The Conflict Between RERA and SARFAESI and Their Respective Dominance

Introduction:

The expansive nature of the Indian legal framework sometimes results in conflicts between different legislations addressing common subject matters. Such conflicts give rise to a distinct and evolved jurisprudence, aiming to fulfill the objectives of each legislation. This aligns with the legal principle that emphasizes the need for laws to evolve according to requirements. This discussion focuses on a specific conflict between the Real Estate (Regulation and Development Act), 2016 (RERA) and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). Given the significant roles these two legislations play in the real estate industry, it is crucial to understand their potential impact on the overall market dynamics.

The analysis stems from a judgment by the Hon’ble High Court of Judicature for Rajasthan, Jaipur bench in Union Bank of India v. Rajasthan Real Estate Regulatory Authority and Ors.1 (Rajasthan HC Order), subsequently upheld by the Hon’ble Supreme Court of India in Union Bank of India v. Rajasthan Real Estate Regulatory Authority & Ors. The need for this examination arises from the potential repercussions on financial institutions, allottees, and real estate developers.

Several related judgments on similar issues, decided by various benches of real estate regulatory authorities and courts, highlight the ongoing conflict between RERA and SARFAESI. For instance, in Bikram Chatterji v. Union of India, the conflict is evident. Recently, the Gurugram bench of Haryana RERA in Puneet Gupta v. International Infratech Private Limited emphasized that RERA, being subsequent to SARFAESI, aims to safeguard the interests of allottees in real estate projects. RERA imposes an obligation to ensure that the rights of allottees are not compromised.

This article delves into the decision and potential conflicts arising from the clash between these heavyweight legislations. It also explores possible positions that stakeholders may adopt in such conflicts.

The Issue Itself:

Real estate developers typically raise debt while simultaneously marketing projects to prospective allottees who deposit amounts with the developer. The project is often mortgaged in favor of financial institutions as security for the debt. The developer is accountable to both financial institutions and allottees who have booked units in the project. It is essential to note that contractual or civil disputes between the developer and financial institutions fall under civil courts, while enforcement of security under SARFAESI is handled by the appropriate Debt Recovery Tribunal (DRT). Disputes between the developer and allottee concerning the project, possession, and related matters are adjudicated by the relevant authority under RERA.

The SC Order, based on the Rajasthan HC Order, establishes the principle that, in case of a conflict between RERA and SARFAESI, RERA, being a special legislation, prevails. RERA does not apply to transactions between the borrower and financial institutions unless the creation of mortgage or transaction is found to be fraudulent or collusive. Importantly, the SC held that RERA Authorities have jurisdiction to entertain complaints by aggrieved persons against the bank as a secured creditor under Section 13(4)5 of SARFAESI. However, this is subject to the caveat that RERA’s jurisdiction applies only when homebuyers initiate complaints to protect their rights. This caveat aims to prevent developers from using this provision as a defense to evade SARFAESI’s clutches.

The Rajasthan HC Order interprets Section 2(zk)7 of RERA broadly, considering financial institutions, as assignees of promoters, as promoters themselves. This interpretation implies that financial institutions can be deemed promoters under RERA. The order clarifies that RERA does not apply to transactions between the borrower and the lender unless the creation of security interest is found to be fraudulent or collusive.

Projects often involve multiple allottees. If there is a delay in possession by the developer and simultaneous default with financial institutions, enforcing security becomes challenging due to multiple complaints by allottees.

Haryana RERA in Puneet Gupta’s case asserts that the allottees’ investments and the builder-buyer agreement create vested rights, which financial institutions cannot infringe upon. This observation raises questions about the enforcement rights of financial institutions in real estate projects.

Implications:

These orders’ direct impact on the interplay between RERA and SARFAESI creates a situation where financial institutions must consider their recourses in case of a promoter’s default, taking into account the rights of homebuyers. The involvement of RERA Authorities in SARFAESI’s enforcement process adds complexity. The SC Order introduces qualifiers for financial institutions’ exercise of rights under SARFAESI. The applicability of RERA is contingent on whether the security interest was created before the introduction of RERA and whether such creation was fraudulent. Homebuyers themselves must initiate complaints to show an infringement of their rights for RERA to have jurisdiction.

The SC Order also compels financial institutions to assume the role of promoters instead of solely enforcing secured property to settle debts. While safeguarding homebuyers’ rights is crucial, it raises challenges for financial institutions, as they cannot be held liable for defaults that occurred in the project. Financial institutions may explore alternative reliefs, such as approaching the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016, and seeking additional securities beyond the mortgaged project.

Implications for Future Cases and the Real Estate Industry:

This ruling establishes a precedent that is destined to shape upcoming legal disputes within the real estate sector. The clarity it imparts regarding the interaction between RERA and SARFAESI holds significant importance for stakeholders navigating the intricate landscape of real estate transactions. Banks, acting as secured creditors, now possess a clearer understanding of the circumstances triggering RERA’s jurisdiction. Concurrently, homebuyers find reassurance in the reinforced protection afforded by RERA against the actions of secured creditors.

Balancing Rights and Responsibilities:

The Supreme Court’s nuanced approach in this judgment reflects a delicate equilibrium between the rights and responsibilities of all parties engaged in real estate transactions. By upholding the supremacy of RERA while recognizing the legitimate interests of secured creditors, the Court underscores its commitment to cultivating a fair and transparent real estate ecosystem.

Looking Ahead: Charting the Course for Legal Clarity:

As legal interpretations continue to evolve within the dynamic realm of real estate, the Union Bank of India vs. Rajasthan RERA case serves as a testament to the judiciary’s dedication to providing clear and unambiguous guidelines. This judgment not only dispels existing ambiguities but also paves the way for a more predictable legal environment, allowing all stakeholders to operate with an enhanced sense of legal certainty.

Conclusion:

For financial institutions, the situation resulting from the SC Order is less than ideal, with certain qualifiers limiting their rights under SARFAESI. Protecting all stakeholders’ interests is crucial, and the completion of projects becomes paramount. Balancing the rights of lenders under SARFAESI and the protection of homebuyers’ rights is a delicate task. Stakeholders must work towards project completion to recover outstanding dues and facilitate possession. The rights of lenders under SARFAESI should be upheld to avoid reluctance in financing real estate projects, which could lead to increased borrowing costs for developers. Such complications may ultimately result in higher project costs borne by homebuyers.

Aditya Pratap is a lawyer and founder of Aditya Pratap Law Offices. He practices in the realm of real estate, corporate, and criminal law. His website is adityapratap.in and his media interviews can be accessed at http://www.youtube.com/@AdityaPratap/featured. Views expressed are personal.

This article has been assisted by Siddharth Pandey, 5th year law student pursuing B.A.LL.B. from Amity Law School, Lucknow