Home loans: what to do if builder defaults

The recent slump in the real estate industry has meant that several major builders are unable to complete housing projects and deliver possession to their customers, leaving them entirely in the lurch. As is usually the practice, many of these customers have taken home loans, and they now have to continue paying EMIs on their loan with no delivery date for their dream home in sight. This has put them in utter confusion and into dire straits financially.

Banks will continue to dem ­and EMI payments, and if these customers default, the bank can start repossessing their other assets to claim their dues. The unfortunate truth is that the principle of caveat emptor - buyer beware - is written into the legal regime regulating such situations. This means that the customer continues to be liable, as the customer should somehow have known better. While this is a bad position to be in, there are some solutions that they can consider.

CDRC: Ordinarily, approaching the courts in case of such defaults by builders would be an intimidating option with the high cost of a long-drawn judicial process with no definitive guarantee of relief. The  Consumer Dispute Redressal Commission (CDRC) at the district, state, and national levels offer a substantially better alternative.

In recent cases, the commission has ruled against leading builders and imposed penalties for delays and non-delivery of possession. Further, many affected home buyers are creating registered associations to file their case before the national CDRC, saving their time and money by having something akin to a class action suit.

Criminal courts: Criminal courts are powerful entities, and the defaulter company can have a bailable or non-bailable warrant issued against its representatives if they do not appear before the court and respond to your complaint on their default.

However, criminal courts in India usually have a very long line of pending cases, and hearing dates often happen several weeks apart. Even in instances where the proceedings happen without undue interruption, the defaulter company often employs a battery of lawyers to confound any legal proceeding against them.

Filing a claim at NCLT: When builders find themselves in a state of default, they often declare bankruptcy, in which case they are taken in front of the National Companies Law Tribunal (NCLT) for liquidation.

Potential homebuyers who have been defaulted on can claim compensation through this process as unsecured creditors. This means that they will receive a share of whatever money is left once the operational and financial secured creditors have had their debts satisfied.

RERA Act: The Real Estate Regulation and Development (RERA) Act, passed last year, is a legislation designed to protect the interests of homebuyers. All future housing projects must be registered under this Act, and the law requires housing projects to keep a minimum amount of money in escrow acco ­unts for each project; this means that in instances of default, affected homebuyers can be compensated from this money.

Using the bank: Where the construction project has been 'approved' by the bank, they can be made a party to the dispute especially when the bank has lent construction finance separately to the project. In case of court proceedings, the bank can be expected to claim the home loan debt also from the builder, as it is essentially two loans on the same asset, one from the bank for construction pledging the entire project and also a loan from the consumer who purchases a flat in the project the bank has lent to.

In some cases, the construction company offers to pay 80% of the loan EMIs until the construction is complete, after the bank has done its due diligence. This is because aggrieved homeowners can claim that the bank erred in approving the project. The homebuyer can also approach CIBIL to expunge the default that the banks have reported, or approach the court to expunge the remarks on your credit history in such cases. Where the banking system has defaulted, homebuyers might have to depend upon the government.

The government: For thousands of distressed homebuyers, the government is the last line of hope for some kind of compensation. In the case of Amrapali, state Urban Housing Minister Suresh Khanna stated, "There are nearly 40,000 homebuyers whose investm ­ents are stuck in various Amrapali housing projects. We have decided to give them relief. They will pay the remaining amount only when the builder readies the project for possession." Other affected homebuyers might get similar relief as the disputes continue to attract attention.

(The writer is co-Founder and CEO, LoanAdda.com)