WHAT IS A SUBVENTION SCHEME?
Homebuyers are facing the double-edged sword between home loans and delay in possession. Law Answer Online offers legal advice on property for such cases. There are times when people are not able to bear the whole purchasing cost of a property, they initially require financial schemes to ease the burden.
legal advice on property
These financial schemes were introduced in the form of subvention schemes to support property buyers, with an aim to alleviate the burden of the buyers by making it an easier way to purchase property
The main area of focus has been the homebuyers who have been availing of home loans. There have been three parties involved in a subvention scheme, namely the buyer; the bank; and the builder.
These three parties come in an agreement where the buyer agrees to pay partly i.e. the down payment (fixed ratio), where the bank agrees to pay the loan amount to the builder in the form of a home loan, and thus the builder agrees to pay the interest on the buyer’s home loan till the possession is received or as per the terms mentioned in the agreement. The banks, therefore, are liable to release the payments according to the construction schedule.
REALITY OF SUBVENTION SCHEME;
With the increase in fraudulent cases under the veil of such attractive schemes, the National Housing Board (NHB) had imposed a ban over such schemes. These schemes were resulting in shifting liability towards each other. Some of its clauses included that if the builder fails in paying interest on the home loan then the liability to pay the interest shift onto the home buyer, allowing the builders to make more money through the buyers and were able to evade any liability associated with the money. The buyer was the one who was forced to pay the whole loan amount along with interest, resulting in the negligence of financial institutions.
LEGAL REMEDIES
Delivering possession on time is a key requirement and if due to any circumstances the purchaser is not able to attain his property then he/she can send a legal notice to the builder, claiming a refund on the amount besides the interests and/ or damages fabricated. The buyer can also file a grievance in the consumer court for deficiency in service under the consumer protection act 1986, against the builder. The people can avail legal advice on property in order to have a brief idea upon such sort of schemes.
EFFECTS OF THE DELAY IN POSSESSION
- Due to delay in possession, the credit score of the buyer gets affected and it results in damaging the credit score, further limiting the borrowing capacity of the buyer.
- If the project gets delayed or the presence of the liability results in a shifting clause where the bank pays off the loan amount without deducting the pre-EMI interest, the burden of payment shifts to the buyer.
- If the builder is paying off the amount, the price gradually increases with a premium of 10% -15%.
- The tax benefits can only be claimed from the date from which his EMI commences.
- If the builder delays the possession, then the burden of paying the interest needs to be paid by him.
- The penalties that would be required to pay if there is any occurrence in delayed possession needs to get decided beforehand.
ROLE OF BANKS
Due diligence is an essential activity in terms of property. Due to the involvement of large amounts, the due diligence by the homebuyers has increased rapidly. Due to the applicability of the subvention scheme, it has led the liability with the financial institution to provide easy home loans to the required home buyers. This has created a vast opportunity for the buyers as they are relying on the credibility of the bank investing in the project. Legal help over such matters can provide a better framework for such schemes.
However, these financial institutions are not obligated to perform any sort of due diligence of the developer prior to sanctioning loan any such schemes. Although it is their duty to carry out due diligence investigation prior to sanctioning a loan, and are subject to RBI regulations, which further provides more security to the home buyers taking loans from the House Financing Company.
If, due to the absence of proper guidelines relating to due diligence to be charged against builder under subvention schemes, these regulations are to remain a paper tiger. It gets unlikely if the bank does not appeal in a higher forum, since the tripartite agreement mentions that the ultimate liability rests with the buyer when there is a default made by the account of the builder.
CASE LAW
The famous Bikram Chatterji case, famously known as ‘AMRAPALI GROUP OF COMPANIES CASE’, was an interim order passed in favour of homebuyers, providing a stand against such schemes.
Amrapali group came with their real estate project to be established in Noida, and Greater Noida for residential accommodation. Various brochures, pamphlets, were been distributed. In addition, the assurance was given that the possession would be provided within 36 months with a liberty period of 6 months, along with various other amenities. Provision was also made that the home loans could be availed by the subvention scheme, which was considered to be an attractive offer for the homebuyers.
A massive amount was being delivered to the builder but the construction was not completed within the given period of time including the extended delivery date as well. When the enquiry was being conducted it was found that neither the builder had paid the amount to land leasing authorities nor they had paid the interest payable to the banks under the subvention scheme. Due to this pitfall and non-payment of interest, homebuyers were asked to pay the loan interest which was defaulted by the builder which henceforth resulted in a heavy loss of the homebuyer.
In 2017, several homebuyers went to address the National Consumer Dispute Redressal Commission (“NCDRC”). While the complaint at NCDRC was in the process of being heard, a petition for winding up was filed by Bank of Baroda before NCLT under Section 7 of the Insolvency and Bankruptcy Code, 2016 which initiated the corporate insolvency resolution process against the respondent, i.e., the builder. The moratorium was imposed which made the homebuyers approach the Hon’ble SC for saving their hard-earned money.
Once the court got deeper into the case and facts the commencement of such frauds got acknowledged, in order to get a clear view of the alleged fraud, the forensic audit was ordered which further stated many activities of fraud, divergence, and money laundering done by the builder for their personal benefit. It was found that the builder used the homebuyer’s money and other 40 companies for building personal assets.
The Apex Court held that the Uttar Pradesh Land Leasing Authorities and Bankers, have failed to comply with their legal duty and have been a hand in glove for the builder and have breached the public trust. The land leasing authorities have failed to collect premiums in a timely manner and on the other hand the bankers sanctioned the loan on the condition to invest in the project without inquiring about the mortgaged property and were not even bothered enough to verify the location of transferred funds.
The compilation of all such factors provided an opportunity for the builder to defraud people and banks.
CONCLUSION
This landmark judgment on Bikram Chaterjee, states that there is an implied duty on the financial institutions to conduct due diligence investigations before sanctioning loans to the builders under subvention schemes where the bank/financial institution plays a vital role in being accountable to buyers for the project, leading them to invest in the project.
These banking institutions cannot be held liable under subvention schemes when they fluctuate, either intentionally or unintentionally, in complying with the due diligence standards and accessing the funds generated under such schemes. The liability in such cases should be outlined, considering the scheme which is opted to the person held liable. If the brochure that the bank has provided assures such schemes then, the bank should not be allowed to recover the amount of the default done by the developer from the innocent homebuyers.