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Unending woes of realty sector - High Interest Rates

The real estate sector in the past few years has witnessed massive financial crisis with several real estate companies going bankrupt and many others undergoing corporate insolvency resolution process. While the reasons are manifold, one could see steady recovery despite inflation worries and expensive capital. The recent Supreme Court judgment in recalling its past orders delivered in the matter, relating to insolvency of Amrapali Group of Companies (“Amrapali Group”), have now posed a new challenge to the realty business in NOIDA and Greater NOIDA region. The Supreme Court has held that real estate developers in these regions will have to pay interest amount on outstanding lease premium and other dues to Noida and Greater Noida Authorities (“Authorities”) at rates that have been agreed upon under the contract entered into between them and the reduced interest rates will not be applicable to them.

The Supreme court in Bikram Chatterji and ors. vs. Union of India[1] had passed an order dated June 10, 2020 (“2020 Order”), inter alia addressing the note of the court-appointed receiver and the interlocutory application filed by Ace Group of Companies (“Ace Group”), seeking a general reduction in the interest rate being charged on outstanding premium and other dues by the Authorities. The argument of Ace Group was that the interest rates were excessively high when compared to the prevailing financial market scenario. It was contended that the entire real estate sector is under financial distress and that various projects have come to a standstill due to the exorbitant interest rate charged by the Authorities, on dues of land given on lease to various developers, as well as the penal interest charged on delay in such payment.

The apex court in the order had put a cap of 8% on interest rate per annum on the basis of MCLR (“Marginal Cost of Funds based Lending Rate”) as set by the State Bank of India rather than the rate specified in lease agreements, which ranged from 11% to 14-15% to 18-23% per annum. The Court had granted this concession to real estate developers/ allotees to ensure that the projects are timely constructed and that dues are paid to the Authorities, with a rider that failure to pay such dues on time would lead to withdrawal of concession.

Consequently, the Court passed two more orders on August 19, 2020, and August 25, 2020 (“Additional Orders”), clarifying the calculation of interest rate on the basis of MCLR, and that the interest shall be charged as a simple rate of interest and not on a compoundable basis. The Court further ordered that interest rate shall be applied prospectively.

Subsequently, the Authorities had filed applications, seeking recall of the 2020 Order and Additional Orders on the grounds that implementation of this order would lead to great financial loss to the tune of more than INR 3,000 crore and INR 4,280 crore for Noida and Greater Noida Authorities, respectively. The Authorities further contended that the rate of interest charged by the Authorities was contractual, which was agreed upon by the developers and which was in consonance with market practice. Further, the developers were themselves charging a higher rate of interest from flat buyers, for e.g., 18% in the case of Ace Group.

The Court in its November 7, 2022, decision held that the earlier 2020 Order was delivered after taking into consideration the peculiar facts pertaining to Amrapali Group. It held that though the case of other developers such as Ace Group was considered in the 2020 Order, the Court was unaware of the financial loss it would cause to the Authorities. The Court reasoned that the developers were aware of the interest rate since it was mentioned in the brochure for allocation of land, allotment letter and lease deed, and thus the prices charged by them from the flat holders must have subsumed the interest rate. It was also held that the earlier order was passed by a bench primarily concerned with the Amrapali Group and no adequate notice was given to the Authorities. The Court held that it had erred in granting relief to the projects other than Amrapali Group and that the 2020 Order and Additional Orders are, thus, recalled. Hence, the 8% interest rate/ annum payable on dues was held to be applicable only to Amrapali Group. This enables the Authorities to recover the dues with interest rate specified in lease agreements, which ranged from 11-23% per annum. If this decision is to be enforced in its letter and spirit, the interest amount due is likely to be more than the principal outstanding amount.

While this decision was hailed by the Authorities, it is likely to cause a financial crunch, which will further delay delivery of projects. The concerns are not only with regard to interest rate, but also the penal interest that is charged on a compoundable basis. The high interest rates might even lead to insolvency of many projects. The fallout of this decision may further worsen the woes of homebuyers who will continue to pay EMI to banks, without receiving possession of flats. This new development is expected to be a big disruptor to the flagship government scheme of ‘housing for all’ in planned cities of Uttar Pradesh.

It is, however, to be seen whether the State Government or the state backed Authorities would come up with a bail-out plan or a one-time settlement scheme with developers, as has been done in the past.

[1] Writ Petition (Civil) No. 940 of 2017.