Cost escalation, project risks passed on to buyers, but these clauses may not be valid

Long used to enjoying huge profits, some builders in Mumbai are now trying to palm off cost escalation to property buyers, who, unlike mutual fund or bank customers, do not have a proper real estate regulator to protect their interests. Many builders are inserting new clauses in transaction agreements to pass on some of the project uncertainties amid higher costs, slow demand and regulatory hurdles. The allotment letters given to home buyers contain clauses like provisions for cost escalation, project abandonment, inability to commence construction and also eventuality of non-disbursal of loans from banks. However, some of these clauses are not allowed under The Maharashtra Ownership Flats Act 1963 (MOFA). 
“Developers may include any clause they wish. But if they are contrary to MOFA then it will be ultra-vires and the contract cannot be enforced legally as the provisions of law are statutory in nature and they will supersede contractual obligations,” said Vinod Sampat, advocate and president, Co-Operative Societies’ Residents, Users and Welfare Association. Under the cost-escalation clause, developers seek to recover hike in input costs above 10% from the buyer on pro-rata basis. In another clause governing the possibility of abandoning the project, the developer shall be liable to refund the amount paid by the buyer without any interest or compensation within 12-24 months from the date of such event. 

“In case the project is abandoned for any reason other than force majeure or on failure to give possession, the developer is expected to refund the amount paid by the customer with 9% interest under MOFA,” said another legal expert. One of the new clauses stated that after the buyer terminates the contract to buy the apartment if the developer does not commence project construction within a year of allotment letter, the builder will refund the amounts paid by the buyer with simple interest of 6% per annum. 
This clause is aimed at passing on the uncertainty over securing civic authorities’ approvals that have almost stopped coming in for the last couple of months. 

In case of termination or cancellation of the deal, according to a new clause, the developer will refund the amount paid so far in monthly instalments starting from the 13th month of such termination or cancellation. 

An allotment letter is a temporary arrangement between parties until a formal contract is executed, stamped and registered. It is not covered under The Maharashtra Ownership Flats Act 1963 (MOFA) and therefore may not be legally binding until both the parties — developer and flat buyer — have the intention to convert this into a stamped and registered agreement. 
“Allotment letter between developer and buyer is not allowed in Maharashtra, but it is only a convenience practice facilitating financial transaction between developers and investors. One can’t push such clauses, which are not permissible. Buyer need not suffer under any circumstances,” said Sunil Mantri, president, Maharashtra Chamber of Housing Industry

According to brokers, HNIs who usually consider these premium developments may not support these new clauses like cost escalation, project abandonment, and non-commencement of work. Most of the investors resort to this kind of arrangement with developers and therefore genuine end users may not be affected, they said. Mr Mantri highlighted MOFA 1963 does allow escalation cost clause in agreement, but usually developers do not pass on any hike in input cost to buyer. 

Source: The Economics Times April 20th, 2011