Karnataka High Court comes to the rescue of homebuyers bullied by banks for EMIs

Karnataka High Court comes to the rescue of homebuyers bullied by banks for EMIs

In a first-of-its-kind ruling, the builder has been asked to pay the financial institution in delayed projects without burdening the flat purchasers

The Karnataka High Court has given a ray of hope to lakhs of homebuyers facing coercive action from financial institutions. It applies to those who availed of loans from banks but could not pay the EMIs due to the delay by real estate developers in offering possession of their flats.

In a significant judgment, a single-judge bench comprising Justice Krishna S Dixit held that if banks erred during their business and suffered a loss, the borrower who wanted a permanent roof over his head, cannot be the casualty. It has ordered a bank against harassing people for recovering loans if it failed to ascertain the construction status of flats.

The matter pertains to a housing project Mantri Webcity by Mantri Developers Private Limited in Bangalore where the developer launched over 1600 apartments in 2014. Numerous homebuyers had booked flats under the pre-EMI scheme, also called the pre-sanctioned loan scheme or subvention scheme.

The Punjab National Bank Housing Finance Limited (PNBHFL) disbursed the loans to the Mantri Developers on behalf of the homebuyers as and when the developer raised a demand. This was done without ascertaining the stages of construction.

The loan disbursement was in violation of the Reserve Bank of India (RBI) and the National Housing Board (NHB) 2013 guidelines. The rules mandate the banks and housing finance companies must first establish the construction phases before handing out funds to the developer.

The three entities - the buyers, the developer and the bank entered into a Tripartite Loan Agreement. One of its clauses mentioned that if the homebuyer wished to withdraw, the entire amount would be refunded to him by the developer.

Thus, dissatisfied with the slow pace of development, many buyers decided to withdraw their bookings from the project and intimated it to both the bank and the developer. Besides loans, they had also paid certain payments out of their own pockets, which also they asked the developer to refund.

On refusal by the developer, they filed a complaint with the Real Estate Regulatory Authority (RERA), which directed the developer to pay them within 30 days or else it would carry 10.25 percent interest.

RERA ordered the developer to discharge the loan raised in the name of homebuyers to the bank with all its EMI and interest if any. But when the developer failed to obey, the bank instead initiated coercive proceedings against the homebuyers for the recovery of housing loans.

Thereafter, about 30 homebuyers approached the high court. On behalf of the homebuyers, senior advocate CK Nandakumar referred to the various clauses of the tripartite agreement. He argued that the agreement imposed an obligation on the developer to refund the amount received from PNBHFL and the buyers.

However, the bank argued that both the buyers and the builder were jointly and severally liable to repay the loans.

But the court ruled, "A conjoint reading of various clauses in the tripartite agreement makes it very clear that even when the booking/allotment is cancelled and as a consequence thereof, borrowers obligation to serve the debt evaporates into thin air. The interest of the lending agency is protected, provided that the sanctioned housing loan was released to the developer only after ascertaining the stage-wise construction of the apartments."

The bench added, "The non-fruition of such protective clauses, because of the reckless release of the sanctioned loan even in the absence of any construction on the site, cannot put the borrowers in peril. Such a release being made with the consent of the borrowers concerned, notwithstanding."

Appearing on behalf of the bank, senior advocate Uday Holla argued that the loan was disbursed to the developer on the instruction of the homebuyers. Therefore, they should be barred from filing a case against the developer.

Dismissing the argument, the judge said that in a loan transaction of this kind, "The bankers seek the consent of the borrowers as a precautionary measure to release the amount in favor of the developers. That does not dilute the protection otherwise to them under the tripartite agreement."

The court restrained the bank from persuading the homebuyers for loans. It directed the RBI, the NHB, the PNBHFL and the TransUnion CIBIL Limited to process homebuyers' claims "for reframing the CIBIL scores and for issuing no dues certificate in accordance with the law within 60 days."