding the rate of compensation, the Court considered that in Wing Commander the rate of contractual compensation was Rs 5 per sq. ft. and in the present case the contractual compensation rate was Rs 10 per sq. ft. Since the contractual compensation rate was higher in the present case, the Court brought down the additional annual compensation rate from 7% to 6%, even though the NCDRC held that compensation should be paid at the rate of 7% annually. Relying on the same case, the Court cancelled the refund of the parking and club charges that were supposed to be refunded as per the NCDRC Order.

In Wing Commander, where similar issues had arisen, it was decided that the Court could grant additional compensation to the flat buyers, even though they have agreed to a lower rate of compensation in the ABA because the bargaining power of the flat buyer is negligible, and they have to sign a one-sided ABA that is drafted by the developers. Further, the Court relied on principles laid down in Pioneer Urban Land and Infrastructure Ltd v. Govindan Raghavan where the Court observed that “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 […] The incorporation of such one-sided clauses in an agreement constitutes an unfair trade practice as per Section 2(1)(r) of the Consumer Protection Act, 1986 since it adopts unfair methods or practices for the purpose of selling the flats by the builder.“

Further, in DLF Homes Panchkula Pvt. Ltd. v. D S Dhanda, the Court held that the parties needed to provide strong and exceptional reasons to seek additional compensation from the consumer forum. However, in Wing Commander, the Court held that Dhanda did not prohibit the consumer forum from detracting from the agreed compensation rate, but it merely lays down that there should be a requirement of strong and exceptional circumstances to claim additional compensation, apart from the contractual rate of compensation that was agreed between the parties. The Supreme Court also stated that a court must take a logical approach while deciding compensation by noting that the flat buyers have to take loans and payback their EMIs to the banks for such loans. Delays caused by the developers postpone the date of possession and, as a result, the flat buyers have to live in alternative accommodation, which incurs a lot of expenses. Hence, the Court held that where an inordinate delay of two to four years has occurred, the jurisdiction of the consumer forum to award reasonable compensation cannot be foreclosed by a term of the agreement.

Conclusion

Thus, in the present case, the Supreme Court held that there was no force majeure event in the present case, as delay in obtaining building approval is a common phenomenon that the developers should take into account while committing the date of handing over possession. Relying on the principle laid down in Wing Commander and Pioneer, the Court held that additional compensation should be granted at the rate of 6% per annum until the delivery of possession is given to the flat buyers, apart from the agreed contractual rate. Moreover, the Court also held that merely because exit offers were given to the flat buyers would not disentitle them to claim additional compensation.

By way of the aforesaid decision, the Supreme Court came to the rescue of the flat buyers, who do not have any bargaining power to decide the contractual rate of compensation, by entitling them to seek additional compensation from the developers on account of delay in handing over possession of flats. As such, the developers can no longer shrug off the liability of paying just compensation to the flat buyers on account of delay. 

– Ashish Singh & Megha Shaw