Reckless release of sanctioned loan in absence of construction cannot put homebuyers in peril: Karnataka High Court

The Karnataka High Court recently held that if banks disburse loans to developers without ascertaining the stage of construction of a project, they cannot resort to coercive measures against homebuyers. [Mudit Saxena v. Union of India].Justice Krishna S Dixit granted relief to over 30 homebuyers, who challenged the coercive measures imposed by Punjab National Bank Housing Finance Limited (PNBHFL) after they withdrew their flat bookings with respect to an ongoing construction project."If bank has erred in the course of its business and suffers loss, the poor borrowers who wanted to have a shelter of their own, cannot be put to peril, the right to residence being constitutionally guaranteed under Article 19(1)(e)," the judge said..The observation was made after the judge noted that PNBHFL had disbursed loan amounts "recklessly" to the developer, Mantri Developers, without ascertaining the status of construction at the site. This, the Court noted, was against the mandate of the Reserve Bank of India (RBI) and also the National Housing Bank. The homebuyers had initially booked flats in the developers' project - Mantri Webcity in Bangalore, which had around 1,600 apartments. They had entered in a tripartite agreement with the bank and developer.As per the agreement, the homebuyers availed loans under a "pre-EMI" or the "pre-sanctioned" loan scheme, which was in violation of the guidelines of the RBI. It was also agreed that if they withdraw or cancel their bookings, the loan amounts would be paid back to the bank by the developer. Initially, the bank kept disbursing loan amounts to the developer as and when a demand was raised by it, on behalf of the homebuyers. .The homebuyers had even moved the Real Estate Regulatory Authority (RERA) in the State, which had ordered the developer to refund the amounts paid by the homebuyers as their own contribution. The bank, on the other hand, claimed that as per certain clauses of the tripartite agreement, both the developer and the homebuyers were jointly liable to refund its money. .Taking note of the submissions, the Bench referred to several clauses of the agreement in question and dismissed the contentions of the bank that the homebuyers too are liable to pay back the money. "A conjoint reading of various clauses in the Tripartite Agreement makes it very clear that even when the booking or the allotment is cancelled and as a consequence thereof, borrowers’ obligation to serve the debt evaporates into thin air, the interest of lending agency is protected, provided that the sanctioned housing loan was released to the Developer only after ascertaining stagewar construction of the apartments, in terms of extant RBI Guidelines and Circulars issued by National Housing Bank," the Court held. The judge, therefore, ordered the bank not to take any coercive measures against the homebuyers for recovery of the loan amounts. .Senior Advocate CK Nandakumar along with Advocate MD Rajkumar appeared for the homebuyers. Senior Advocate Udaya Holla along with Advocate Venugopal MS represented the Bank. Additional Solicitor General H Shanti Bhushan appeared for the Central government. .[Read judgment]