Builder Cannot Cite Financial Hardship To Convert Residential Project To Commercial Use: Karnataka REAT

The Karnataka Real Estate Appellate Tribunal has held that commercial hardship or difficulty in obtaining approvals does not amount to frustration of contract, setting aside a RERA order and ruling that Italix Living Spaces Pvt. Ltd. could not change a residential project to commercial use after dismantling the structure during pending complaints.

In its decision dated March 11, 2026, the tribunal set aside a previous order passed by the Karnataka Real Estate Regulatory Authority (RERA) that had dismissed a complaint filed by homebuyers Vankadari Aniruddha Vaishnav and Vankadari Sunitha.

A coram of Judicial Member Santhosh Kumar Shetty N and Administrative Member Mahendra Jain found that Italix Living Spaces had acted with mala fide intent by demolishing a partially constructed structure while complaints were still pending, and directed refund of Rs 5 lakh with interest along with Rs 2.5 lakh as consolidated compensation for the loss and mental agony suffered by the allottees.

“Mere commercial hardship, inconvenience, or difficulty in obtaining regulatory approvals does not amount to frustration of contract. The doctrine cannot be invoked merely because performance has become onerous or less profitable. Therefore, Promoter cannot alter the nature of the project from residential to commercial use on the pretext of non-availability of TDR, nor can such difficulty be invoked to deny relief to the Allottees”, it held.

It further held that "the way in which the building was demolished during the pendency of the Complaints, that too, without informing the Authority or the Allottees clearly indicates a mala fide intention on the part of the Promoter to deviate from the agreed residential project and to convert the same for Commercial exploitation."

The dispute arose from a project originally registered as “Pebblebay Koramangala Phase-1,” later transferred to Italix Living Spaces Pvt. Ltd. and renamed “Green View Koramangala.”

On November 18, 2019, Vaishnav and Vankadari Sunitha booked a flat for Rs1.96 crore, paying ₹5 lakh, with completion due by September 30, 2021. The promoter neither commenced construction nor complied with the timeline. 

The homebuyers approached RERA on April 8, 2022, seeking possession or a refund with compensation.

By an interim order dated May 17, 2022, the Authority restrained any change in the project.

However, a June 10, 2022 spot inspection revealed that the structure had already been dismantled. 

By a judgment dated February 12, 2025, RERA dismissed the complaint while directing refund of Rs 5,00,000 with interest.

Challenging this, the homebuyers approached the Appellate Tribunal under Section 44 of the Real Estate (Regulation and Development) Act, 2016, alleging miscarriage of justice and violation of RERA's orders. 

The developer cited COVID-19, financial stress, and lack of Transferable Development Rights (TDR), claiming the contract stood frustrated.

The Tribunal rejected this, holding that frustration under Section 56 of the Indian Contract Act, 1872 applies only where performance becomes impossible, not merely difficult or unviable.

"The alleged difficulty in obtaining TDR does not render performance impossible; at best, it indicates a commercial or administrative impediment. Therefore, the Promoter cannot alter the nature of the project nor deny the statutory relief available to the Allottees under RERA by invoking the doctrine of frustration", it held.

The Tribunal further rejected the reliance on settlements with other buyers, observing that:

“It is pertinent to note that the mere withdrawal of Complaints or settlement by other Allottees does not ipso facto extinguish the independent contractual and statutory rights of the Allottees herein.”

It also held that refund alone was insufficient to address the allottees' loss and hardship, and that it had the power to mould relief by granting consolidated compensation.

“we are constrained to hold that the impugned judgment passed by the Authority suffers from non-application of mind and is liable to be interfered with", it concluded.

Accordingly, it allowed the appeal in part, set aside the RERA order, and directed Italix Living Spaces to refund ₹5 lakh with interest at SBI MCLR + 2% from the respective dates of payment, along with ₹2.5 lakh as consolidated compensation, payable within 60 days.

For appellants (Vankadari Aniruddha Vaishnav & Anr.):  Lex Scripta.

For respondent (Karnataka Real Estate Regulatory Authority): Advocate I.S. Devaiah.

For respondent (Italix Living Spaces Pvt. Ltd.): Advocate E. Sushail Ahmed.