Reconstituted Real Estate Firm Cannot Escape Liability To Refund Homebuyer: Karnataka REAT

The Karnataka Real Estate Appellate tribunal has refused to absolve, a partnership firm, East North VVS Realty of its liability to refund ₹42 lakh to an 82-year-old homebuyer, holding that the firm could not escape its obligations following changes in its constitution.

“Viewed in this factual backdrop, we are of the considered opinion that the present appeal is an attempt to avoid the legitimate obligations of the Firm and thereby defeat the lawful rights of the Allottee,” the tribunal observed.

A bench comprising Chairperson Justice J.M. Khazi and Judicial Member Santhosh Kumar Shetty N. delivered the ruling while modifying an order passed by the Karnataka Real Estate Regulatory Authority (RERA).

The dispute arose from a registered sale agreement executed on November 29, 2019, under which B.K. Nagaraj agreed to purchase an apartment in the Nash Ville project for ₹42 lakh. Possession was due by November 28, 2020.

Nagaraj claimed that he had paid the entire sale consideration but was not given possession even after more than two years. He approached RERA seeking a refund with interest.

On December 11, 2023, RERA directed the promoters to refund ₹64.46 lakh with interest calculated from May 1, 2017, to November 11, 2023, and to pay further interest until final payment. The order was passed against East North Realty Private Limited and R. Venkatesh, partners of East North VVS Realty.

East North VVS Realty challenged the order, arguing that it was the actual promoter and developer of the project but had not been made a party to the original proceedings.

The firm, represented by Managing Partner P.A. Vinay, also contended that the sale consideration had been received by East North Realty Private Limited, a separate company, rather than the partnership firm. It argued that it could not be held liable for money it had not directly received.

Nagaraj opposed the appeal, maintaining that the firm's reconstitution and induction of new partners after the sale agreement could not defeat his rights.

Prabhakara Reddy, another partner, pointed out that Vinay and C.S. Vasu had joined the firm under a reconstitution deed dated September 3, 2020, and collectively held 97% of the partnership shares. He also contended that he had transferred the firm's assets and liabilities to the appellant firm after the reconstitution.

Examining the deed, the tribunal noted that Vinay held a 57% share and Vasu 40%. The deed appointed Vinay as managing partner, authorised him to operate the firm's bank accounts, and gave him sole responsibility for managing the firm. The incoming partners had also agreed to share its profits and losses and were bound by the terms of earlier partnership deeds.

The tribunal held that Vinay could not disown the firm's liabilities arising from the 2019 sale agreement after taking over as managing partner.

It also noted that Vinay was a director of East North Realty Private Limited, which had been named in the original complaint. Since the company and R. Venkatesh, another partner of the firm, were parties to those proceedings, the tribunal inferred that Vinay was aware of the complaint.

Rejecting the firm's attempt to avoid liability, the tribunal found no justification for absolving it of its obligations under the sale agreement.

However, it found fault with RERA's decision to calculate interest from May 1, 2017, more than two years before the sale agreement was executed. Nagaraj had not claimed to have made any payment that year.

The tribunal observed that the allottee was entitled to interest, if otherwise eligible, only from the date of the sale agreement, since there was no basis to assume that he had made payments before it was executed.

“In all probability, the allottee is entitled to interest, if otherwise eligible, only from the date of the Sale Agreement and not from any date prior thereto, for the simple reason that there could have been no occasion for the allottee to make payments towards the sale consideration before the execution of the agreement,” it observed.

The tribunal further held that, as the first appellate forum, it was duty-bound to correct an error apparent on the face of the record, even though neither party had raised the issue. Allowing interest for a period in which no payment was shown to have been made would confer an unjustified benefit on the allottee at the promoter's expense.

The judgment also records that Nagaraj had filed a separate complaint seeking compensation for rental losses caused by the delay in handing over possession. That matter was settled before the Lok Adalat, where he received ₹3 lakh towards rental loss.

The tribunal dismissed the firm's appeal insofar as it sought to escape liability, while modifying RERA's order on the interest calculation.

East North VVS Realty was directed to refund ₹42 lakh with interest at the State Bank of India's marginal cost of funds-based lending rate (MCLR) plus 2% per annum, calculated from November 29, 2019, until March 24, 2025, when the firm deposited the amount with the tribunal under Section 43(5) of the Real Estate (Regulation and Development) Act, 2016.

The tribunal directed its registry to release the amount payable to Nagaraj, along with interest accrued on the fixed deposit, after the appeal period expires. Any remaining balance is to be refunded to the firm.

For appellant (East North VVS Realty): Advocates Samarth Shreedhar & Associates.

For respondent (B.K. Nagaraj): Advocate Nagesha Poojary Y.

For respondent (Karnataka RERA): Advocate K.V. Girish.

For respondent (Prabhakara Reddy): Advocate Lokesh R.