1. INTRODUCTION

With the advent of the Real Estate Regulatory Authority ("RERA") in the year 2016, a lot has been written about the promoters in terms of their responsibility under RERA but rarely has the focus shifted to the homebuyers who are equal stakeholders in a real estate transaction. The Hon'ble Supreme Court of India in The Kerala State Coastal Zone Management Authority Member Secretary v. Maradu Municipality & Ors.1 ("Maradu Case"), carved some responsibilities for the homebuyers and ruled on the criteria where the interest component shall not be applicable to the refund payable to the homebuyers by the builders.

This article analyses the content and spirit of the decision rendered in the Maradu Case and its practical implications in the real estate industry. The article also brings out different thresholds for qualifications on the applicability of interest and considers whether more needs to be done to clarify the stand taken by the Hon'ble Supreme Court of India in the Maradu Case and lays down a holistic view that can be used in the real estate industry when it comes to compensation.

2. FACTUAL MATRIX: THE MARADU CASE

In order to understand what the Hon'ble Supreme Court of India ruled, it is important to know a bit about the Maradu Case.

(a) 5 (five) builders, namely, H2O Holy Faith, Alfa Serene, Golden Kayaloram, Holiday Heritage and Jain Coral Cove (collectively referred to as the "Builders"), were collectively developing a total of 343 (three hundred and forty-three) flats spread over an area of 68,028.71 (sixty-eight thousand and twenty-eight point seven one) square meters for which the building permission was granted in the year 2006. Out of these 5 (five) Builders, Holiday Heritage did not start any construction of the project. Post the grant of the permission, the Maradu panchayat on the directive of Kerala Coastal Zone Management Authority (the "KCZMA") issued certain show cause notices to the Builders for violating the Coastal Regulation Zone (the "CRZ") norms as the construction fell within 200 (two hundred) meters from the coast where no construction is allowed.

(b) The Builders approached the Hon'ble High Court of Kerala and obtained interim stay order and finished the construction. Later, KCZMA approached the Hon'ble Supreme Court of India in 2016, and subsequently, a technical committee was formed to study the issue. Ultimately, the Hon'ble Supreme Court of India declared the construction permission illegal and ordered the demolition of the structures.

(c) In order to comply with the directions of the Hon'ble Supreme Court of India, the residents were served notices by the municipal authorities to vacate the premises that were met with protest by the occupants. The Hon'ble Supreme Court of India held that the owners of the flats that were demolished due to CRZ violations are not entitled to receive interest on the refund payable to them by the Builders. While the flat-owners of Alfa Serene, Golden Kayaloram and Jain Coral Cove received the amount paid by them for the flats, the flat-owners of H2O Holy Faith did not receive the amount paid to the builder due to liquidity issues of the builder. The Hon'ble Supreme Court of India had directed the collector on possible ways to recover the money from H2O Holy Faith through revenue recovery.

2.1 Analysis of the Maradu Case

(a) It is important to understand the rationale behind the ruling in the Maradu Case. The Builders contended before the Hon'ble Supreme Court of India that all the flat-owners are not similarly situated, and a portion of these flat-owners went ahead with the purchase of the flats despite having complete knowledge about the ongoing dispute between the Builders and KCZMA. It must be noted that the flat-owners were residing in the flats for the last few years and held an undivided share in the land and the market value of such land had increased substantially since the time of purchase. Accordingly, the Hon'ble Supreme Court of India held that as the flat-owners are also the owners of the undivided share in the land that has appreciated in asset value, they shall not qualify to receive interest on the amounts paid by them to the Builders. Further, the State Government of Kerala also came forward and paid INR 25,00,000/- (Indian Rupees twenty-five lakhs only) as interim compensation (the "Interim Compensation") to each flat-owner.

(b) Further, Justice Balakrishnan Nair under whom the Interim Compensation was paid to flat-owners, submitted a report (the "Report") that opined against the payment of interest because of a number of reasons such as: (i) determining the market value of the flats is challenging as each flat is furnished differently; (ii) particulars of payment made in installment by the flat-owners were not available and hence it is difficult to determine the calculation of interest; (iii) number of procedural difficulties and the possibility of re-opening all the cases between the Builders and flat-owners which would take substantial time to materialize; and (iv) unforeseen circumstances and complications that may occur due to unavailability of material data on record.

(c) While point number (iii) and (iv) as recorded in the Report can still be dealt with, it is important to understand the concept of compensation itself. Compensation to victims is a recognized principle of law that is enforced through courts for the injury or loss suffered by the victims. The term itself means a way to amend the loss incurred and to make it balanced. Time and again it has been emphasized by the courts that the quantum of compensation should be equitable, factual and contextual, and the justifiability of the claim has to be taken into account while determining the quantum of compensation. Given that the whole concept of compensation is highly subjective and completely fact dependent, there has to be a balance and a limit where such compensation ends. Compensation cannot be limitless and once it satisfies the loss incurred, the purpose of compensation stands complete and fulfilled.

(d) Further, the principle of caveat emptor or buyer beware can never be ignored, especially when it comes to a big-ticket transaction such as real estate. The fact that many flat-owners went ahead with the purchase of the flats that were demolished in the Maradu Case signifies that compensation cannot be claimed for an act that has been done with consent. The Hon'ble Supreme Court of India correctly held that when the State of Kerala was directed to pay the Interim Compensation, it was to make up for the illegal constructions by the Builders. Further, a portion of compensation in addition to the Interim Compensation was to be paid by Builders to the flat-owners. The flat-owners were now seeking an interest component on the principal amount that was to be paid as compensation by the Builders. Further, it is to be noted that this was not a case of non-possession of the flats that are eligible for the interest component, and the undivided share in the land appreciated with the passage of time.

(e) The Hon'ble Supreme Court of India further relied on Allahabad Bank v. Bengal Paper Mills Company Limited & Ors.2, where the Hon'ble Supreme Court of India had held that the applicants were not entitled to any interest as compensation in view of their enjoyment of assets for 10 (ten) years on the deposit of the purchase price. Another case that was relied upon was Central Bank of India v. Ravindra,3 wherein, the Hon'ble Supreme Court of India had held that a person is entitled to compensation for deprivation of money due to a creditor that was not paid or withheld by the debtor after the time when payment should have been made upon breach of legal rights, and interest was a compensation against such breach. It is relevant to note that although the flat-owners were only paid an amount equivalent to their investments in the flats that were demolished, it cannot be ignored that they enjoyed the benefit of staying in the flat for a period of 8 (eight) to 9 (nine) years and hence, the interest component is ruled out.

3. IMPLICATIONS

The ruling in the Maradu Case creates a jurisprudence that limits the compensation in cases where the buyers of the real estate units have consented to a purchase that comes with certain disclosures. Further, the calculation of compensation shall always be fact-dependent and must be balanced. In such cases, factors such as the value of the land, the duration of usage of premises and the interim compensation will be taken into account when deciding the final compensation value.

Although it remains to be seen to what extent the ruling in Maradu Case can be applied, the ruling is clear in its wording that homebuyers are equally responsible and equal stakeholders in a real estate transaction. Homebuyers can be held liable for their acts and must pass the test of equity. The compensation payable to homebuyers cannot exceed the extent of liability. The amount must balance the wrong done and such an amount must limit itself at some point, especially when a transaction is being undertaken with the full consent of the party concerned. In cases where both buyer and the seller are at fault, the Maradu case will come handy in determining the liability of the seller and the compensation against such liability.

4. CONCLUSION

The ruling in the Maradu Case is clearly a welcome step for the industry as it provides clarity on one of the heavily contested issues in any real estate litigation. The onus of responsibility may not always fall completely on the builders and the buyers should also make an informed choice. Interest over the compensation may not be asked as a matter of right but it should be seen how viable such interest over the compensation will be and most importantly, if it is even required.

The rights and interests of all the stakeholders must be balanced to maintain an equilibrium of market sentiments. Questions like – (i) what will trigger a liability; (ii) the quantum of such liability; and (iii) if the amount of the compensation is crossing the amount that is actually payable, must be answered before invoking the deep pocket theory.

Footnotes

1. MA No. 1808-1809 of 2019 in Civil Appeal Nos. 4784-85, 4786-89, 4790-93 of 2019, decided on May 13, 2022.

2. C.A. No.- 004191-004191/1991.

3. (2002) 1 SCC 367.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.