Maintenance Charge Litigation After Possession: Legal Framework, Judicial Trends, and the Charge-Audit Mechanism

Introduction : The execution of conveyance deed by promoter and handing over of possession marks the real estate project’s transition from construction to operation and maintenance phase. However, for a considerable number of urban home buyers, getting possession is far from the end of troubles as they face prolonged litigation against real estate developers for disputes on post-possession maintenance charges. The home buyers’ association members identify the post-possession maintenance charges as one of the most contentious issues in the buyer-developer relationship. Developers resort to collecting hefty advance maintenance fees for one to three years, adhesion contracts with unilateral rate escalation provisions, and refusal to hand over the common amenities and corpus funds to democratically elected AoA/RWA.

Moreover, buyers are subjected to poor maintenance of facilities, collection of maintenance charges for unsold inventory, unaccounted management fees, and misappropriation of funds for commercial exploitation of common areas and amenities. This paper reviews legal provisions and case laws concerning post-possession maintenance fees and charge audit for enforcing accountability and transparency in operation and maintenance of apartment project. It also throws light on the statutory rights of association of allotees and remedies for unilateral rate escalation by developers. Finally, this paper highlights the charge audit process for ensuring compliance with statutory provisions for transparency and accountability in post-possession management of residential units.

Legal Provisions

A. The Real Estate (Regulation and Development) Act, 2016 (RERA)

Section 11(4)(e): A promoter shall be entitled to provide or cause to be provided and maintain or cause to be maintained on his account all services, facilities, and amenities as may be agreed to in the agreement for sale till the handing over of possession to the allottees.

Section 11(4)(g): The promoter shall be entitled to pay all outgoing pertaining to the land, ground rent, municipal or other taxes, and maintenance charges till he hands over the possession of the real estate project to the allottees or association of allottees. A promoter cannot levy maintenance charges for the maintenance of unsold inventory.

Section 11(4)(f): The promoter shall facilitate the formation of an association or society of allottees or a federation of such associations or societies under the applicable laws by the allottees within three months from the date on which a majority of allottees have taken possession of plots, apartments, or buildings.

Section 19(6): Every allottee shall contribute to the registration of an association of allottees and pay the maintenance charges as may be agreed to in the agreement for sale.

B. State Apartment Ownership Acts

The Maharashtra Ownership Flats (Regulation of the promotion of construction, sale, management and transfer) Act, 1963 (MOFA), the Uttar Pradesh Apartment (Promotion of Construction, Ownership and Maintenance) Act, 2010, the Karnataka Apartment Ownership Act, 1972, and the Delhi Apartment Ownership Act, 1986 govern the transfer of ownership of apartments and residential plots.

Transfer of Management and Maintenance: Most of the state laws provide that the promoter needs to execute a conveyance deed within 3 to 4 months from the receipt of occupancy certificate or allotment of 51%–60% of the apartments in the project and transfer management and maintenance of the project to the apartment owners’ association.

Apportionment of Expenses: The state apartment ownership laws provide that the common expenses need to be apportioned among the apartment owners on the basis of undivided interest in the apartments, or on a square-foot basis as may be stipulated in the apartment declaration document.

C. Consumer Protection Act, 2019

Section 2(11): Any fault, imperfection, inadequacy, or deficiency in the quality, nature, and manner of performance of a service as agreed in the consumer contract constitutes “deficiency in service.”

Section 2(46): Any unfair term in a contract of sale, agreement for sale, or partnership agreement that causes undue hardship or forms an unreasonable restraint on trade constitutes an “unfair contract.”

Section 2(47): Any trade practice that is fraudulent, restrictive, coercive, or otherwise harmful to the consumer constitutes an “unfair trade practice.”

Legal Analysis

A. The Advance Maintenance Collection Dilemma and Corpus Fund Management

The real estate developers adopt the practice of collecting huge advance maintenance charges ranging from 12 to 36 months and a non-refundable Corpus Fund/IFMS at the time of possession hand over. As per the provisions of Section 11(4)(e), the promoter is the trustee of the corpus funds collected till the maintenance charge responsibility is transferred to the AoA/RWA.

Developers often mix the maintenance funds with their other operating expenses and/or use the interest accrued on IFMS for funding the corporate office expenses. Some developers fail to account for the maintenance proceeds generated through the commercial exploitation of the project’s common facilities and amenities such as clubhouse rental, cellular tower lease, and advertisement board rental.

B. Maintenance Charges for Unsold Inventory

The most contentious issue in the maintenance charge dispute pertains to the question whether the developer is liable to levy maintenance charges for unsold inventory in his possession, or bear the capital expenditure on the maintenance of unsold inventory. Many developers levy exorbitant maintenance charges for the maintenance of unsold inventory in their possession. On the contrary, developers’ opponents claim that the unsold inventory is not physically occupied by the allottees and does not entail any burden on the allottees. Therefore, a developer cannot levy maintenance charges for the unsold inventory.

However, as per the statutory provisions governing maintenance charge levy and apportionment, the maintenance obligation of an apartment project is governed by title and undivided interest in the common areas and facilities, and not by the physical occupation or absence thereof. Accordingly, developers who make an assertion that unsold inventory does not entail any burden on the allottees are committing unfair trade practice by making an unreasonable demand for escalation of maintenance charges. Moreover, it is a violation of the statutory provisions for the promoter to withhold the maintenance charges for the maintenance of the allottees by utilizing it for the maintenance of the developer’s inventory.

C. Transition of Governance and Locus Standi of Allotees Associations

The promoter’s captive or subsidiary facility management companies continue to reap rich maintenance and service charges benefits by restricting the buyers from taking over possession of the common areas and maintenance infrastructure. Developers also evade the accountability of addressing construction-related defects, incomplete facilities, and maintenance of the project by transferring these responsibilities to the buyers through AoA/RWA.

The Association of Allotees attains independent existence upon registration under the relevant apartment ownership statutes, and has locus standi to enforce the promoters’ accountability and transparency in project maintenance. The allottees association has a statutory right to demand a complete audit of maintenance accounts pertaining to the apartment project and claim the unutilized advance maintenance and IFMS along with the accrued interest. The Association also has a right to take possession of the maintenance and common facilities upon the expiry of the maintenance account audit period.

D. Adhesion Contracts and Unreasonable Demands of Developers

Home-buyers are subjected to sign the standard-form maintenance agreements with promoters, which contain unilateral terms providing the promoters with absolute rights to levy exorbitant maintenance charges upon expiry of the initial one-year period. The courts have been applying the doctrine of unequal bargaining power to invalidate such unilateral terms as per Section 2(46) and 2(47) of the Consumer Protection Act, 2019.

Case Laws

Wing Commander Vikas Goel v. M/s Unitech Limited, Consumer Case No. 136 of 2014, NCDRC

The NCDRC held that the developer cannot demand or collect maintenance fees or operational charges on the common facilities before the issuance of a valid occupancy certificate (OC) and handing over of possession to the home-buyers per the agreement for sale.

DLF Limited v. Homeowners Association, (2019) 14 SCC 160

The Hon’ble Supreme Court emphasized on the promoter’s legal and statutory obligation to take over possession of the project’s common areas and maintenance infrastructure and hand it over to the homeowners’ association within the specified statutory period upon registration of the association. The promoter has no right to collect advance maintenance fees beyond the statutory time limit. The promoter needs to execute a conveyance deed and transfer all the IFMS and its accrued interest to the registered homeowners association at the time of transfer of possession.

Sanjeev Sulati v. M/s DLF Universal Ltd., 2021 SCC OnLine RERA 412

The MahaRERA held that the promoter is legally obligated to pay the full maintenance charges for the unsold flats and inventory.

Pioneer Urban Land & Infrastructure Ltd. v. Govindan Raghavan, (2019) 5 SCC 416

The Hon’ble Supreme Court held that it is an unfair trade practice for a promoter to include unilateral abusive clauses in the contract for sale of real estate apartments. Such unilateral clauses are declared as invalid by the courts because of the unequal bargaining power between the promoter and the allottees.

Practical Implications

The home-buyers, without the benefit of financial and managerial expertise, are in for perpetual exorbitant maintenance charges and downgradation of services (e.g., maintenance of elevators, basic security, and fire fighting services) and amenities in case of promoter’s default for payment of maintenance charges for unsold inventory. The developer may face heavy financial penalty and prolonged litigation for violation of RERA provisions and non-compliance with the RERA regulations pertaining to the allottees association registration and formation, transfer of possession, and transfer of maintenance charges responsibility. There is emerging RERA trend led by MahaRERA, UP RERA, and HRERA to open a joint escrow account for maintenance charges and prohibit the promoter from depositing the maintenance funds directly into the promoter’s account.

Charge Audit

Phase I: Document & Ledger Reconciliation (Contractual & Financial Records Audit)

• Verify the Agreement and record the maintenance charges.

• Collect the annual financial statements, the IFMS statements, and bank statements.

• Check whether the maintenance charges were levied before the issue of OC.

Phase II: Inventory & Revenue Allocation Audit (Unsold Units & Common Area Revenue Verification)

• Verify the inventory by counting the number of builder flats.

• Levy maintenance charges for the unsold inventory as per Section 11(4)(g) of RERA.

• Record the revenue attributable to the commercial exploitation of the project’s common amenities and/or facilities such as clubhouse, restaurant, etc.

Phase III: Operational Expense & Vendor Scrutiny (Expense Justification & Arm’s-Length Assessment)

• Physically inspect the vendor contracts and ensure that there are no deviations from the competitive pricing.

• Scrutinize the operating expenses and segregate them from the capital expenditure with reference to the maintenance fund.

• Cross-verify the paid electricity and water bills with the common area’s electricity and water consumption.

Phase IV: Transition & Legal Enforcement (Governance Handover & Formal Dispute Resolution)

• Formulate the Association and register it under the applicable apartment law as per Section 11(4)(f) of RERA.

• Send a legal notice demanding the submission of the maintenance fund audit and notice for the association formation.

• File a complaint under Section 31 of RERA and/or the Consumer Protection Act for deficiency of service and seek the adjudication on the maintenance fund audit.

Author: Goutami Solanki in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

Endnotes

1. Real Estate (Regulation and Development) Act, 2016, § 11(4)(e) (India).

2. Real Estate (Regulation and Development) Act, 2016, § 11(4)(g) (India).

3. Real Estate (Regulation and Development) Act, 2016, § 11(4)(f) (India).

4. Real Estate (Regulation and Development) Act, 2016, § 19(6) (India).

5. Maharashtra Ownership Flats (Regulation of the promotion of construction, sale, management and transfer) Act, 1963, § 10 (India).

6. Uttar Pradesh Apartment (Promotion of Construction, Ownership and Maintenance) Act, 2010, § 14 (India).

7. Consumer Protection Act, 2019, § 2(11) (India).

8. Consumer Protection Act, 2019, § 2(46) & § 2(47) (India).

9. Wing Commander Vikas Goel v. M/s Unitech Limited, Consumer Case No. 136 of 2014 (NCDRC) (India).

10. DLF Limited v. Homeowners Association, (2019) 14 SCC 160 (India).

11. Sanjeev Sulati v. M/s DLF Universal Ltd., 2021 SCC OnLine RERA 412 (India).

12. Pioneer Urban Land & Infrastructure Ltd. v. Govindan Raghavan, (2019) 5 SCC 416 (India).

13. Haryana Real Estate Regulatory Authority (HRERA), Circular on Maintenance Handovers and Escrow Accounting, Circular No. HRERA/2021/Maint-04 (2021).

14. Maharashtra Real Estate Regulatory Authority (MahaRERA), Standard Operating Procedure for Handover of Maintenance and Society Formation, Order No. 28/2022 (2022).