Development agreement vis-a-vis construction contract for Redevelopment of societies
By K.K. Ramani, Advocate (from his book…)
Development agreements, broadly speaking, are agreements between the owners of land/building and the developers to construct/reconstruct large building complexes. The agreements are of the nature of joint venture between the two in which the owner contributes his share by way of the development rights existing on the land and allows the developers to load TDR FSI by procuring DRCs and use the same as per D.C. Regulations. Apart from procuring DRCs the developers also contribute by way of cost o be incurred in construction and construction related activities, manage the construction work and carry out all activities necessary and incidental to such work. The two collaborators to the agreement are generally compensated by a sharing arrangement in which the product, i.e. the constructed space is distributed between the two.
The arrangement is a variant of the contract agreement in as much as the person undertaking the actual construction work is compensated not in terms of fixed agreed monetary consideration but in terms of allotment of some FSI which he is entitled to construct on his own, hold it as is own and dispose it in the manner suited to him subject to the terms and conditions stipulated in the development agreement. It is similar to the contract arrangement in so far as it relates to constructed area to be handed over to the owner except for the difference that the consideration is received by the developer not in money but in term of constructed area and/or use of some percentage of TDR entitlement which can be loaded on the property of the owner.
The arrangement can also be distinguished from a joint venture arrangement in so far as the two parties join together not to earn profit arising therefrom but to share the fruits in terms of the space constructed as a result of such activities. There is no profit worked out from the venture as such. The two parties arrive at their respective profit on the basis of their contribution and the benefit derived as a result of the agreement.
Another distinguishing feature of development agreement is the fact that the property viz. The land/ building continues to remain the property of the owner in the property card. What is given to the developer is the right of development to exploit the percentage of development potential of the area to be kept by him as free sale area which he is entitled to dispose of and make profit therefrom. This was clearly stated by the Bombay High Court in Chaturbhuj Dwarkanath Kapadia Vs. CIT 260 ITR 491 when it observed that “the object of entering into a development agreement is to enable a professional builder/contractor to make profits by completing the building and selling the flats at a profit. The aim of these professional contractors is only to make profits by completing the building and, therefore, no interest in the land stands created in their favour under such agreements”. Such agreements are only a mode of remunerating the builder for his services of constructing the building as stated in Gurinder Developers Vs. Kurla Konkan Niwas Co-operative Housing Society (2000) 3 Mah Lj 131