I have been staying in Bandra East in Mumbai for as long as I can remember. I have seen the facilities in the area grow in the last 15-20 years making it an ideal place to stay for a middle class family. The only snag was that the building is about 45 years old and need extensive repair.
At the same time since the construction was done in the early 1960’s when the space crunch was not so high it is a sprawling complex with lots of open land. With the increased FSI and a strategic location, the redevelopment bug has caught up with us and is now a raging fever in our locality with almost all of
Mumbai’s top builders in the fray to redevelop the property. Recently a prominent builder signed up with our society to redevelop the property.
Not only would he give us much bigger flats in the to be constructed new buildings but he also gave us (and the society) certain sums of money. He would of course make money by selling off the additional flats that he would build by using the surplus FSI available on our flat. So if all this has happened why am I writing this Article?
In this article I wanted to cover the issues faced by the members who had taken a home loan to buy the property in our society. I apologize in advance to non Mumbai readers if this article deals primarily with a Mumbai issue but I am sure the re-development bug will hit other cities as well as the real estate prices (and FSI) goes up in their cities.
At the time when the member took the loan, the society would have provided a NOC to the lender wherein they (the society) would have acknowledged the charge of the lender on the member’s flat and would have also confirmed to the lender that it would not allow the transfer of the flat without the prior approval of the lender.
Now typically by allowing the builder to demolish the flat, the society is allowing the lender’s security to be compromised without their prior approval. So legally minded societies ask the concerned member to get an NOC from the lender for the redevelopment. Also, since the lender has a charge on the member’s flat it can create a legal hurdle for the builder or the society to go ahead with the redevelopment. So builders may also ask for an NOC from the lender before he begins the redevelopment.
From the lender’s perspective the loan becomes much more riskier. Earlier the security for the loan was a ready flat which now becomes an under construction flat in a redevelopment project where the construction risks have not been evaluated by the lender. Construction risks means the risk of the construction getting delayed or abandoned or not being made as per approved plans. Hence obviously for the lender the risk increases and he would be loath to agree to the redevelopment.
So what is the solution to this impasse?
The initial and the most common solution is where the builder who is redeveloping the property doesn’t ask for the ownership papers of all the flats in the buildings and even the society does not really understand that by agreeing for the redevelopment it is violating its own commitment given to the lender in its NOC.
So as long as the member continues to pay the EMI on a timely basis the lender remains blissfully unaware of the redevelopment and life just goes on with the member taking possession of the new flat when it is ready and continuing to pay the EMI on time.
In some cases where the developer is paying money apart from the new flat than the society (or the developer) may request the member to pay off the full loan amount and get a clearance certificate from the lender.
In such cases the money may also be directly paid to the lender by the developer/society. Of course this solution only works where the money payable to the member is equal to or more than the outstanding loan amount.
Another interesting solution is also beginning to emerge. The developer normally gets his project pre-approved from some lender or the other. Obviously this lender is willing to take the construction risk on the project and would be amenable to takeover any existing loan. In this solution the new lender will pay off the loan to the earlier lender and the member will now have to pay EMIs to the new lender.
If neither of these solutions is feasible then it probably becomes quite sticky. All the mainline lenders that Andromeda team spoke to said that they would not provide an NOC for a house that was under security with them to be demolished and rebuilt.
Thus receiving an NOC from the lender is not only tough but looks all the more impossible to get. One possible solution is to transfer the loan to smaller HFCs who may be willing to take a risk on under construction property but such loans are likely to be significantly expensive as compared to regular home loans.
All this brings out the necessity of proper regulations around the whole subject of redevelopment. After all in an island city like Mumbai land for construction is going to be available only through the redevelopment route.
Let’s hope we get some more clarity around this whole subject soon. I would like to invite readers to share their own experiences on this subject.