Buyers beware, you can lose your property if the developer defaults

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Recently, over 200 families living in the Noida housing society Gardenia Gateway were shocked when they received an eviction notice from the Union Bank of India. The notice said that the developer – Gardenia India – had taken a loan of Rs 78.45 crore and had defaulted, according to reports. Since the developer had mortgaged the project for the loan, the bank said it was well within its rights to attach the property to recover the debt, the notice said.

If a developer has mortgaged a project to a lender and defaulted, the bank can take possession of the property, according to lawyers. Typically, when an individual purchases a property from a developer, it’s the buyer’s responsibility to do the due diligence and check whether the title is clear. In case the project is mortgaged, the buyer should ask the developer to get a no-objection certificate (NoC) from the lender to sell the house. If the buyer fails to do so, the courts can consider it negligence on the buyer’s part.

In the case of Gardenia Gateway, the remedy would depend on whether the buyers got the NoC, or if they have paid stamp duty and registration, or if they are just mere allottees.

Buyers’ obligations: Usually, the realtor is legally bound to inform the lender when he sells any unit in the project and ask the financer to release the charge for the specific house. In some states, like Maharashtra, the law makes it clear that for an under-construction property, it is the developer’s responsibility to have a clear and marketable title. If a project is mortgaged to a lender and the developer still allows you to pay stamp duty and register the flat, without getting an NoC from the lender, it amounts to cheating.

The law gives first preference to secured creditors over buyers who only have an allotment letter. The agreement that lenders sign with the developer gives the former superior rights over allottees. If buyers don’t have an NoC from the lender or a document that shows that the bank has released the charge on the house, the solution can be complicated.

Those buyers who have taken a loan to buy the property would have received an NoC from the developer’s bank. Typically, lenders don’t sanction a home loan unless the buyer submits the NoC .

There’s little precedence in case of buyers who have paid the stamp duty and registered the house but did so without the developer’s lender releasing the charge of their home. It’s a grey area as the property is now in the buyers’ name while being mortgaged. Buyers who have not registered the flats and don’t have an NoC would be considered as mere allottees.

Try to get a stay order: To prevent a lender from taking over their properties, homeowners need to approach the debt recovery tribunal from where the bank has obtained the eviction notice. Lawyers say that the buyers should try to get a stay order preventing the lender from taking possession of their properties. Homeowners need to convince the court that their rights would be jeopardised if the lender goes ahead with the possession.  

According to lawyers, the buyers should form an association to implead in the court. There are times when developers provide personal guarantees to the lender when taking a loan. The personal guarantee can be land parcels or properties belonging to the developer or directors of the company. If there’s a personal guarantee, the buyers can request the court to direct the lender to use the personal guarantee to recover the due.

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