Navigating the Labyrinth: Landowners’ Rights in Real Estate Insolvency

[Dhaval Bothra and Rajdeep Bhattacharjee are law students at Symbiosis Law School, Pune]

The intricate realm of real estate development is governed by meticulous development agreements, fostering a collaborative relationship between landowners and developers. In this partnership, landowners contribute valuable land, while developers undertake construction responsibilities, potentially leading to profit-sharing upon property sale. Despite the Real Estate Regulation and Development Act, 2016 (“RERA”) recognizing homebuyers/allottees as financial creditors in insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”), the omission of landowners as creditors presents a significant inconsistency. This lack of uniformity raises complex issues, as the implementation of the IBC and legal scrutiny overlooks safeguarding landowners’ rights within the framework of development agreements.

The Insolvency & Bankruptcy Board of India (“IBBI”) has adopted a proactive stance in tackling this issue by releasing a Discussion Paper that is grounded in the suggestions put out by the Amitabh Kant Committee Report on Real Estate projects. This Discussion Paper lays the groundwork for suggested modifications that could significantly improve the dilemma experienced by landowners under the IBC. The proposed regime seeks to mitigate the exigencies encountered by landowners in the context of insolvency. These measures encompass a multifaceted approach to delineate the dilemma under the current regulatory regime. This post will analyse the IBBI’s efforts to address existing issues and anticipated gaps, along with evaluating the effectiveness of the suggested solutions.

Profit Sharing Models: Legal Challenges

The cases of Mrs. Jesleen Kaur Papneja v. Raheja Developers Limited and Mukesh N. Desai v. Piyush Patel demonstrate landowners’ complex insolvency and bankruptcy issues, notably profit-sharing arrangements in real estate development agreements. Despite resembling loans, the National Company Law Tribunal (“NCLT”), in the first case, ruled that a collaborative agreement on land development and profit-sharing is not operational debt under the IBC. This ruling stresses the difficulty of categorising such agreements and the need to determine developers’ and landowners’ true intentions. The latter held that landowners’ anticipation of profits and residual advantages following project completion is not ‘financial debt’ under the IBC. The verdict portrays the parties as consortium participants in a property development project based on a memorandum of understanding.

Landowners seeking legal remedies for joint development agreement breaches face significant challenges in a section 7 application due to the interpretation of the provisions of the IBC. The above instances demonstrate the legal complexity of profit-sharing arrangements, especially for landowners whose rights are harder to enforce due to loans and collaborative development partnerships. Developers and landowners work together; thus, courts emphasise that these agreements are mutually binding.

Landowners’ Status and Built-Up Area Sharing Model

The cases of Namdeo Ramchandra Patil & v. Vishal Ghisulal Jain and Aditi Bezbaruah v. Mr. Kamalesh Kumar Singhania shed light on the legal position of landowners as financial creditors under the IBC. In the first case, the National Company Law Tribunal (“NCLAT”) dismissed the landowners’ categorization as allottees in the letters allocating shares of built-up areas. The NCLAT emphasised the importance of disbursing debt with consideration for the time value of money for it to be considered “financial”. The lack of a definitive IBC classification for landowners creates uncertainty in profit-sharing arrangements, which influences settlements. Although court decisions have upheld the rights of landowners to their property, the possibility of corporate insolvency could pose a threat to these rights, leading to ambiguity in the execution of profit-sharing agreements.

The case of Aditi Bezbaruah highlights the intricate challenges that landowners encounter in corporate insolvency, as demonstrated by the resolution plan’s absolution of the applicant from penalties and attribution of delays to the corporate debtor. Under the built-up sharing model, landowners’ claims were categorised as non-financial liabilities according to the IBC, unless monies were obtained directly from them. The circulars issued by the Maharashtra Real Estate Regulatory Authority provide additional emphasis on the categorization of entities interested in real estate, such as landowners, as promoters within the ambit of RERA. An intricate regime is necessary to effectively tackle these roadblocks, guaranteeing a harmonious equilibrium between the concerns of landowners after insolvency and the efficiency of resolving the matter.

Moreover, the approval of a resolution plan in corporate insolvency raises complex concerns about landowners’ rights, especially concerning the continuity of leasehold rights. Secure legal standing for landowners’ hinges on the continuation of leasehold rights post-resolution. Examining how the resolution plan maintains existing agreements becomes crucial to safeguard landowners’ interests. The presence of uncertainties in the settlement process compounds the challenge, hindering the enforcement of profit-sharing agreements and protecting landowner rights. The ongoing conflict between resolution plans and title claims further complicates the situation. Addressing these complexities requires a clear legal framework, emphasising the need for comprehensive laws in real estate insolvency.

The IBBI Discussion Paper and its Implications

The IBBI Discussion Paper dated 6 November 2023 outlines proposals that could have a notable impact on the rights of landowners in the context of real estate projects undergoing the corporate insolvency resolution process (“CIRP”). The proposals and their implications are as follows.

Firstly, the RERA mandates the registration of real estate projects exceeding certain parameters to enhance transparency and accountability. This includes projects under CIRP that have not yet received completion certificates. The proposal suggests explicitly mandating the interim resolution professional (“IRP”) or resolution professional (“RP”) to comply with RERA Act provisions. This implies that registration under RERA would be a prerequisite for real estate projects undergoing CIRP, emphasising transparency and aligning with RERA norms. The mandatory registration requirement could potentially benefit landowners by ensuring that projects under CIRP adhere to the transparency and accountability standards set by RERA. This may positively influence the resolution process and protect the interests of landowners by providing clearer project information.

Secondly, the proposal aligns with RERA’s requirement for developers to maintain separate bank accounts for each project by extending this practice to those undergoing CIRP. The IRP/RP would operate separate bank accounts for each CIRP project, enhancing transparency and enabling a project-wise financial overview. This measure aims to provide landowners with increased visibility into the financial aspects of the specific project they are involved in, aiding them in assessing project health and making informed decisions during the resolution process.

Thirdly, it proposes granting the RP the authority to execute registration and sublease deeds during CIRP, pending approval from the committee of creditors (“CoC”). This addresses challenges in the real estate sector where project formalities, such as ownership transfers and handovers, may be delayed despite contractual obligations being fulfilled. Additionally, the discussion paper acknowledges the importance of business continuity in CIRP, specifically in the acquisition and sale of real estate inventory. The proposal allows RPs to transfer ownership or possession of units to allottees with CoC approval, introducing flexibility for allottees to take possession on an “as is where is” basis or contribute funds for project completion. These amendments offer potential benefits to landowners, including homebuyers, providing a more efficient resolution process, protected rights during CIRP, and a structured mechanism for property transfers with CoC involvement.

Fourthly, the paper proposes a solution to challenges in the real estate sector’s CIRP, where companies often manage multiple projects at different completion stages. Recognizing the diversity of these projects, the proposal suggests departing from the current practice of requiring one resolution applicant for all projects. Instead, it recommends that the CoC direct the RP to invite separate resolution plans for each project, allowing for customised treatment based on individual project characteristics. This approach may attract diverse bidders, maximising value in the resolution process. Additionally, the proposal encourages active involvement from allottees in presenting their resolution plans, providing a platform to address project-specific issues and empowering landowners with a more tailored and comprehensive resolution strategy for safeguarding their rights and interests.

Lastly, it tackles a key issue regarding the exclusion of properties in possession of homebuyers from the liquidation estate in real estate insolvency. Recognizing the confusion around properties where allottees have possession but lack registration, the proposal aims to amend the IBC for clarity. This amendment seeks to address judicial ambiguity, providing a consistent treatment of assets and protecting the rights of homebuyers and allottees. The proposal suggests using IBBI’s powers under section 36(4)(e) of the IBC to specify excluded assets, signalling a proactive approach to ensure a fair and transparent resolution process.

Looking Forward

The proposed amendments outlined in the IBBI Discussion Paper signal a potential paradigm shift in addressing the complex challenges faced by landowners in the realm of real estate insolvency. By aligning the CIRP with the stringent provisions of the RERA, the proposals aim to introduce a layer of transparency and accountability. The emphasis on mandatory RERA registration for projects under CIRP could empower landowners by ensuring adherence to established norms and bolstering the resolution process. The proposal’s recognition of the need for separate resolution plans tailored to the unique characteristics of individual projects holds promise for maximising the value and active involvement of allottees, potentially safeguarding landowners’ rights. Moreover, the proactive stance on excluding properties in possession of homebuyers from the liquidation estate reflects a commitment to clarity and fairness, addressing the ambiguity surrounding such assets in insolvency cases. While the proposed amendments present a positive trajectory, their effective implementation and clear guidelines will be instrumental in reshaping the landscape of real estate insolvency, ultimately safeguarding the interests of landowners.

Dhaval Bothra & Rajdeep Bhattacharjee

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