Real Estate and the Competition Act, 2002

The Competition Commission of India in the matter of Belaire Owner’s Association Vs DLF Limited had the occasion to examine the buyer’s Agreement executed between M/s DLF Limited and its consumers/allottees in respect of residential apartments constructed by DLF Limited at Gurgaon.

The Competition Act, 2002 was enacted and came in force w.e.f 13th January, 2003. The Act was enacted to establish a commission inter-alia with a view to prevent practices having adverse effects on the competition and to protect the interests of the consumers. The Competition Act provides reliefs to consumers, in addition to and not in derogation of the Consumer Protection Act, 1986. Section 2 (u) of the Competition Act includes real estate as a service within the meaning of this Act. This Act also prohibits abuse of dominant position of an enterprise in any commercial activity; the Competition Commission has been empowered to hold an inquiry into the allegation of the dominant position and to pass interim orders restraining against the exercise of dominant position. Dominant position would inter-alia mean imposing un-fair or discriminatory conditions. Since 1991, a series of economic measures have led India to a higher sustained level of growth which has stimulated development across all sectors including the real estate industry. The Residential sector constitutes a major share of the real estate market; the balance comprising of commercial segment like offices, shopping malls, hotels etc. Apart from its importance as a segment of real estate sector, residential housing has a special place in India where investment in a home remains one of the biggest and most important investments in a person’s life. Previously, government’s support to housing had been centralized and directed through the State Housing Boards and development authorities. However, in 2002, there was a shift in the stand of the Government towards housing; the government permitted 100 per cent foreign direct investment (FDI) in housing through integrated township development. Resultantly the residential real estate industry is now driven largely by private sector players. The mushrooming activities in the sector are reflected in the advertisements that come up in the newspapers and number of messages on the cell phones received every day indicating launches of new products. Along with the increased activity in the sector, often reports of problems being faced by the consumers do also surface. The Competition Act, 2002 and Consumer Protection Act, 1986, therefore have assumed greater role in the protection of the interest of the consumers. The Competition Commission of India in the matter of Belaire Owner’s Association Vs DLF Limited had the occasion to examine the buyer’s Agreement executed between M/s DLF Limited and its consumers/allottees in respect of residential apartments constructed by DLF Limited at Gurgaon. The Owner’s association had alleged that DLF Limited had abused its dominant position and imposed conditions which were arbitrary, unfair and unreasonable. Resultantly a penalty of Rs. 630 Crores was imposed upon the DLF. Some of the conditions which were found unreasonable by the Commission are as under: a. Unilateral changes in agreement and supersession of terms by DLF without any right to the allottees. b. DLF’s right to change the layout plan without the consent of allottees. c. Discretion of DLF to change inter se areas for different uses like residential, commercial etc. without even informing allottees. d. Preferential location charges paid up-front, but when the allottee does not get the location, he only gets the refund/adjustment of amount at the time of last instalment, that too without any interest. e. DLF enjoys unilateral right to increase / decrease super area at its sole discretion without consulting allottees who nevertheless are bound to pay additional amount or accept reduction in area. f. Proportion of land on which apartment is situated on which allottees would have ownership rights shall be decided by DLF at its sole discretion (evidently with no commitment to follow the established principles in this regard). g. DLF continues to enjoy full rights on the community buildings / sites / recreational and sporting activities including maintenance, with the allottees having no rights in this regard. h. DLF has sole discretion to link one project to other projects, with consequent impact on ambience and quality of living, with the allottees having no right to object. i. Allottees liable to pay external development charges, without there being disclosed in advance and even if these are enhanced. j. Total discretion of DLF regarding arrangement for power supply and rates levied for the same. k. Arbitrary forfeiture of amounts paid by the allottees in many situations. l. Allottees have no exit option except when DLF fails to deliver possession within agreed time, but even in that event he gets his money refunded without interest only after sale of said apartment by DLF to someone else. m. DLF’s exit Clause gives them full discretion, including abandoning the project, without any penalty. n. DLF has sole authority to make additions / alterations in the buildings, with all the benefits flowing to DLF, with the allottees having no say in this regard. o. Third party rights created without allottees consent, to the detriment of allottees’ interests. p. Punitive penalty for default by allottees, insignificant penalty for DLF’s default The Owner’s Association had also challenged the following facts: a. As against initial plan of building 19 floors and 368 flats, DLF constructed 29 floors, thereby compressing the area and facilities promised and delaying the project. b. Allottees were required to sign the Apartment buyer’s agreement in toto, without any scope of asking for change in the terms of the Agreement. c. The project was advertised and allotment letters were issued without preparing and submitting the plans/lay outs of the project to the town planner. The Competition Commission of India in its land mark judgment held the following: a. It is clear that the meaning of ‘service’ as envisaged under the Act is of very wide magnitude and is not exhaustive in application. It is not disputed that DLF undertakes to construct apartment intended for sale to the potential consumers after developing the land. Therefore, it is explicit that this kind of activity is a provision of service in connection with business of commercial matters such as real estate or construction. Hence, the contention raised on behalf of the DLF that sale of an apartment is not covered under the definition of service is wholly misplaced and is devoid of any substance. b. The Commission concluded that DLF Ltd. is in a dominant position in the relevant market in the context of Section 4 read with Section 19(4) of the Act. c. The evaluation of this “strength” is to be done not merely on the basis of the market share of the enterprise in the relevant market but on the basis of a host of stipulated factors such as size and importance of competitors, economic power of the enterprise, entry barriers etc. as mentioned in Section 19(4) of the Act. This wide spectrum of factors provided in the Section indicates that the Commission is required to take a very holistic and pragmatic approach while inquiring whether an enterprise enjoys a dominant position before arriving at a conclusion based upon such inquiry. It is conceivable that the “dominant position” may be acquired due to several factors even outside the “relevant market” but, “for the purpose of” Section 4, this “position of strength” must give the enterprise ability to operate independently of competitive forces” in the relevant market or ability to “affect its competitors or consumers or the relevant market in its favour”. Thus, strengths derived from even other markets, if they give an enterprise such abilities as mentioned above, would render the enterprise as “dominant” in the relevant market. d. The Commission has, inter alia, noted the following facts about the conduct of DLF, which apparently are followed by other service providers also: (i) They issue advertisements for launching projects without the land in question being actually purchased, registered in their name and possession taken and without taking prior approval of Competent Authorities. (ii) They do not specify the total area of the plot/flat/house indicating clearly the carpet area and utility area. (iii) They do not specify the date of delivery and consequential remedies available to the consumer in case of delay. (iv) The amount collected from the allottees against a particular project is not deposited in a designated escrow account and utilized only for the construction of the concerned building. (v) The information relating to the progress of works and status of account of each allottee is not made available to buyers in a transparent manner. (vi) They build in hidden costs other than the initial set price. (vii) They do not post all the relevant information on internet and make them available in public domain. There is no transparent and participatory mechanism put in place to deal with escalation in price, if any. (viii) There is often inordinate delay in execution of the project and if the project is delayed without previously agreed valid reasons, there is no provision that would entail pre-determined amount of penalties on total project to be paid to the consumers. (ix) There is no fair, participatory and transparent mechanism to tackle any substantive and major changes in the project mid-way, before taking approval of the authorities for the revised scheme and commencing construction thereon. Changes in FAR or density per acre, exclusion of some common facilities or substantive changes in design and layout are not included in the category of substantive or major changes. The description of substantive or major changes as well as the mechanism for decision making is not clearly given in the Buyers’ Agreement. The author of this Article is Anupam Srivastava who can be reached at