All the Laws & Rules mentioned in this article can be downloaded here: http://tinyurl.com/Real-Estate-Laws-Rules-etc
18 July 2011: Lakhs of redeveloped apartments have been completed in the last 15 years, and millions of people are living in new houses with shiny new flooring and fancy bathroom fixtures. So it is widely felt that all the stakeholders are satisfied, and therefore, it is reactionary to argue against redevelopment.
Is this true? Is the Indian public really satisfied? There are the untold stories of lakhs of victims in the story of India Shining – but who wants to listen? The victims of hundreds of unethical redevelopment projects are stranded without viable legal remedies. There is much anger in flat owners – both before and after redevelopment. But their housing societies, the government, courts of law and the influential building industry are stifling their cries.
Building redevelopment is a market-driven frenzy fuelled by greed and ignorance –- a lot like Ponzi schemes. Redevelopment projects taken up by cooperative societies for economic advancement of a brute majority of its members have a flawed mandate and a crumbly legal foundation.
Gaps in the law deprive the dissenting minority of their voice and their right to proper legal remedies. Members of managing committees forcefully push for redevelopment –- often in return for unethical gratifications from the builders — but are not held legally responsible when things go wrong. Builders too escape legal consequences by passing the onus of their unlawful actions to slippery managing committee members.
Grey areas are persistently ignored by Union and State Law Ministries, State Urban Development Ministry, Municipalities and regulators like MMRDA while formulating and implementing housing policies. The government is deliberately ignoring the harsh ground realities of redevelopment, and turning a deaf ear to its victims. Gaps in the law are papered over by High Courts and Supreme Court while delivering verdicts that ride roughshod over civil liberties, endorsing majority-ism and blind consumerism. By their endorsement, builders are enabled to violate the Fundamental Right of Life & Personal Liberty of the minority who just want to live unmolested in the homes that they own.
But there is a silver lining in all this: UNDERSTANDING GAPS IN THE LAW CAN ENABLE US to fight more effectively against redevelopment. We can have the redevelopment agreement declared void if we properly understand the relevant law.
I. GAPS IN THE LAW:
A. ‘REDEVELOPMENT’ IS NOT DEFINED IN STATE OR CENTRAL LAWS. The various implications of redevelopment have not been debated and passed by Union legislature or state assembly. Although the term ‘redevelopment’ appears in many relevant state and central laws, its definition is nowhere to be seen. Please note: the definition of ‘development’ does not do justice to the complexity of redevelopment. Redevelopment is not merely a cognate form of the term Development. Redevelopment is not simply demolition and rebuilding; it is so much more.
The term ‘redevelopment’ first appeared in the Maharashtra Slum Areas (Improvement, Clearance & Redevelopment) Act 1971 and the concept of redevelopment of middle-class buildings is a logical progression from slum redevelopment. However, this term is not defined in the Maharashtra Slum Areas Act. It is also not defined in:
- Maharashtra Cooperative Societies (MCS) Act 1960
- Maharashtra Regional Town Planning (MRTP) Act 1966
- MMRDA Act 1974 and Development Control (DC) Regulations for Mumbai Metropolitan Region 1999
- DC Regulations of Greater Mumbai 1991 (which has over 102 definitions)
- DC Regulations issued by Maharashtra for other areas
EVEN THE MAHARASHTRA GOVT. DIRECTIVE ON REDEVELOPMENT ISSUED IN JANUARY 2009 DOES NOT DEFINE REDEVELOPMENT; it only stipulates procedures by which a cooperative housing society must pursue redevelopment.
WHY IS LEGAL DEFINITION ESSENTIAL? Because, without a legal definition, nobody knows where the legal responsibilities lie. For example, at the end of redevelopment, a flat-owner gets an unsatisfactory flat which is not as per agreement. However, his society, which entered into the redevelopment agreement with the builder, is not interested in seeking legal remedies. The question is: Can the flat-owner proceed against the society, against the builder, or both? Should he go to cooperative court or to high court? What is the individual flat-owner’s locus standi in enforcing an agreement between society and builder? Without a definition of Redevelopment, this is unclear. Not having the answers to such questions, a flat-owners is forced to accept whatever the builder gives.
B. TYPICAL REDEVELOPMENT AGREEMENT CAN BE EASILY CHALLENGED UNDER INDIAN CONTRACT ACT. Chapter II of Indian Contract Act 1876 defines Voidable Contracts and Void Agreements.
(i) Section 10 states, “All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.” Section 24 says that IF THE OBJECT OR CONSIDERATION OF AN AGREEMENT IS EVEN PARTIALLY UNLAWFUL, THE AGREEMENT IS VOID. Typically, redevelopment projects have all sorts of unlawful objects and considerations, such as sale of parking spaces and the unspoken black-money “cash component”.
(ii) Section 11 stipulates ‘Who are competent to contract.’ It states, “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.” Section 12 stipulates, ‘What is a sound mind for the purposes of contracting’. It states, “A person is said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.”
In the case of a society entering into a Redevelopment Contract with a builder, it is rare that the members collectively understand the redevelopment agreement and are “capable of understanding it and forming a rational judgment as to its effect upon his interests”. Many members are bullied and misinformed into agreeing with the builder’s terms. So it can be argued that for the purpose of contracting, they were not of sound mind!
(iii) Section 13 defines ‘Consent’. It states, “Two or more persons are said to consent when they agree upon the same thing in the same sense.” Given the complexity of redevelopment, and in the absence of legal definitions of redevelopment and its components, it may not be very difficult to prove that consent was given without agreeing on the “same thing in the same sense.”
(iv) Section 14 defines ‘free consent’ as being “without coercion, undue influence, fraud and misrepresentation”. Section 16 defines ‘undue influence’. It states, “A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.” Coercion and undue influence are commonly exercised by the builder upon flat owners, especially after entering into an unholy alliance with managing committee members.
(v) Section 29 describes ‘Agreements void for uncertainty’. It states, “Agreements, the meaning of which is not certain, or capable of being made certain, are void.” The initial agreement with the builder does not completely describe the nature of the transaction, as required by the Contract Act, and yet it seeks to legally bind the society. The builder’s layout plans are drawn up and approved by civic authorities many months or years after the agreement. There is no finality, as the builder keeps changing his layouts without the knowledge and consent of the society members. Unknown to society members or even lawyers, SUCH UNCERTAINTY VOIDS THE CONTRACT.
For the above reasons, the Redevelopment Agreement is either not a contract as defined by the Indian Contract Act, or it becomes void later on. But, such is the widespread ignorance of law, that builders threaten the building society and its members with court action for breach of contract! Fear of bringing the project to a standstill or getting locked in litigation forces flat-owners to agree to new terms and conditions, layout changes, shifting deadlines and various other changes by the builder. REDEVELOPMENT AGREEMENT IS USED LIKE A CHICKEN TRAP; society members are forced to enter deeper and deeper into relationship with the builder who exploits them.
C. HOUSING SOCIETY LACKS MANDATE FOR REDEVELOPMENT UNLESS THE BUILDING IS DILAPIDATED; its mandate is restricted to maintenance of building and common amenities. What most people don’t know is that unless the building is dilapidated, the society does not have legal mandate for seeking redevelopment. To understand why, we have to understand the intent of the law. Each individual buys his own flat by paying money for it, but the society automatically becomes the owner of all the flats in the building in the eyes of the law, and the flat-owner becomes a member. Why? Because, the floor of each flat is the ceiling of the flat below it, and walls, lifts, staircases, compounds, terraces etc. are shared, and must be commonly maintained. For the purpose of joint maintenance of the building, the individual owner is required to surrender a part of his powers or ownership rights to the society.
However, this is not unconditional surrender; there is an unwritten understanding that the society will not interfere in his fundamental right to life and liberty unless compelled to do so in order to safeguard the life and liberty of other members. (For example, the society will not normally break into his house; however, it can do so if he goes out of town leaving the taps wide open, thus flooding the neighbours’ houses and depriving them of their share of tap water.) Life and Liberty is guaranteed to us by our Constitution, and this cannot be taken away by the housing society in exercise its deemed-ownership rights. REDEVELOPMENT TO SATISFY THE ECONOMIC GREED OF THE MAJORITY OF SOCIETY MEMBERS CANNOT BE LEGALLY JUSTIFIED, IF IT TRAMPLES EVEN ONE MEMBER’S RIGHT TO LIFE AND LIBERTY.
D. FROM WHERE DOES A COOPERATIVE SOCIETY DERIVE ITS POWERS? From the Cooperative Societies Act of the respective state. In Maharashtra, the society derives its powers (or legal mandate) from Maharashtra Cooperative Societies (MCS) Act 1960. So let us examine its various sections, and the rules, bye-laws etc, to see where this power is coming from.
(i) BYE-LAWS. Under Chapter VII (Management of societies), Section 72 (Final Authority of Society) says, “Subject to the provisions in this Act and the rules, the final authority of every society shall vest in the general body of members in general meeting, summoned in such a manner as may be specified in the by-laws.” The question then arises: Before entering into redevelopment-oriented activity, has the society formally amended its bye-laws to include redevelopment? In almost all cases, the answer is: No. Therefore, these societies definitely have no legal mandate.
(ii) AUTHORITY OF MANAGING COMMITTEE TO MANAGE SOCIETY’S ASSETS. Section 73 (Committee, its powers and functions) says, “The management of every society shall vest in a committee, constituted in accordance with this Act, the rules and by-laws, which shall exercise such powers and perform such duties as may be conferred or imposed respectively by this Act, the rules and the by-laws.” However, ‘management’ means limited powers to maintain the society’s assets and optimize the benefits of EXISTING ASSETS FOR EXISTING MEMBERS. It does not imply sweeping powers to undertake MASSIVE GROWTH OF ASSETS & HUGE ENROLLMENT ON NEW MEMBERS, as required by redevelopment.
The General Body or Managing Committee often appoints a “Redevelopment Committee” to take the process forward. However, such a committee does not have the necessary mandate either. No such committee can take decisions and exercise powers that affect the Fundamental Right of Life & Liberty given to us under Article 21 of the Constitution.
(iii) REDEVELOPMENT GUIDELINES CIRCULAR DATED 3 JANUARY, 2009 is meant to facilitate redevelopment. It recognizes that redevelopment is widespread, and lays down guidelines for procedures. This circular is a directive under Section 79A of Maharashtra Cooperative Societies Act i.e. Government’s power to give directions. BUT THIS CANNOT BE DEEMED TO CONFER POWERS OF REDEVELOPMENT ON THE MANAGING COMMITTEE, AND THIS CANNOT BE DEEMED TO DEFINE REDEVELOPMENT. It regulates the managing committee’s powers to undertake redevelopment without answering the basic question: From where did the managing committee get these powers? Therefore, this circular is ultra vires of the Constitution as it goes beyond the intent of Maharashtra Cooperative Societies Act. This circular is bad in law, because it strives to regulate an activity that cooperative societies have no power to undertake!
(iv) INDIAN SOCIETIES REGISTRATION ACT 1860. Older housing societies or associations are registered under this Act, and are governed by the Charity Commissioner’s office under Bombay Public Trusts Act 1950. Such a society derives its mandate from its Objects, which is a part of its Memorandum of Association. The Objects typically refer to securing better amenities for its tenants, beautification of the colony, maintaining hygiene etc. Without amending the Memorandum of Association, these societies have no legal mandate for entering into the adventure of redevelopment.
Neither a society’s bye-laws nor Redevelopment Circulars can go beyond the ambit of existing laws and Acts. Rules and directions drafted by the government cannot go beyond the laws passed by the legislature, and cannot amend the basic intent of these laws; they can only flesh out existing laws. THE INTENT OF THE MAHARASHTRA COOPERATIVE SOCIETIES ACT OR INDIAN SOCIETIES REGISTRATION ACT IS NOT TO ENABLE ADVENTURISM AND PROFIT-SEEKING BEHAVIOR BY HOUSING SOCIETIES. The Redevelopment Circular cannot give legitimacy to such behaviour.
Even a unanimous decision by the society’s General Body cannot authorize Redevelopment, because it is beyond the scope and nature of the Law governing Cooperatives, and infringes on the Fundamental Rights of individuals to live peacefully in their own homes!
II. FOR CLARITY IN THIS DISCUSSION, LET US DESCRIBE REDEVELOPMENT AS IT IS CURRENTLY CARRIED OUT.
Redevelopment is an enterprise or adventure undertaken by a housing society, which involves destruction of the existing building(s), and construction of new and much larger building(s) with new specifications, plan layout etc. It involves a contractual agreement between the society and the builder that confers total control to the builder, and virtually confers title over the society’s land to the builder. After the agreement is carried out, the society never regains its original shape and form, and its ownership and management control is forever diluted.
III. EFFECTS ON ORIGINAL FLAT OWNERS:
(i) EVICTION FOR 24-36 MONTHS. After builder receives in-principle approval from municipal authorities for the construction activity, the society hands over vacant possession of the premises to the builder, to enable him to destroy the old building and construct the new building. During this period (typically of 24 to 36 months), the flat-owners are forced to vacate and live elsewhere on rent, and the cost is normally borne by the builder. Moving their families from one leave-and-license accommodation to another for 2-3 years is not a pleasant experience for most.
(ii) DILUTION OF OWNERSHIP & MANAGEMENT CONTROL. As the new building has many more flats, new members will join in large numbers by paying a commercial price directly to the builder, in which the society will have no say. Thus, the redevelopment dilutes the interest of the original members in the land asset, and also in management control of the cooperative society.
(iii) CHANGES IN CHARACTER OF THE FLAT-OWNER’S ASSET. While the old members get new amenities, larger houses and a new and larger building, they must bear increased recurring costs (higher property tax rates and also monthly maintenance of lifts, tower structure, and difficult-to-maintain amenities such as gymnasium, swimming pool etc). When a cooperative housing society of a 3-storey building of 30 members, open playgrounds and no lift virtually hands over the title to the land, and he builds a 20-storey tower with 100 members, it changes its own character, and the livability of the building for the original flat-owners.
(iv) PRESSURE ON ORIGINAL FLAT-OWNERS TO MOVE TO A CHEAPER NEIGHBOURHOOD. The price of the individual flat-owner’s asset increases after redevelopment, but the manifold increase in monthly outgoing cause difficulties to flat-owners with fixed incomes. This forces many original owners to sell these houses and move to cheaper accommodation.
(v) SOCIAL DISADVANTAGE. Typically, the original flat owners are housed in a different wing of the building, which is built first. Alternatively, they are allotted flats on the lower floors. As the builder does not earn anything from this portion but only discharges his contractual obligations, he cuts corners in construction quality, and may design this component with a “poor” appearance. Thus, by seeking redevelopment, the housing society or association acts against the interests of its original members. By contrast, the large number of members who move into the redeveloped society are more “high society”. Not only do they enjoy larger and better-constructed houses, they are typically more moneyed, have bigger cars etc. This leaves the original flat-owners feeling like an underprivileged class in their own compound! How can a cooperative housing society be allowed to inflict this on its own members?
(vi) UNDERVALUING OF FLAT-OWNERS’ COLLECTIVE LAND ASSET. Take the example of an old building society in, say, Vile Parle West with 50 members, on a plot admeasuring 5,000 sq. metres, abutting two roads. Land in this locality being scarce, the plot defies market valuation; the true value depends on the developer’s capacity to exploit it commercially. It is in the interest of the 50 members who own this plot together to find a buyer and negotiate an outright sale agreement that fetches them many multiples of the market price of their individual houses; then they can move to higher-priced properties of their choice, with money to spare. Instead, when they enter into a redevelopment agreement, they hand over their land to a builder who utilizes the unutilized FSI (Floor Space Index) and also loads additional FSI bought as TDR (Transfer of Development Rights), builds a massive tower and earns hundreds of crore rupees. The builder rewards the original owners with a slightly bigger flat than they had – say 110% of original size – but keeps most of the gains. Alternatively, if the redevelopment project goes awry after demolition of the old building, the builder ends up retaining his grip on the land having paid very little for it.
High Courts and Supreme Court courts have adjudicated on whether a few cooperative society members can prevent a redevelopment project, after the majority signed on the dotted line. And the courts have given contradictory orders. For example, Bombay High Court said in 2008 that if 70% majority in the general body is in favour of redevelopment, a minority cannot stand in the way of redevelopment. However, in 2011, it said that even a minority of the members can stop redevelopment if due procedures are not followed by the society. Evidently, the judiciary is confused and has lost its way because of the gaps in the laws on Redevelopment.
IV. RELATED READING MATERIAL:
1. Maharashtra’s proposed Real Estate (Regulation of Development) Act is good, but it does nothing to remove the shortcomings discussed above. Read http://tinyurl.com/Real-Estate-Regulatory-Act
2. Draft of PIL against Redevelopment: http://tinyurl.com/PIL-against-Redevelopers