Six years ago, Prosanto Mujumdar (name changed) had booked a flat in a project by a leading developer in Noida. He got to know about this project during the pre-launch stage, and negotiated a handsome discount on his 1,600 sq ft three-bedroom flat. Two months later, the developer entered into an agreement for sale promising delivery in three years’ time. That was, however, delayed and in September 2013, the developer sent the allotment letter along with another surprise.
“There was a demand for Rs 10 lakh towards escalation of costs. The developer said that the super built-up area of my flat had increased to 1,820 sq ft and I was presented a chart showing the heads under which the escalation has taken place,” says Mujumdar, who is now figuring out how to arrange the funds to settle the dues and take possession.
The key point here is that such a provision has been built into Mujumdar’s agreement with the developer who charged him for the eventuality of increased super area turning out to be true. There are several cases of buyers who have been caught in the same situation.
The Union government is aware of the problem, but cannot play a role in the absence of a real estate regulator. “The real estate regulatory bill aims to bring about standardisation in the builder-buyer agreement. Once the bill is passed, the Central government can play a greater role. Currently we are raising awareness among state governments about such problems being faced by the buyers,” says Arun Kumar Mishra, secretary, ministry of housing and urban poverty alleviation.
A buyer’s agreement on the website of a leading developer for a luxury housing project in the National Capital Region vividly makes the case for such charges. This developer has listed out two primary eventualities where the buyer would be required to pay additional charges before taking possession.
One is the “escalation charge”, on account of increase in the costs of raw materials, labour and power. The published agreement lists out a time frame under which any rise in input costs can take place, and then proceeds to show how escalation in these costs would be calculated. A percentage of the base sale price has been determined as the construction cost and within that weightages have been given for different heads: steel, cement, materials, fuel, power and labour.
The other significant eventuality is the “increase in super area”. This developer has defined super area as “sum of apartment area”, “pro-rata share of common areas” in the building where the apartment is located and “pro-rata share of other common areas outside the apartment building” used by all residents of the area. The developer goes on to say that the super area is “tentative”, and that the “final super area” shall be confirmed only after the construction is complete and the occupation certificate granted. The buyer would then have to pay for the increased area.
Anil Kumar Sharma, president, Credai-NCR says that additional demand towards increase raw material cost is now an obsolete practice. “Credai members do not indulge in such practices. However, any sudden additional burden imposed on the developers by the authorities is passed on the buyers, partially or fully, depending upon the builder-buyer agreement.” Sharma adds that almost all reputed developers have put in place robust systems to factor in cost escalation due raw material prices. “They do not charge buyers mid-way.”
The question of increase in the super area is a tricky one, and happens in two instances: when there is a change in the plan or design and when there is a policy change by the government.
Buyers, in order to get the benefit of discounted rates often sign up during the pre-launch stage. At this stage, all that the developer shows is an artist’s impression of the project. Neither is the design final, nor the plans approved. Later, after the civic authorities give their stamp with modifications, the area may change, resulting usually in cost escalation. This actually favours the developer as in the pre-launch deal, he only has to give a receipt towards the down payment. The agreement comes much later, which factors in possible changes to areas and other modifications.
“Developers have the flexibility of effecting suitable changes under the ‘alteration clause’ mentioned in the lopsided contracts. These alterations could be in the layout plan, floor, block, number of said flats and increase in the area of the said unit, which in effect raises the total cost for buyers,” says Sachin Sandhir, MD, RICS South Asia, a professional body for standards and certification in the real estate sector.
“It is a blatantly unethical practice on the part of such developers. When a buyer enters into an agreement, he should know what he is buying, and the numerical value of the area that he is being charged for. When this number itself is subject to alteration, it places a question mark on the developer’s motives. Buyers are best advised to stay away from such projects,” says Vivek Singh, regional business head-NCR, Value and Budget Housing Corporation.
The second situation that can arise is change in government policy. Suppose that construction has not commenced, and the government changes policy that would apply to the project in question. The developer would have to go back to the drawing board in order to comply and recalculate his margins. This happened in Mumbai when the government changed development control norms. What is the remedy that buyers in such a situation have? Actually, none since they have entered into an agreement that can be best termed as unfair, but not illegal.
“Buyers in case of an escalation do not have much choice. In the past too, several cases have come to our notice, where even the judiciary has cited the problem that agreements are framed in a manner to adjust the additional cost incurred during the course of construction,” says Sandhir.
“Buyers must check the content of the cost escalation clause and must always keep some extra money in case the super built up area increases,” says Sam Chopra, chairman, Re/Max India, a brokerage firm. “The rate of change can be effectively reduced by mutual agreement before the actual deal,” adds Sandhir. “Buyers should read the builder-buyer agreement carefully before investing in any project. However, if a developer mid-way demands an amount due to escalation in raw material cost and if there is no related clause in the agreement, the buyer can lodge the complaint with Credai-NCR,” says Sharma.
The other point to remember is not to fall for pre-launch discounts, for the hidden charges can erode the supposed savings. Given the complexity of agreements, one should always seek legal and professional advice before entering into an agreement. Further, if any delay on the part of the developer has resulted in escalation of costs, then buyers have the option of approaching consumer forums. Until the real estate bill is passed, buyers like Mujumdar will have to depend on the developer’s goodwill, who slashed the bill to Rs 5 lakh, adjusting for the sum owed due to delayed delivery.