Failure to Obtain Occupancy Certificate a Deficiency in Service by Developer: A Note on the Supreme Court’s Decision

On January 11, 2022, the Supreme Court of India delivered a noteworthy decision in the case of Samruddhi Co-operative Housing Society Ltd. vs. Mumbai Mahalaxmi Construction Pvt. Ltd.,[i] by affirming that the failure of a developer to obtain an occupancy certificate would constitute a deficiency in service under the consumer protection law of India.

Relevance of Occupancy Certificate

 

Setting up one’s perfect abode for peaceful dwelling calls not only for a perfect finishes and a picturesque interior but also entails ensuring that all housing-related statutory requirements are fulfilled. One such indispensable compliance, the very mention of which causes flat owners to prick up their ears is an occupancy certificate. Under such an occupancy certificate, the local municipal authority permits the occupation of any building, as provided under local laws, which has provision for civic infrastructure such as water, sanitation and electricity.[ii]

However, a large number of flat owners across the country are far from having a perfect legally compliant abode given the failure of developers to obtain occupancy certificates in a timely manner. As a matter of practice, flat owners would take possession of their flats before obtaining the occupancy certificate and refurbishing the interiors, which, in some cases would result in a violation of statutory requirements and would further complicate the process of obtaining an occupancy certificate. In the case of old buildings, the developers are seldom approachable, and the residents are left helpless, in anticipation and burdened with extra costs for years.

 

Background of the Case

 

The flat owners in the case of Samruddhi Co-operative Housing Society Ltd. vs. Mumbai Mahalaxmi Construction Pvt. Ltd., had purchased flats from Mumbai Mahalaxmi Construction Pvt. Ltd. (“Respondent-Developer”) around the year 1993, were given possession of their flats around the year 1997, and had further constituted themselves into a co-operative housing society viz. ‘Samruddhi Co-operative Housing Society Limited’ (“Appellant-Society”). The Respondent-Developer failed to obtain the occupancy certificate for the buildings of the Appellant Society but went ahead and delivered possession of the flats. Consequently, the Appellant Society, being ineligible to obtain electricity and water supply services in the absence of the occupancy certificate, was burdened with extra taxes and charges payable to the local municipal authority, including payment of excess property tax at 25 per cent over and above the normal rate and water charges at 50 per cent over and above the normal rate.

In the year 1998, the Appellant-Society instituted a consumer complaint before the State Consumer Disputes Redressal Commission (“SCDRC”) seeking that the Respondent-Developer be directed to obtain the required occupancy certificate. The SCDRC not only issued a direction to the Respondent-Developer to obtain the required occupancy certificate within a period of 4 months but also directed the payment of INR 100,000/- towards reimbursement of the excess water charges paid by the Appellant-Society. Upon the failure of the Respondent-Developer to comply with the aforesaid directions of SCDRC, the Appellant-Society filed a complaint before the National Consumer Disputes Redressal Commission (“NCDRC”), the apex consumer dispute resolution forum in the country, in the year 2016.

The aforesaid complaint was filed on the statutory ground of ‘deficiency in service’ of the Respondent-Developer and the Appellant-Society sought payment of INR 26,073,475/- as reimbursement of excess charges and tax paid by the Appellant-Society and INR 2,000,000/- towards the mental agony and inconvenience caused to the members of the Appellant-Society. However, the NCDRC dismissed the aforesaid complaint on the grounds of being time-barred and the ineligibility of the Appellant Society to seek relief as a ‘consumer’ under Section 2(1)(d) of the governing statute i.e., the Consumer Protection Act, 1986 (“CP Act”). The Appellant-Society thereafter challenged the decision of the NCDRC before the Supreme Court.

 

Operating Law

 

In addition to dealing with the point of limitation as per the CP Act, the Supreme Court, in its analysis, considered the provision of the Maharashtra Ownership Flats (Regulation of the promotion of construction, sale, management and transfer) Act, 1963 (“MOF Act”), which was introduced to curb malpractices by developers in relation to the sale of flats on an ownership basis.

Section 3 of the MOF Act prevents a developer from allowing a flat purchaser to take possession of a flat before the completion certificate, as may be required under law, is duly obtained by the developer from the local authorities.

Section 6 of the MOF Act obligates a developer to discharge payment of all outgoings, including municipal or other taxes and water charges, until the developer transfers the flats to the flat owners or organisation of flat owners. Further, the aforesaid provision clarifies that the developer will continue to be liable for payment of dues and penalties related to the outgoings which were collected from the flat owners prior to the transfer of the flats, even after such transfer is completed.

By a co-joint reading of Sections 3 and 6 of the MOF Act, the Supreme Court concluded that the Respondent-Developer was obligated to provide the Appellant-Society with the occupancy certificate and was also liable to discharge payment of all outgoings until such a certificate was provided. The Supreme Court further observed that the failure of the Respondent-Developer to do so was a continuing wrong and the Appellant-Society was entitled to claim compensation for such continuing wrong.

 

The Verdict

 

Following the above analysis, the single-judge bench of Justice Dhananjaya Y Chandrachud dealt with the findings of the NCDRC and overruled the decision of the NCDRC on the eligibility of the Appellant-Society as a consumer under Section 2(1)(d) of the CP Act. Based on precedent judgments of the Supreme Court, it was concluded that the failure of a developer to obtain an occupancy certificate or abide by contractual obligations would amount to a deficiency in service under the CP Act. The Supreme Court thus held that:

“In the present case, the respondent was responsible for transferring the title to the flats to the society along with the occupancy certificate. The failure of the respondent to obtain the occupation certificate is a deficiency in service for which the respondent is liable. Thus, the members of the appellant society are well within their rights as ‘consumers’ to pray for compensation as a recompense for the consequent liability (such as payment of higher taxes and water charges by the owners) arising from the lack of an occupancy certificate.”

Allowing the appeal, the Supreme Court thus, directed NCDRC to decide the complaint based on the observations made by the Supreme Court in deciding the appeal and dispose of the complaint within a period of 3 months from the date of the judgment therein.

 

Significance of the Judgment

 

It is noteworthy that the provisions of the MOF Act have been interpreted in conjunction with the consumer protection law to offer relief to flat owners. It is expected that this judgment can come to the aid of flat owners who have purchased flats and are waiting for decades for regularisation of their flats.

In the present scenario, under the Real Estate (Regulation & Development) Act, 2016 (“RER Act”) (which was introduced in the succession of the MOF Act) developers are obligated to obtain the completion certificate or the occupancy certificate, or both, as applicable, from the relevant authority and make the same available to the flat purchasers or association of flat purchasers.[iii] Hence, for buildings that are registered under the RER Act, the authority set up under the RER Act can be approached in case of delay by the developer to provide an occupancy certificate.

Thus, the instant matter also resounds an alarm bell for developers to ensure that the occupancy certificate requirements are complied with as a prime concern as flat purchasers may have recourse to multiple forums to seek relief in case of any delay in this regard.

References

[i]Civil Appeal No. 4000 of 2019 in the Supreme Court of India Civil Appellate Jurisdiction.

[ii]Real Estate (Regulation & Development) Act, 2016 (Act No. 16 of 2016), §2(zf).

[iii]Real Estate (Regulation & Development) Act, 2016, § 11(4)(b).

 

Image Credits: Photo by Tierra Mallorca on Unsplash

It is noteworthy that the provisions of the MOF Act have been interpreted in conjunction with the consumer protection law to offer relief to flat owners. It is expected that this judgment can come to the aid of flat owners who have purchased flats and are waiting for decades for the regularisation of their flats. In the present scenario, under the Real Estate (Regulation & Development) Act, 2016 (“RER Act”) (which was introduced in the succession of MOF Act) developers are obligated to obtain the completion certificate or the occupancy certificate, or both, as applicable, from the relevant authority and make the same available to the flat purchasers or association of flat purchasers.

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Consumer Protection (Direct Selling) Rules, 2021 – Tightening the Noose on Pyramid and Money Circulation Schemes

Direct selling entities, multi-level marketing and pyramid schemes have existed for decades across the globe. These entities and direct sellers lure customers into these serpentine schemes by provoking an individual’s desire to become entrepreneurs with minimum investment. In addition, COVID-19 induced lockdown proved to be a fertile ground for a significant increase in the establishment of direct selling/multi-level marketing businesses. While some operated legally, others exploited the grey areas in the regulatory framework or were outright pyramid schemes.

Whilst people were and still are jumping into the direct selling bandwagon, the existing and potential stakeholders must be aware of the caution that the Government has issued[1] and the legal landscape surrounding direct selling/multi-level marketing business. The Consumer Protection (Direct Selling) Rules, 2021 (“DS Rules”), one of the primordial tools to regulate the direct selling industry, is being examined herein.


Brief History of the Regulations on Direct Selling

With the intent to curb the menace of illegal multi-level marketing and pyramid schemes that were masquerading as legitimate businesses, back in 2016, the Department of Consumer Affairs, Ministry of Consumer Affairs, Food & Public Distribution, formulated a set of guidelines titled “Direct Selling Guidelines 2016”. These guidelines were formulated as model regulations,  issued as an advisory that put the onus the State Government and Union Territories for their effective implementation. 

Taking a cue from the Central Government’s advisory, various State Governments enacted their respective direct selling guidelines – The Tamil Nadu Direct Selling Guidelines Order 2018[2], Karnataka Direct Selling Rules, 2019[3], Maharashtra’s Guidelines for regulating the business of ‘Direct Selling’ and Multi-Level Marketing (MLM)[4] enacted in 2019, West Bengal Direct Selling Guidelines, 2018[5]. While some State Governments embraced the central government advisory and implemented guidelines on the lines of the DSG 2016, not all States followed suit, resulting in a lack of uniformity and regulation across the country.

With this brief history, let us understand the recently enacted Consumer Protection (Direct Selling) Rules, 2021 under the Consumer Protection Act, 2019, which is intended to operate as a bulwark against pyramid schemes established in India or offer goods and services to customers in India.


Consumer Protection (Direct Selling) Rules, 2021

 

1. Overview 

The Consumer Protection (Direct Selling) Rules, 2021 came into force on December 28, 2021, to prohibit participation and/or promotion of pyramid schemes and money circulation schemes[6]. While the new DS Rules do not define direct selling as compared to the DS Rules, 2016; the term direct selling entity has been defined as “principal entity which sells or offers to sell goods or services through direct sellers, but does not include an entity which is engaged in a Pyramid Scheme or money circulation scheme”[7]. The exclusive definition is made to limit the application of the Act only to pyramid or money circulation schemes.

A pyramid scheme has been defined as “a multi-layered network of subscribers to a scheme formed by subscribers enrolling one or more subscribers in order to receive any benefit, directly or indirectly, as a result of enrolment or action or performance of additional subscribers to the scheme, in which the subscribers enrolling further subscribers occupy a higher position and the enrolled subscribers a lower position, resulting in a multi-layered network of subscribers with successive enrolments”[8]. And, money circulation scheme is defined as “means the schemes defined in clause (c) of section 2 of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (43 of 1978)”[9].

The obligations under the DS Rules can be broadly categorized into:

  • obligations of direct selling entities;
  • obligations of direct sellers; and
  • duties of direct selling entity and direct seller.

Before analyzing various obligations under the DS Rules, it is pertinent to note that the DS Rules are applicable to any entity offering goods and services to consumers in India, whether or not such entity is established in India[10] and such an entity is mandated to maintain records such as charter documents, tax registration documents, income tax returns, financials, etc.[11] Further, direct selling entities must comply with the provisions of the DS Rules within ninety (90) days from the date of its publication.[12] It is pertinent to note that, the Consumer protection (e-Commerce) Rules, 2020 apply to both the direct sellers and the direct selling entities[13].


2. Obligations under the DS Rules:

Among other things, every direct selling entity shall[14]:

  • have a physical office in India.
  • Keep their website updated including details of its nodal office, grievance redressal officer and mechanism, management, products information including price and such website shall also explicitly provide name, address, contact details, complaint tracking mechanism, return, refund and warranty, payment-related information.
  • obtain all relevant registrations, including PAN and other tax registrations.
  • obtain a certificate from a company secretary for all information provided on its website.
  • Make just, fair and equitable written contracts with its direct sellers for dealing with the entity’s products and services.
  • ensure its direct sellers have verified identities and physical addresses.
  • comply with the Legal Metrology (Packaged Commodities) Rules, 2011.
  • store personal data within India.

Among other things, every direct seller shall[15]:

  • Provide full information about the direct selling entity, nature of goods and services, terms of purchase, return and refund, warranty, etc.
  • Provide an order form with various details about the direct seller and the direct selling entity.
  • Protect the sensitive personal information provided by consumers.
  • Not approach a consumer without his/her identity card and prior approval, provide literature to prospects without approval, make claims inconsistent with claims as authorized by direct selling entity.

 

3. Duties

Under Rule 7 of the DS Rules, direct seller and direct selling entity shall:

  • ensure terms of offer are clear, make true representations, not use unfair or deceptive trade practices, not indulge in fraudulent activities, not portray direct selling as market research.
  • not indulge in mis-selling products or services to customers.
  • charge any entry or subscription fee.
  • ensure orders are delivered within the proposed delivery date at the time of purchase.
  • follow provisions of the Legal Metrology Act, 2009 and rules framed thereunder.
  • Not induce customers to make purchases based on the representation that they can reduce or recover the price by referring prospective customers to the direct sellers for similar purchases.

Any contravention of the DS Rules will attract penalties and the legal procedures enumerated under the Consumer Protection Act, 2019[16]. Further, the DS Rules require the State Governments to set up a mechanism to monitor or supervise the activities of direct sellers and direct selling entities, which fortifies the effective implementation of the DS Rules.


Bringing In Uniformity 

 

The Direct Selling Guidelines 2016 were implemented during the time when FTC (Federal Trade Commission) of USA filed a complaint accusing Herbalife Nutrition Ltd. (a multi-level marketing (MLM) corporation) of deceiving consumers about how much money they could make selling its products, noting that most Herbalife distributors make no money at all[17]. The FTC also announced that Herbalife later agreed to pay $200 million to reimburse consumers who lost money on its nutrition supplements and planned a major restructuring of its sales and distribution practices[18].

The Direct Selling Guidelines 2016 which were issued as an advisory by the Central Government, were not implemented by all States resulting in a lack of uniformity, certainty and effective protection from the perniciously proliferating pyramid and money circulation schemes.

The new Rules shall now result in a uniform application of the law across the country, thereby standing in alignment with the legislative intent.  Additionally, by bringing the direct selling entities and direct sellers under the ambit of Consumer Protection Act, 2019, the Central Government has taken a step in the right direction since consumers can now approach the consumer protection forums for effective redressal of grievances.

References: 

[1] RBI cautions Public against Multi Level Marketing Activities: https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=1514, January 01, 2015.

[2]https://upload.indiacode.nic.in/showfile?actid=AC_TN_85_1061_00003_00003_1553515101944&type=rule&filename=trekking_rules.pdf

[3] https://idsa.co.in/resources/media/guidelines/1609826052_Direct%20Selling%20Notification_0.pdf

[4] https://idsa.co.in/resources/media/guidline/1563874609_Maharashtra%20DS%20Guidelines_0.pdf

[5] https://www.idsa.co.in/resources/media/new/1596788872_West%20Bengal%20Direct%20Selling%20Guidelines%202018_0.pdf

[6] Rule 10 of the Consumer Protection (Direct Selling) Rules, 2021.

[7] Rule 1 (d) of the Consumer Protection (Direct Selling) Rules, 2021.

[8] Rule 1 (i) of the Consumer Protection (Direct Selling) Rules, 2021.

[9] Rule 1 (f) of the Consumer Protection (Direct Selling) Rules, 2021.

[10] Rule 2 (2) of the Consumer Protection (Direct Selling) Rules, 2021.

[11] Rule 4 of the Consumer Protection (Direct Selling) Rules, 2021.

[12] Proviso to Rule 2 (1) (d) of the Consumer Protection (Direct Selling) Rules, 2021.

[13] Rule 9 of the Consumer Protection (Direct Selling) Rules, 2021.

[14] Rule 5 of the Consumer Protection (Direct Selling) Rules, 2021.

[15] Rule 6 of the Consumer Protection (Direct Selling) Rules, 2021.

[16] Rule 13 of the Consumer Protection (Direct Selling) Rules, 2021.

[17] https://www.npr.org/sections/thetwo-way/2016/07/15/486174340/herbalife-agrees-to-pay-200-million-to-settle-complaints-it-deceived-consumers

[18] https://www.npr.org/sections/thetwo-way/2016/07/15/486174340/herbalife-agrees-to-pay-200-million-to-settle-complaints-it-deceived-consumers

 

Image Credits:

Photo by Tara Winstead from Pexels 

The new Rules shall now result in a uniform application of the law across the country, thereby standing in alignment with the legislative intent.  Additionally, by bringing the direct selling entities and direct sellers under the ambit of Consumer Protection Act, 2019, the Central Government has taken a step in the right direction the consumers can now approach the consumer protection forums for effective redressal of grievances.

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