9/2/2014 Rs 630 cr penalty: How DLF duped home buyers with false promises - Firstbiz http://firstbiz.firstpost.com/corporate/rs-630-cr-penalty-how-dlf-duped-home-buyers-with-false-promises-21015.html 1/6 FIRSTPOST FIRSTBIZ TECH2 FAKING NEWS CORPORATE MONEY ECONOMY BIZTECH BRANDS REAL ESTATE MORE CORPORATE Aug 28, 2014 Rs 630 cr penalty: How DLF duped home buyers with false promises By Raman Kirpal T he Supreme Court has today directed India's real estate major to pay a fine of Rs 630 crore for exploiting its dominant position to the disadvantage of its customers in three projects in Gurgaon. The case pertains to 2011 when the residential welfare society of DLF's Belaire project in Gurgaon filed a case against the builder for beguiling and entrapping them. The Competition Commission of India had in 2011 indicated that DLF had used this dominant position for unfair practice and imposed a penalty of Rs 630 crore which the apex court has now asked the company to pay. The 12 August order of the Competition Commission of India (CCI) against DLF is a massive indictment of the market leader's dubious business practices and a clear rejection of the real estate industry's unfair practices. Though the order imposing a penalty of Rs 630 crore on DLF relates to only one project in Gurgaon, Haryana, it will impact future industry practices as it underscores the unequal power equation between builders and home buyers. Labelling DLF's contracts with home buyers as "blatantly unfair, even exploitative," the CCI's observations in a complaint filed by apartment owners in Belaire project in Gurgaon amount to stinging rebuke. "The impunity with which these (unfair) clauses have been imposed, the brutal disregard to consumer rights that has been displayed in its action of cancelling allotments and forfeiting deposits and the deliberate strategy of 1 Comment The CCI's observations in a complaint filed by apartment owners in Belaire project in Gurgaon amount to stinging rebuke. Reuters
Transcript
9/2/2014 Rs 630 cr penalty: How DLF duped home buyers with false promises - Firstbiz
CORPORATE MONEY ECONOMY BIZTECH BRANDS REAL ESTATE MORE
CORPORATE Aug 28, 2014
Rs 630 cr penalty: How DLFduped home buyers with false
promisesBy Raman Kirpal
The Supreme Court has today directed India's real estatemajor to pay a fine of Rs 630 crore for exploiting its dominantposition to the disadvantage of its customers in three projectsin Gurgaon.
The case pertains to 2011 when the residential welfaresociety of DLF's Belaire project in Gurgaon filed a case against the builderfor beguiling and entrapping them. The Competition Commission of Indiahad in 2011 indicated that DLF had used this dominant position for unfairpractice and imposed a penalty of Rs 630 crore which the apex court hasnow asked the company to pay.
The 12 August order of the Competition Commission of India (CCI) againstDLF is a massive indictment of the market leader's dubious businesspractices and a clear rejection of the real estate industry's unfair practices.Though the order imposing a penalty of Rs 630 crore on DLF relates to onlyone project in Gurgaon, Haryana, it will impact future industry practices as itunderscores the unequal power equation between builders and homebuyers.
"The impunity with which these (unfair) clauses have been imposed, thebrutal disregard to consumer rights that has been displayed in its action ofcancelling allotments and forfeiting deposits and the deliberate strategy of
1 Comment
The CCI's observations in a complaint filed by apartmentowners in Belaire project in Gurgaon amount to stingingrebuke. Reuters
obfuscating the terms and keeping buyers in the dark about the eventualshape, size, location, etc, of the apartment cannot be termed as fair. Thecourse the progress of the project has taken again indicate that DLF Ltdbeguiled and entrapped buyers through false solicitations and promises," theorder states.
Among other things, CCI found that DLF unilaterally decided to increase thesize of the building from 19 floors to 29, starting work without all permissionsbeing in place, and delaying its completion to the extent where buyers havestill not obtained possession of their flats.
So what are these clauses that CCI found abusive in DLF's Belaireproject agreement? There are as many as 16 of them.
•Unilateral changes can be made by the builder without the buyers' consent
•Builder has the right to change the layout plan without buyer consent
•Building can unilaterally change inter se areas for different uses likeresidential, commercial, etc, without informing anyone
•Preferential location charges are paid for upfront, but if you do not get thelocation you ask for, you only get a refund/adjustment amount at the time oflast instalment, and that too without interest
•The builder enjoys unilateral right to increase/decrease super area at hissole discretion without consulting allottees, who nevertheless are bound topay additional amounts or accept a reduction in the area
•The proportion of land you get as your share will be decided by the builder
•The builder continues to enjoy full rights on the community buildings, sites,recreational and sporting activities, including maintenance, with you havingno rights in this regard
•Builder has sole discretion to link one project to other projects, withconsequent impact on ambience and quality of living, with buyers having noright to object
•You are liable to pay external development charges, without these beingdisclosed in advance and even if these are enhanced
•The builder has total discretion regarding arrangement for power supply andrates levied for the same
•In many situations the buyer forfeits the amounts paid
•Allottees have no exit option except when builder fails to deliver possessionwithin the agreed time, but even in this case they get refunds withoutinterest, and that too only after the apartment is sold
•The builder's exit clause gives him full discretion, including the right toabandon the project, without any penalty
•The builder has the sole authority to make additions/alterations in thebuildings, with all the benefits flowing to the builder, and not the apartmentowners
•Third party rights can be created without your consent, to the detriment ofyour interest.
•Punitive penalties can be imposed if you default, but not if the builderdefaults.If any or all of these clauses are written into your purchaseagreement with your builder, you can rest assured that these clauses are"abusive, arbitrary, unfair and unreasonable" and an infringement of yourrights. Or so the CCI has held in the DLF case.The above 16 "unfair"
conditions figured in DLF's group housing complex project called `TheBelaire', in Gurgaon. The complex consists of five 19-storied buildings with368 apartments and was to be constructed in three years. DLF took crores ofrupees from the allottees, even before the first brick was laid. It announcedchanges in plans by declaring that it would construct 29 floors instead of theearlier 19, thus delaying the project. Till date, homes are yet to be handedover to many buyers.DLF contended that the conditions mentioned in thepurchase agreements were not an abuse. They are "in fact, usual conditionsincluded in the agreements in accordance with 'industry practice.'"
The complaint to the CCI was filed by the Belaire Owners' Association forabuse of their rights. They had paid 33 percent of the total amount evenbefore construction began, and each flat cost Rs 1.5-3 crore.
On receiving the complaint, the CCI ordered an investigation by its DirectorGeneral (DG) who found that DLF was the industry leader in this segment ofthe market, and that these clauses were indeed standard, though arbitrary.
A Firstpost story on Noida Extension had pointed out that builders wereadvertising flats in housing complexes even when they had not been allottedthe land for it. In DLF's case, the DG report found that DLF had alreadycommenced the structural work for all 29 floors without obtaining anyapproval from the competent authority.
DLF is the only builder listed in top 100 brands. Its promoter KP Singh wasranked eighth among India's top 10 billionaires in 2010. His net worth isestimated to be $9.2 billion against his nearest competitor Unitech's RameshChandra ($1.86 billion). His marketshare among construction companies inGurgaon exceeds 55 percent - which DLF has contested.
Says the DG report: "There is a huge housing shortage and buyers cannotinfluence the business decisions of DLF since residential units are inshortage. The consumers are dependent on DLF in Gurgaon because of itshuge land reserves and projects under construction. The demand is hugewhile the supply is less. Thus, there is no case of countervailing buyer powerin this case which has any sobering impact upon the dominance and marketpower of DLF."
The CCI, in its 237-page order, observes that "the allottees become capturedconsumers who are subject to abuse by DLF through imposition of unfairconditions contained in the agreement. Such abuse is not a one-time abuseby DLF; rather it continues throughout the span of the period of construction,and allottees are subjected, or there is a scope to subject them time andagain, to newer conditions, aggravating the existing abusive conduct ofDLF."
The Commission'sorder says:"Certain bookingswere made as farback as August2006 andsubstantialamounts running inseveral hundredthousands weretaken by DLF Ltd.At that point in
time, necessary approvals from agencies like the Airports Authority ofIndia...had not been obtained by the developer. Moreover, the building was
to be of 19 floors only. The application for approval was moved in December2008 and the approval for the revised plan came only in August 2009 - a fullthree years after the first bookings were made."
"The revised plan did not increase the number of floors by a couple of storiesbut by 10 floors, that is almost by 50 percent more. The buyers' agreementgave an impression that the project would be completed in three years.However, the dates of possession kept shifting forward and even as on date,the possession is supposed to be given around October 2011."
Pointing out the "draconian and one-sided clauses" of DLF, theCommission's report says: "There are clauses that give DLF Ltd solediscretion in respect of change of zoning plans, usage patterns, carpet area,alteration of structure, etc. In case of change in location of the apartment,PLC (preferential location charge)determined at the discretion of the builderand, if a refund is due, no interest is paid. No rights have been given to thebuyers for raising any objections.
"Further, even if the buyer has paid the full amount, the builder can raisesubordinate mortgage on the property for finances raised for its own purposeand the consumers are subjected to this mortgage. Despite knowing thatnecessary approvals were pending at the time of collection of deposits, DLFLtd inserted clauses that made exit next to impossible for the buyers."
"Similarly, in the event of delay, the builder would pay compensation at Rs 5per square foot per month for delays beyond three years. In sharp contrast, ifthere is a delay on the part of the buyer, the interest charged is 15 percentper annum for the first 90 days, increasing by another 3 percent after that."
The other violations and abuse of consumer rights, according to the CCI,are:
•They (builders) issue advertisements for launching projects without the landbeing actually purchased, registered in their names and possession takenand without taking prior approval of competent authorities.
•Builders don't specify the total area of the plot/flat/house, indicating clearlythe carpet area and utility area.
•They don't specify the date of delivery and consequential remediesavailable to the consumer in case of delay.
•They don't deposit the amounts collected from allottees against a particularproject in a designated escrow account that will be utilised only for theconstruction of the concerned building.
•They don't inform buyers about the progress of works and status of accountof each allottee in a transparent manner.
•They don't inform buyers of built-in hidden costs other than the initial setprice.
•They don't post all the relevant information on the internet and make themavailable in the public domain. There is no transparent and participatorymechanism put in place to deal with price escalations, if any.
•In cases of inordinate delays, there is no provision for the payment of pre-determined penalties to buyers.
•There is no fair, participatory and transparent mechanism to tackle anysubstantive and major changes in the project mid-way, before takingapproval of the authorities for the revised scheme and commencingconstruction thereon.
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•The agreements don't include 'changes' in FAR, or density per acre, orsome common facilities in the category of `substantive' or major changes.
In view of these transgressions, the Commission directed DLF Ltd to:
•Cease and desist from formulating and imposing such unfair conditions inits agreements with buyers in Gurgaon; and
•Suitably modify unfair conditions imposed on its buyers within three monthsof the date of receipt of this order.
"In the view of the Commission, the conduct of DLF in abusing its dominantposition requires to be taken very seriously and thus the Commission isrequired to adopt a deterrent approach so that recurrence of such conduct isstopped. Keeping in view the totality of the facts and circumstances of thecase, the Commission considers it appropriate to impose penalty at the rateof 7 percent of the average of the turnover for the last three precedingfinancial years on DLF," the report said, adding that this amount comes to Rs630 crore.
This decision has far-reaching impact on the realty sector, because everyrealty company, more or less, is following the leader DLF.
(Editor's note: This article was originally published in 2011 and has beenmodified to reflect the Supreme Court's verdict in the DLF case)
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