The loan liability is entirely yours. Check land documents and insert clauses in the agreement to ensure some payback by the builder.
Buyers of under-construction property have umpteen benefits. First, they are likely to get the house cheaper. Second, they can ask builders to make changes during construction, according to their requirements.
However, what happens if the under-construction property gets into litigation, or comes under the government's or the court's radar over compliance issues?
Recently, there were news reports about Lavasa Corporation's compliance with environment and land acquisition norms. Following this, the company sent letters to its stakeholders assuring them that the project was in accordance with the regulatory requirements.
While future homeowners of Lavasa might be relaxed now, they would have definitely got the jitters when the reports first came.
If the property you purchase gets into trouble, you are pretty much alone. A senior official in a leading bank says although such cases are rare, if your project gets stalled because of any litigation, it's your problem. S V Parthasarthy, head, consumer finance, Indusind Bank, says "A bank is not liable if a real estate project gets stalled. The primary responsibility for loan repayment stays with the borrower."
The first hit is on the initial down payment of 15-20 per cent that a person makes before taking a loan. The remaining 80-85 per cent of the loan has to be paid through equated monthly instalments.
Bankers say there are a couple of things that you can do.
Kamlesh Rao, executive president, personal finance, Kotak Mahindra Bank, explains the first step one can take to ensure the loss is minimised in case a project is stuck: "Always opt for construction-linked payment vis-a-vis a full-fledged payment." This way you will not lose your entire investment.
Second, banks include a clause in the loan agreement about the construction period -- ranging from 18-24 months. This is according to the period mentioned in the builder's agreement. You may include a clause in your agreement with the builder that if the construction is delayed beyond the specified time, he will service the loan. A bank may accept construction delays of up to six months. But beyond that it may recall the loan.
Say, you have taken a loan of Rs 20 lakh (Rs 2 million)., out of which Rs 15 lakh (Rs 1.5 million).has been disbursed. Now, the project gets delayed. The bank may stop further disbursement and ask you to start repaying the loan.
While you are obliged to repay the loan irrespective of the status of the project, there is an option of seeking legal recourse to recover your losses.
Jehangir Gai, joint secretary, Consumer's Welfare Association, suggests individuals can seek the help of the consumer court to get their refund as well as compensation.
Under the Maharashtra Flat Ownership Act, 1963, buyers can file a case against the builder and claim a refund if the project gets delayed or halts due to his negligence.
"If a project halts due to compliance issues, it may be deemed as wilful negligence. In such a case, a buyer is entitled to claim a refund," adds Gai.
In this case, the builder will have to refund the entire amount. Also, nine per cent annual interest rate will be added to the amount.
Buyers can also claim additional compensation. For instance, you purchased a flat for Rs 20 lakh (Rs 2 million). in 2008. In 2010, the project runs into litigation and you claim a refund. But in 2010, the cost of buying a similar property may be Rs 25 lakh (Rs 2.5 million). You can claim the difference of Rs 5 lakh as additional compensation from the builder.
A legal recourse may be available for recovering your losses. However, prevention works better than cure. It may be years before you get your money back.
To avoid such hassles, follow Rao's simple advice, "Mostly litigation in a house project relates to land. So, check the title of the property, the reputation of the construction company and any litigation associated with the property concerned."
