Tripartite agreements in Real Estate matters
How far consumer is protected
During the last decade, builders have marketed to the customers with a new attractive idea and offer –enter into tripartite agreement between the buyer, builder and the bank/financer for loan. The scheme entitles the buyer of flat/house/ to get loan for any huge amount to be repaid in installments spread over for as many as twenty years. The attraction for the customer is that he is not to pay any installment till the construction is complete. Builder says-‘Dear buyer, you need not worry for payment of installments, I shall pay all till you are given possession of your flat. You only have to pay balance installments when construction is complete .Just relax, take loan and wait for your sweet home’
Under such tripartite scheme of home loans, buyer does not have to pay EMIs until the flat is delivered or for the period till construction is completed and possession given to the buyer, whatever the case may be. The developer pays installment to the bank during this period.
Do note, upfront disbursal for an under-construction property is banned by RBI in 2013 which is called Subvention Scheme. The arrangement where the pre-EMI payments are made by builders in a construction-linked disbursal is not banned.
There is yet another scheme also wherein tripartite agreement is entered between the buyer builder and financer, entire loan money is paid by the banker to the builder directly, all installments are to be paid by the buyer but first lien on the property is created in favour of financer under the tripartite agreement as well as separate MoU executed between builder and financer. Here builder becomes guarantor for the buyer and in case of default on the part of buyer in making payment to the financer through EMI’s, builder holds the right to cancel the allotment, forfeit earnest money and legally holds the right to return entire amount taken on loan by the buyer to the financer /bank and for balance money if remains unpaid, financer can still sue the buyer. Other remedy with the bank shall be to get property in their name, all the three parties already have agreed to this arrangement also.
Points to be noted –
As a matter of fact for all practical purposes, the bank does not have any role in the Equated Monthly Installment (EMI) sharing scheme. The bank simply finances allottee home loan according to the cost of flat. The bank disburses up to 80 per cent of the market value of the property, but not to the applicant. Bank advances the entire amount, in one go straight to the builder. Builder gets entire amount needed for construction from all allottees ,starts his project spending no single money from his pocket .On the other hand ,buyer has parted with entire construction cost , taken on loan in one go. Now builder pays installments of interest on the loan taken by the buyer till the construction is over and principal amount remains as it is which is paid at later stage by the allottee. During the course, builder attracts more buyers, books more flats as the construction proceeds. With the result, when construction is over, possession is given, purchaser is left with almost entire principal amount yet to be paid .he is under loan for forth coming number of years. Builder has paid only interest till then. In other words, he has used your money and paid interest to the bank (Pre-EMI) on your behalf for a certain period
How the purchaser is secured and benefitted under such schemes
- Banks give such facility of loan to the purchasers on recommendations of reputed builders who have APF Code allotted to them The Indian financing companies involved in housing and related developments provide an APF number or a code to developers .An APF number indicate that the project is registered and has approval/ permit of an authorized agency. This assures the purchaser that he has chosen the right developer for getting a dwelling.
- Purchaser can overcome cash/liquidity constraints
- Since he is not to pay EMI till possession, it helps him to plan budget till the property is ready-to-move-in
What are the documents required for this scheme
- Developer and the Bank execute A Memorandum of Understanding (MoU) between them
- Tripartite Agreement is executed between the developer, bank/financer and the respective home loan applicant These agreements specifically state that if the owner is in breach of the non-payment clause of the loan agreement, the lender becomes the new owner of the property The specific clauses for this purpose are incorporated in the home loan sanction letter also binding applicant of loan
How the developer benefits
- Developer attract customers in large numbers for their project under this scheme
- Developers get 20 per cent payment from home loan applicants and 80 per cent of the funds from banks.
- Home loan interest rates that developers pay to bankers on behalf of buyer in the form of EMI are much lower than commercial/ corporate funding rates
How the bank benefits
- The bank finds large numbers of home loan applicants from one approved project
- No “legal and technical” verifications are required and Banks find this cost-efficient.
- Bank can make more home loan approvals in lesser time
There are in between situations when buyer is shocked-
- If the builder fails to pay Pre-EMI on your behalf, you have to pay it. The bank has direct recourse to you because loan has been taken by you. The fact remains-you have applied for loan, loan is sanctioned, payment released. Installments are to be paid by buyer may be some Pre-EMI through builder as per arrangement through tripartite agreement. Bank has to recover the principal amount as well as interest and failure on the part of any one, flat is under mortgage to bank. Buyer is barred to get possession
- If construction does not start due to any reason and builder does not pay installment of interest to bank, you really have nothing in hands to stop paying to builder for construction because your banker has already transferred the entire amount of loan to the builder
- The builder only pays the Pre-EMI for a specific period or till such time possession is given to you, whichever is earlier. If there are delays in possession, you may have to pay Pre-EMI during the delayed period or may have to pay full-EMI also from own pocket
- In case of delay in possession you can go to the court for your grievance and it may take time to resolve the matter but clauses agreed by all the three parties shall come in operation without waiting for the outcome before the court. Financer may pressurize the builder to return the loan money, builder may cancel the booking if money is to be returned or financer may get full ownership of your booked property. Builder can also forfeit your earnest money if booking is cancelled.
Frankly speaking the agreement between buyer and seller is sufficient and there is no need of any third party. But sometimes the circumstances are such that the third party indirectly becomes related to it though the third party has no concern with that transaction. However it is not compulsory to make a tripartite agreement the law does not mandate it. If no tripartite agreement is made, it is valid.One can have separate agreement for loan with financer.
The only purpose the tripartite agreement serves is that the third party, in such agreement, acts as a confirming party. It is often seen that this arrangement helps the banks in recovering loan money and creating lien on property This arrangement helps the builder to cancel the house under pressure from bank even if he is the defaulter of initial EMI payments during construction period because developer has agreed to such arrangement and purchaser has also signed the document
One must understand, there is never a free lunch in any deal The builder will in one way or the other, recover the cost of pre-EMI payments from you only. This will most likely be in form of higher property price. If everything goes well and suits your budget, its fine. But one must understand the consequences for the entire situation.
Dr Prem Lata