Legally Speaking: Recent Court Rulings Developers May Take Note Of

While hopes of a better future keep them going, India's real estate developers, as it stands today, are dealing with a humungous pressure. Revolutionary legislations such as the Real Estate Act and the Goods and Service Tax are causing teething problems that might take a while to subside. Additionally, there are other concerns, too, that developers have to be mindful of, recent verdicts and guidelines by the judicial system included.

Speaking of the judicial system, let us look at certain recent court orders that will impact the way India's real estate developers do business.

Willful defaulters should be dealt with an iron hand, say SC

Financial stress was one of the prime reasons why several developers failed to complete their projects in time in the recent history of India's real estate. Many of them have failed to pay their dues to the banks, with their debts turning non-performing assets. While there are provisions to deal a situation such as that, developers will find it increasingly hard to get away with financial defaults in case authorities sense any willfulness in their manner.

“It has become a general scenario that persons who earn money with the help of hefty loans are not making payment of dues … The time has come when they have to be dealt with sternly and with an iron hand so as to make them pay public dues,” the Supreme Court (SC) observed recently. The apex court made this observation while hearing a matter in which an educational trust had taken a loan of Rs 75 crore. Due to non-payment of dues, its liability to the bank had swelled to Rs 480 crore. 

Giving its verdict in the Maharaji Educational Trust versus Hudco (Haryana Urban Development Cooperation) case, the SC said: “In spite of running institutions which have been set up by the money lent to them, they are not making payment of dues. Consequently, they will have no right to run the institutions in such a dishonest manner. The increase of non-performing assets in banks is one of the offshoots of such murky deals. It is shocking that despite having means, earning profits they are not interested in making payment.”

The highest bidder may not necessarily be the winner: SC

Suppose, an urban development authority is selling a plot for a reserve price of Rs 10 core. However, there are not many bidders and only one developer has agreed to pay Rs 8 crore for the property. One would naturally assume that the development authority will have no choice but to sell the plot to this highest bidder. However, the Haryana Urban Development Authority (HUDA) refused to sell a 9.5-acre commercial property in Gurgaon to Orchid Infrastructure Developers even after its bid was the highest at Rs 111.75 crore. Auction trends in other cities of Haryana show that the property in Gurgaon was worth far more than the bidding amount. However, the company took the development authority to the Punjab and Haryana High Court which ruled in favour of the former. When the matter reached the SC, the HC order was quashed. The SC ruled that the rejection of the bid was “beyond the pale of judicial scrutiny”, as the HUDA had acted in the interest of the public by rejecting the company bid. It also saved state revenues by saving the prime asset “from being plundered”, the SC said.

Another crucial point that emerged of the judgement was that a bidder has only the “right of fair treatment” in matters related to bidding. If his bid has been refused, he cannot insist on further negotiations.  Refusal to accept a bid by the auctioneer does not amount to the breaking of any contract.

Developers have to pay welfare cess

Before the apex court gave its verdict on the matter, there was ambiguity on whether construction companies were liable to pay welfare cess to construction workers.  In their plea to the SC, several construction companies that united to file an appeal argued that the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act and the related Welfare Cess Act did not apply to them as they were registered under the Factories Act.

Now, the apex court has ruled that construction workers are not covered under the Factories Act, and construction companies are obliged to pay welfare cess to them. The SC has ruled that the welfare measures provided under the two legislations cannot be denied to building workers.

Giving its verdict in the Lanco Anpara Power Ltd versus State of Andhra Pradesh case, the SC ruled: “Semantic luxuries are misplaced in the interpretation of 'bread and butter' statutes. Welfare statutes must, of necessity, receive a broad interpretation. Where legislation is designed to give relief against certain kinds of mischief, the court is not to make inroads by making etymological excursions.”

Work contract is divisible, says SC

Another landmark running that will have a direct bearing on real estate and construction companies are the SC ruling on work contracts. Giving its verdict in the Indian Hume Pipe versus the State of Rajasthan case, the apex court has ruled that a works contract is divisible. It could be divided into two parts, one for sale of goods and the other for supply of labour and services, and they can be dealt with separately. Based on that, authorities can levy sales tax on the goods going into the civil work.

In the current case, Indian Hume Pipe undertook civil work to maintain dams and canals, mainly to lay pipelines, using its own material. The company sought an exemption for the goods used in the works, saying it was a single composite works contract and the goods used couldn't be separated from the civil work. The government, on the other hand, argued that the contract was divisible ─ the work of supply of pipes and the works for the contract of civil work were two different contracts.  The first part was concerned with the sale of the material on which tax had been levied.

Also read: Legally Speaking: Recent Court Orders On Land Acquisition