India - Development Manager As ‘Promoter’ Under RERA Regime: Deconstructing MahaRERA ’s Order In Shapoorjee Pallonji’s Case.
Legal News & Analysis - Asia Pacific - India - Construction & Real Estate
31 May 2021
The Development Management Model (“Model”) has risen exponentially to meet the pace of growth and ensure expansion of real estate projects. The Model typically involves a Development Management Agreement (“DMA”) between a promoter and a development manager, wherein the latter is appointed for project execution, designing, marketing and sales of a project in consideration of a share of the revenue/profit or management fees. There have been instances wherein the responsibilities of development managers have been blurred, allowing them to assume the role of promoters in the garb of being development managers. In light of this, the recent judgment of the Maharashtra Real Estate Regulatory Authority, (“MahaRERA”) pronounced on March 5, 2021 in Gauri Thatte & ors. vs. Nirmal Developers & ors. (“Order”), marks an important development. By interpreting the definition of ‘promoter’ under Section 2(zk) of the Real Estate (Regulation and Development) Act, 2016 (“RERA”), MahaRERA included a development manager appointed under a DMA within the definition of ‘promoter’ for the purpose of refund of principal amounts along with interest to the four flat purchasers (“Complainants”) for the delay in construction and possession of their flats under Section 12 of RERA. MahaRERA also directed the development manager to be added as a ‘promoter’ on the webpage of the project. This Order may cause builders to re-examine their scope as a development manager, to avoid falling within the ambit of promoter under RERA.
II. CONTEXTUAL BACKGROUND
The Complainants had booked apartments in ‘Mumbai Dreams — Olympia C & D’ (“Project”) in Mulund West, Mumbai, being developed by Nirmal Developers. The developer had appointed Lucrative Properties Private Limited (“Development Manager”), a subsidiary company of Shapoorji Pallonji Private Limited (“SPPL”), as the development manager for the Project. There was delay in giving possession of the flats and completion of the Project. Accordingly, the Complainants moved MahaRERA claiming refund of their amounts along with interest under Section 12 of RERA alleging the statements regarding the date of possession of the Project were false. The Complainants prayed that Nirmal Developers and Dharmesh Jain (“Promoters”) and SPPL be held liable for refund of the amounts, on the ground that SPPL was a promoter as per Section 2(zk) of the RERA.
III. SUBMISSION OF THE PARTIES
A. Arguments of the Complainants
The Complainants contended that the Development Manager’s role in the Project fulfilled the criteria of promoter under Section 2(zk)(i), (v) and (vi) of RERA along with explanation appended to the section thereof. In addition, it was also contended that the Complainants were made to believe that the Development Manager would construct and be in-charge of completion of the Project. Accordingly, it was argued that the Developer Manager was also liable for refund of funds and interest thereof along with the Promoters.
B. Arguments of the Development Manager
The Development Manager contended that there existed a strict bifurcation in the role of Promoters and Development Manager as per the DMA between the parties. The Development Manager’s task was restricted to aiding in the management, planning, supervision of the Project and use of their brand name for fees to be paid as per the DMA. Further, the DMA was entered between the parties at a stage when 1.71 lakh sq. feet (approx.) residential area of the Project was already sold to the prospective purchasers by the Promoters and that their name was mentioned in the category of “other professional” on the web page of the Project. Conjunctively, it was submitted that as per the terms of DMA, the Promoters were exclusively liable for all the compliances and obligations towards the purchasers of the units under RERA (including refund of amounts with interest) and all the money paid by the Complainants had gone to the Promoters.
IV. REASONING OF MahaRERA
A. Consideration of the clauses of the DMA
In order to determine the nature and scope of responsibilities of the Development Manager vis-à-vis the Promoters, the MahaRERA referred to multiple clauses of the DMA concerning the rights of Development Manager in respect of (i) exclusive development management; (ii) association of brand-name for the purpose of marketing and appearance of their logo in the brochures, pamphlets and marketing material; (iii) activities in respect of customer management including sales process, marketing, customer interactions and handover of possession etc.; (iv) management, supervision and planning of the Project up to its completion; (v) Development Manager’s funding of the Project of up to INR 100 crore and formulation of business plans; (vi) exclusive and absolute right to market the saleable area and right to sell the same at discounted price to meet shortfall of funds; and (vii) payment of almost 10% revenue to the Development Manager towards development management/marketing fees.
B. Touchstone of Section 2(zk) of RERA
After careful consideration of the aforementioned clauses, the MahaRERA laid emphasis on the explanation appended to Section 2(zk)(vi) of RERA which provides for the joint liability of both category of promoters: (i) the persons who construct or convert a building into apartments or develop a plot for sale; and (ii) the persons who sell apartments or plots. In the present Order, it was held that the Development Manager fell under the second category of the explanation since (i) Development Manager had the authority to supervise and control all the activities of planning, selling, funding and constructing of the Project. In case of a shortfall of funds, the Development Manager was empowered to sell the apartments at a discounted price; and (ii), the usage of brand name and goodwill of SPPL, collection of money from buyers, issuance of the receipts bearing their logo and name and selling the units of the Project along with sharing almost 10% of the revenue on priority basis further substantiated the view that the Development Manager assumed the role of a promoter as per Section 2(zk) of RERA.
The Order can be deemed as a ground-breaking development in the RERA jurisprudence and has significant practical implications on the future relationships between development managers and promoters. While the Model has been an instrumental tool in effective completion of projects, the DMAs must now be formulated with caution. It may be noted that the MahaRERA has, in this particular case, rejected the contention that the liabilities under RERA shall be that of the Promoters and not of the Development Manager, notwithstanding the inter-se agreement between the parties and has dissected the role of the Development Manager from the perspective of an allottee. The MahaRERA has recognized that though contractually, a builder may be named as a development manager; however, in essence, if such a builder is actually performing the role of a promoter under RERA, marketing a project under its brand name, representing to allottees that the project will be developed by such builder, then it can neither escape from being categorized as a ‘promoter’ not can it evade the liability of a promoter under RERA. Considering the same, careful drafting of clauses that provide a more narrowed scope of functions of a development manager are indeed paramount. It must be ensured that the development manager’s mandate does not fall under Section 2(zk) of RERA. Therefore, (i) clauses providing for the authority to sell flats, directly or indirectly, branding and appearance of logos of development manager on marketing material/receipts of sale consideration, direct or indirect communication to allottees that the project is being constructed by such development manager, must be limited; and (ii) marketing and branding teams of the builders should also be apprised of creating a careful channel of communication with allottees to avoid creating the impression that the development manager is a de-facto promoter. In the present case, the Development Manager has appealed against the ruling of MahaRERA before the Maharashtra Real Estate Appellate Tribunal (“Appellate Tribunal”). The ruling of the Appellate Tribunal is eagerly awaited as the turn of events would determine the fate of Development Manager’s role vis-à-vis promoters’ scope of work and would subsequently shape the future Model.
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