A difficult and increasingly important issue in housing society redevelopment arises when a developer is terminated after selling flats in the project’s sale component to third-party homebuyers.
The question is simple but legally complex:
If innocent homebuyers have purchased flats and paid substantial amounts to the developer, can the housing society terminate the developer and refuse to accommodate those homebuyers in the redeveloped project?
The issue involves a conflict between the contractual rights of the housing society, the consequences of termination of the developer, and the rights of genuine homebuyers who may have invested their life savings in the project.
From a consumer-protection perspective, innocent homebuyers should not be made to suffer merely because the developer subsequently defaulted or because disputes arose between the developer and the housing society.
The Problem: Homebuyers Become Victims of a Dispute They Did Not Create
In a typical redevelopment project, a cooperative housing society appoints a developer to redevelop its property.
The developer is generally permitted to:
- Demolish and redevelop the existing building.
- Rehabilitate existing society members.
- Construct additional flats forming the sale component.
- Sell those flats to outside purchasers.
- Raise money from the sale component for financing the project.
The society is therefore fully aware that the developer will sell flats to third-party homebuyers.
The developer executes registered agreements for sale, identifies specific flats and collects money from purchasers.
Those purchasers may pay:
- Booking amounts.
- Installments linked to construction.
- Stamp duty and registration charges.
- GST and other applicable charges.
- Loan installments and interest.
In many cases, a substantial portion of the project’s financial structure depends upon the money contributed by sale-component purchasers.
The serious problem arises when the society subsequently terminates the developer.
The society may have valid reasons for termination. However, the termination dispute is between the society and the developer. The question is whether innocent purchasers should automatically lose their right to the flats for which they have paid.
The Argument of the Housing Society: No Privity of Contract
Housing societies generally rely upon the principle of privity of contract.
Their argument is that the development agreement exists between:
The agreement for sale exists between:
Developer ↔ Homebuyer
Therefore, according to this argument, the homebuyer has no independent contract directly with the society.
Consequently, once the society validly terminates the developer, the society may contend that it is not bound to recognise the developer’s commitments to third-party purchasers.
This argument has received judicial consideration in redevelopment disputes and creates a significant challenge for sale-component purchasers.
However, from a consumer perspective, absence of a direct contract should not automatically end the inquiry.
The Society Permitted the Developer to Create the Sale Component
The consumer-side argument is based on the commercial and legal structure of redevelopment.
The society does not ordinarily permit a developer to construct the sale component in secrecy.
The development agreement itself generally authorises the developer to:
- Construct additional flats.
- Sell those flats.
- Enter into agreements with purchasers.
- Receive consideration from those purchasers.
Therefore, the developer’s authority to sell the sale component originates from the redevelopment arrangement with the society.
The society benefits from the overall redevelopment project while the developer raises money by selling flats.
This raises an important question of fairness:
Can a society permit a developer to create and sell a sale component, benefit from the redevelopment structure and the project financing, and later take the position that innocent purchasers have absolutely no connection with the project?
According to the consumer-protection approach, the answer should not simply depend upon whether a separate agreement exists between the society and each purchaser.
Homebuyers’ Money May Be Used for the Same Redevelopment Project
A sale-component purchaser does not ordinarily invest money in an unrelated transaction.
The money is paid towards a specific flat in a specific redevelopment project.
That money may be utilised for:
- Construction.
- Project approvals.
- Rehabilitation obligations.
- Temporary accommodation obligations.
- Professional charges.
- Project infrastructure.
- Other redevelopment expenses.
In practical terms, homebuyers may substantially contribute to financing the project.
If the society subsequently receives the benefit of redevelopment but the homebuyers are left without flats, the purchasers may effectively be required to pursue only the defaulting developer—even where the developer is financially distressed or incapable of refunding the money.
This can produce an extremely harsh result.
A genuine purchaser may lose the flat, the money and several years of time despite having committed no default.
Registered Agreements for Sale Cannot Be Ignored Lightly
In redevelopment projects, sale-component purchasers frequently enter into registered agreements for sale.
These agreements are not merely informal booking letters.
They may:
- Identify a specific flat.
- Specify the consideration.
- Record the payment schedule.
- Contain construction and possession commitments.
- Be registered after payment of stamp duty and registration charges.
The purchaser therefore acquires contractual and statutory rights against the developer.
The difficult legal question is the extent to which those rights survive when the developer’s development rights are terminated by the society.
This issue should not be answered solely by applying a rigid formula of “no privity of contract, therefore no remedy.”
The entire structure of the redevelopment transaction, the society’s knowledge, the permissions granted to the developer and the status of the project must also be considered.
The Importance of RERA’s Concept of Promoter
The position becomes particularly important under the Real Estate (Regulation and Development) Act, 2016 (RERA).
RERA adopts a broader regulatory framework for determining who may have obligations towards an allottee.
The argument referred to in the Wadhwa Group Housing Ltd vs Vijay Choksi & Another decision is significant because it examines the concept of a promoter and the possibility that multiple persons involved in a real estate project may have obligations towards homebuyers.
As noted in the judgment referred to, the court considered the position that where a claim is raised concerning a real estate project, the absence of direct contractual privity with every promoter may not necessarily relieve all persons who fall within the statutory framework from liability towards the flat purchaser.
This approach is particularly relevant in redevelopment projects where the legal structure may involve:
Society + Landowners/Existing Occupants + Developer/Promoter + Other entities connected with project development
The exact legal consequences will naturally depend upon the agreements, RERA registration, project structure and facts of each case.
Two Approaches Create Uncertainty for Homebuyers
The legal difficulty arises because different judicial decisions may approach redevelopment disputes differently.
One approach places substantial importance on the principle of privity of contract.
Under that approach:
The homebuyer contracted with the developer, and therefore the buyer’s principal remedy lies against the developer.
The other approach focuses on the statutory obligations arising under RERA and the broader definition of persons responsible for a real estate project.
Under that approach:
Absence of direct privity may not by itself be sufficient to defeat the legitimate claim of an allottee.
The result is considerable uncertainty for purchasers.
Two homebuyers in apparently similar redevelopment projects may find themselves in different legal positions depending upon:
- The wording of the development agreement.
- The agreement for sale.
- The RERA registration.
- The identity of the promoters.
- The reasons for termination.
- The stage of construction.
- Whether the society had knowledge of the sale.
- How much money was collected.
- Whether the project funds were utilised.
- The particular judicial precedent applicable to the dispute.
MGP’s Consumer-Oriented Stand
From the perspective expressed in the question, the Mumbai Grahak Panchayat (MGP) takes the position that innocent homebuyers should not be abandoned merely because the developer has been terminated.
The fundamental consumer-protection principle is:
The dispute between the society and the developer should not automatically destroy the rights of genuine purchasers who acted in good faith.
If a purchaser:
- Bought a flat in the authorised sale component,
- Executed a registered agreement for sale,
- Paid the agreed consideration or substantial installments,
- Acted without fraud or collusion,
- Purchased with the knowledge that the developer was authorised to develop and sell the project,
then such a purchaser deserves meaningful protection.
The purchaser should not be treated in the same manner as the defaulting developer.
What Should Happen After the Developer Is Terminated?
The ideal approach would be to distinguish between:
The Defaulting Developer
The society may take action against the developer for breach of contractual obligations.
The Innocent Homebuyer
The genuine purchaser should be separately protected.
The society should prepare a complete list of:
- Flats sold.
- Agreements registered.
- Amounts received from purchasers.
- Construction stage.
- Outstanding obligations.
- Genuine and disputed claims.
The new developer or redevelopment structure should, wherever legally and practically possible, recognise and accommodate the genuine purchasers.
This would prevent the absurd situation where:
The old developer is removed, the project continues, society members receive new flats—but the purchasers whose money contributed to the project are left outside the project.
A Need for Specific Legal Protection in Redevelopment Projects
Redevelopment is fundamentally different from an ordinary greenfield real estate project.
There are multiple competing interests:
- Existing society members need rehabilitation.
- The society owns or controls redevelopment rights.
- The developer finances and constructs the project.
- Sale-component purchasers contribute substantial funds.
- Banks may finance individual purchasers.
- Government authorities regulate the project.
The present legal framework does not always provide a clear mechanism for protecting purchasers when the relationship between the society and developer collapses.
There is therefore a strong case for a specific legislative or regulatory framework dealing with homebuyers affected by termination of redevelopment developers.
Possible Reforms
A suitable amendment or regulatory mechanism could provide that when a developer is replaced or terminated:
1. Genuine Registered Purchasers Should Be Identified
All registered agreements for sale should be verified.
2. Homebuyers Should Be Given Notice
The society should not take decisions affecting sold flats without informing the purchasers.
3. A Claim Verification Process Should Be Created
The authority could verify:
- Agreement for sale.
- Payments.
- Registration.
- RERA disclosures.
- Bank finance.
- Construction status.
4. Genuine Purchasers Should Be Protected in the Replacement Project
Where the project continues and the flats remain available, the replacement developer should accommodate verified purchasers subject to appropriate financial and legal adjustments.
5. Project Assets Should Not Be Used While Ignoring Purchaser Claims
If purchaser funds have contributed to the project, their interests should be considered before the project is transferred to another developer.
6. RERA Should Have Clear Powers in Such Situations
A specialised mechanism could determine how the project should continue while protecting:
Society members + genuine homebuyers + lenders + other legitimate stakeholders.
What Should a Homebuyer Do Before Purchasing in a Redevelopment Project?
The issue also highlights the importance of due diligence.
Before purchasing a flat in a redevelopment project, a homebuyer should examine:
Development Agreement
Does the agreement clearly authorise the developer to construct and sell the particular sale component?
Society Resolution
Has the redevelopment proposal and developer appointment been properly approved?
RERA Registration
Is the project properly registered and is the proposed flat reflected in the project disclosures?
Land and Development Rights
Does the developer have valid authority to develop the property?
Existing Litigation
Are there disputes between the society and developer?
Termination Clauses
What happens to agreements already executed with purchasers if the development agreement is terminated?
Escrow and Project Finance
How are purchaser funds being maintained and utilised?
A purchaser should ideally obtain independent legal advice before investing in a redevelopment sale component.
Conclusion
The issue cannot be viewed merely as a contractual dispute between a housing society and a developer.
There is a third and equally important stakeholder: the innocent homebuyer.
Where a society has authorised a developer to construct and sell a defined sale component, and genuine purchasers have entered into registered agreements and invested substantial amounts in the project, their interests deserve meaningful legal protection.
A society may have every right to terminate a developer for genuine default. But terminating the developer should not automatically mean terminating the legitimate expectations and investments of innocent homebuyers.
The apparent tension between decisions focusing on privity of contract and those examining broader statutory obligations under RERA demonstrates the need for greater legal clarity.
A specific amendment to RERA, or a dedicated regulatory framework for redevelopment projects, could ensure that when a developer is removed, the project can continue without sacrificing the rights of genuine homebuyers who acted in good faith.
