KRERA Protects Bengaluru Homebuyers from Lender's Coercive Actions

The Karnataka Real Estate Regulatory Authority (KRERA) has taken a significant step to protect homebuyers in Bengaluru by restraining a finance company from taking possession of flats purchased by a homebuyer in a mortgaged project. This move ensures that the homebuyer's ownership rights are not compromised due to the developer's financial defaults.

The order came after a homebuyer of two units in the Aswani Sunshine project, developed by Aswani Properties India Pvt Ltd, approached KRERA with a complaint. The homebuyer claimed that despite having registered sale agreements, their homes were at risk of being seized due to the developer's default on a loan. The mortgage, originally held by Indiabulls Housing Finance, was later assigned to Edelweiss Asset Reconstruction Company (Edelweiss ARC) for recovery.

According to the KRERA order, “The Respondent No 10 (Edelweiss Asset Reconstruction Company) is restrained from taking possession, auctioning, or in any manner interfering with the complainant's peaceful possession of Flat Nos. C-2-304 and C-3-104 in the project 'Aswani Sunshine' without due process of law.”

The authority has directed the developer to disclose all existing loans and mortgages within the project within one month and to clear any encumbrances affecting homebuyers’ interests. The order, dated October 17, stated that failure to comply would attract penalties.

The case began when the homebuyer purchased two flats in the Aswani Sunshine project under registered sale agreements dated March 5, 2021. At the time of purchase, the developer did not disclose that the flats were mortgaged to Indiabulls Housing Finance Ltd as part of a project loan. The developer later defaulted on loan repayments, leading Indiabulls to classify the account as a Non-Performing Asset (NPA). Subsequently, the loan and its related securities were transferred to Edelweiss ARC for recovery.

The homebuyer recently learned that Edelweiss ARC had initiated proceedings to take possession of the mortgaged flats, including those he had purchased. This, he argued, threatened to dispossess genuine homebuyers who were unaware of any encumbrances on their property. He urged KRERA to restrain Edelweiss ARC or any financial institution from taking possession or auctioning the flats, citing provisions under the RERA Act.

In its findings, the Karnataka Real Estate Regulatory Authority (KRERA) noted that the complainant approached the forum seeking a stay on recovery actions initiated by a financial institution over two flats he had purchased in the project. According to the authority’s order, “the promoter had not revealed to the complainant that the said flats were mortgaged with the respondent financial institution.”

KRERA observed that after the promoter defaulted on the loan, the project was classified as a Non-Performing Asset (NPA). The loan account was subsequently assigned to another financial institution for recovery, which has since initiated steps to take possession of the mortgaged flats, including those sold to the complainant.

The authority recorded that the complainant sought intervention to restrain the lender from taking possession of or auctioning the flats, arguing that homebuyers who purchased the units in good faith should not suffer because of the developer’s undisclosed mortgage and loan default. “As per Section 4(2) (1) (B) of the RERA Act mandates the promoter to declare that the project land is free from all encumbrances or, if encumbered, the details thereof shall be disclosed. Suppression of such material fact constitutes a violation of Section 4(2)(1)(B) and a deficiency in service under Section 104. Hence, it is evident that the promoter failed to make a misrepresentation and violation of the Act. disclosure, amounting to misinterpretation and violation of the Act,” the order said.

“Once the project has been registered under RERA, and flats have been sold to genuine purchasers, any coercive possession or auction by a financial institution would directly defeat the purpose of the RERA Act,” it further said. KRERA clarified that under Sections 35, 36, and 38 of the Act, it has the power to issue directions to any party, including financial institutions, to safeguard the rights of homebuyers.

Accordingly, the authority restrained Edelweiss Asset Reconstruction Company (ARC) from taking possession of or auctioning the complainant’s flats until the builder’s liability is determined and full disclosure is made before RERA.

Akash Bantia, an advocate, said the Karnataka RERA order aligns with the Supreme Court’s landmark judgment in Union Bank of India vs Rajasthan RERA, which clarified that RERA will prevail over the SARFAESI Act in cases where the loan was taken after the project’s RERA registration. “In situations like these, homebuyers should immediately move the High Court to seek a stay on any possession or auction attempts by lenders,” Bantia said. “While RERA protects buyers’ rights, many banks argue that such rulings don’t apply to them, so legal intervention at the High Court level becomes necessary. The process can take time, but it ensures that genuine homebuyers aren’t wrongfully dispossessed,” he said.