Riding the redevelopment wave in Mumbai

The landscape in Mumbai is evolving to include a plethora of redevelopment projects which have already kickstarted or are on the verge of commencing.

Due to the various incentives offered by the government, the lack of open land for fresh development and the number of old and dilapidated buildings which require a revamp, redevelopment projects are gaining an impetus in the current scenario. Developers which were earlier only focusing on new development projects and were shying away from redevelopment projects, have also entered the redevelopment market by making competitive offers to existing societies/ landowners. The demand for redevelopment is at an all-time high thereby ensuring that there is enough scope for developers to participate and win themselves a piece of the redevelopment pie.

We have highlighted certain key judgments which have been passed recently in respect of redevelopment projects and have analysed their impact on developers undertaking such projects.

1. Minority members of a society cannot stall redevelopment

The Hon’ble Bombay High Court has struck down on dissenting minority members who stall the process of redevelopment. The Hon’ble Bombay High Court vide its judgment in Shubham Builders v/s Kanchan Villa Co-operative Society Limited has inter alia held that the directives issued under Section 79A of the Maharashtra Co-operative Societies Act, 1960 (“Societies Act”) will not overrule the decision of the majority of the members as the directives under Section 79A of the Societies Act are discretionary in nature and not binding on the members of the society. In respect of the allegations made by the minority members regarding the offer made by the appointed developer as not being beneficial to the members of the society, the Hon’ble Court recorded that it cannot exercise its wisdom over the consensus of the majority members of the society and bring the redevelopment to a halt. It was further recorded that there are no provisions in the Societies Act or the rules or any other legal provision which would curtail the right of the society to redevelop the property when the general body of the society intends to do so. In view thereof, the Hon’ble Court passed an order to the dissenting minority members to vacate their premises within a specified time frame and hand over vacant possession to the society to enable the society to hand over vacant possession to the developer.

2. Rights of tenants v/s rights of the owner

The rights of tenants to repair the property vis-à-vis the rights of an owner landlord to undertake redevelopment of the property was considered by the Hon’ble Bombay High Court in Anandrao G. Pawar v/s The Municipal Corporation of Greater Mumbai & Ors. The Hon’ble Court inter alia held that the rights of an owner of a property entail a right to enjoy the benefits and fruits of the development of that property. Further, the rights of the tenants for repairing the property would be subordinate to the right of the owner landlord to redevelop the property, especially since the owner landlord had put forward a proposal to redevelop the property and the tenants would be re-accommodated on an ownership basis. The Hon’ble Court further held that to accept the contention of the tenants, that the rights of the owner landlord must be subordinate to the repair and reconstruction rights of the tenants, would be contrary to the provisions of the Maharashtra Rent Control Act, 1999 and the Mumbai Municipal Corporation Act, 1888, which would result in elevating the rights of a tenant over those of a property owner who is willing to develop and re-accommodate all tenants. The Hon’ble Court also recorded that if however the landlord of a tenanted building does absolutely nothing at all and allows the building to simply go to ruin or even to collapse, then in such an event, the tenants will have a remedy under the Maharashtra Rent Control Act, 1999 and the Mumbai Municipal Corporation Act, 1888.

3. Stamp duty on Permanent Alternate Accommodation Agreements (“PAAA”) where the Development Agreement has been stamped

Section 4 of the Maharashtra Stamp Act, 1958 (“Stamp Act”) inter alia provides that where several instruments are used in a single transaction of a development agreement for completing the transaction, the principal document only shall be chargeable with the duty and each of the other instruments shall be charged with a nominal stamp duty.

The Hon’ble Bombay High Court analysed the aforesaid provision in Adityaraj Builders v/s The State of Maharashtra & Ors wherein the Court inter alia held that Section 4 of the Stamp Act clearly contemplates more than one document and does not speak of more than one party to a single document. Accordingly, once the development agreement is stamped, the PAAA, even if it includes rebuilding the existing premises along with additional area that is available free to the member, cannot be separately assessed to stamp duty beyond ₹100/- (Rupees One Hundred Only) [which has now been proposed to be increased to Rs.500/- (Rupees Five Hundred Only)] as per the provisions of Section 4 of the Stamp Act. Further, a PAAA is to be additionally stamped only to the extent that it provides for the purchase by the member for actual consideration and the purchase price of additional area over and above any area that is made available. The Hon’ble Court further held that a development agreement need not be signed by individual members of the society and similarly the PAAA between the developer and an individual society member is not required to be signed on behalf of the society.

4. Transit rent not taxable

In the matter of Sarfaraz S. Furniturewalla v/s Afshan Sharfali Ashok Kumar & Ors, the Hon’ble Bombay High Court inter alia held that the ordinary meaning of ‘rent’ would be an amount which the tenant/ licensee pays to the landlord/ licensor. However, in case of redevelopment, the term used is ‘transit rent’ which is also referred to as hardship compensation/ rehabilitation allowance/ displacement allowance, which is paid by the developer/ landlord to the tenant who suffers hardship due to dispossession. Accordingly, ‘transit rent’ is to be considered as a capital receipt and not a revenue receipt and accordingly, is not liable to be taxed, and as a result, TDS will not be deductible on such ‘transit rent’ that is paid by the developer/ landlord to a tenant.

5. Arbitration clause in a Development Agreement cannot be invoked by individual members

The Hon’ble Bombay High Court in Shankar Vithoba Desai & Ors v/s Gauri Associates & Anr considered a matter wherein certain members from the society sought to invoke the arbitration clause contained in the development agreement that was executed between the society and the developer wherein the individual members of the society were not parties. The Court analysed the arbitration clause in the development agreement and recorded that the individual members are not signatories to the arbitration agreement and the fundamental requirement under Section 7 of the Arbitration and Conciliation Act, 1996, that the arbitration agreement has to be in writing among the parties to the arbitration proceedings has not been met. The Court further held that individual members give up their individual desires and identity by submitting to the collective will of a housing society and consequently the members of the society were precluded from invoking the jurisdiction of the Court under Section 11 of the Arbitration and Conciliation Act, 1996.

About the author: Bhoumick Vaidya is a Partner and Harshini Kotecha is a Senior Associate at Shardul Amarchand Mangaldas & Co.

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