Specific Performance of a Development Agreement

By a judgment dated 9th October, 2018 in the matter of Sushil Kumar Agarwal vs. Meenakshi Sandhu and Ors. [2018 (13) SCALE 778], the Hon’ble Supreme Court, relying on provisions of Section 14 (3) (c) (prior to its amendment) of Specific Relief Act, 1963 (“Act”), settled principles in relation to development agreements and enforcement thereof and held inter alia that the said provisions do not prevent developers from seeking specific enforcement of agreements granting them development rights against the owner of the property.

By and under a Development Agreement dated 14th April, 1992 (“Development Agreement”), one Late Kalidas Sadhu (preceded by its successors-in-interest) (“Respondents”) granted development rights in favour of one Sushil Kumar Agarwal (“Appellant”) for construction of a building on premises situated at Kolkata. In terms thereof:

The costs and expenses for sanction of the plan for construction of the building was to be borne by the Appellant;
The plan of the building would be prepared and submitted by the Appellant;
the Respondents were entitled to retain 42% of the total constructed area on ‘sole owned’ basis leaving the balance 58% as security for due payment of the construction costs;
The Respondents were entitled to demand any loss and/or damages suffered by him for any illegal activities of the Appellant and the Appellant was also, in addition to claim specific performance, entitled to claim damages from the Respondent for lapse and negligence.
Upon execution of the aforesaid Development Agreement, the Appellant alleged that he found that the premises were encumbered and therefore requested the Respondents to make payments, who assured the Appellant that he will reimburse him before obtaining the sanctioned building plan. Accordingly, the Appellant claimed to have made payment of Rs. 7,03,000/-.

Thereafter, the Respondent addressed a letter to the Appellant and denied the execution of the agreement, which was protested by the Respondent. The parties thereafter met and modified the terms of the Development Agreement pursuant to which (i) allocation of the Respondent would be 47% instead of 42% and (ii) allocation of the Appellant would be 53% instead of 58%.

Thereafter, when the Appellant issued a notice upon the Respondent calling him upon to make some payments for his share of the sanctioned fees, in reply to which, the Respondent denied the same on the ground that the Development Agreement has been cancelled.

Against this, the Appellant instituted a suit in the City Civil Court seeking a declaration that the cancellation of the Development Agreement was invalid. Subsequently, the Appellant also amended the plaint, by which a prayer for specific performance of the Development Agreement was included. This suit being dismissed by the City Civil Court on the ground that there was no tangible evidence that the possession of the premises was handed over to the Appellant, the Appellant preferred an appeal before the Hon’ble High Court of Calcutta. This appeal was also dismissed by the Hon’ble High Court on the ground inter alia that the suit was not maintainable in terms of Section 14 (3) (c) of the Act.

The limited issue raised before the Hon’ble Supreme Court was whether in terms of Section 14 (3) (c) of the Act, there is a bar to a suit by a developer for specific performance of a development agreement and whether the word ‘defendant’ in Section 14 (3) (c) (iii) has the effect of confining the scope of the suit for specific performance only to a particular class (consisting of owners) or whether a purposive interpretation to the legislation would be required, so as to provide a broader set of remedies to both owners and developers.

Section 14 (3) (c)
In order to understand the issue vis-à-vis, we may consider the requisites of the Section 14 (3) (c) of the Act, namely, the court may enforce specific performance of a contract for construction of a building or execution of any other work on land provided:

the building to be constructed or the work to be executed is described in such a manner in the contract so as to enable the court to determine the exact nature of works;
the plaintiff has a substantial interest in the performance of the contract;
the interest is of such a nature that compensation in money for non-performance of the contract would not be adequate relief; and
the defendant has, pursuant to the contract, obtained possession of whole or part of the land where the building is to be constructed or work is to be executed.
Interpretation of Section 14 (3) (c)
The court noted judgments of various High Courts wherein they have interpreted the provisions of Section 14 (3) (c) of the Act and circumstances under which a development agreement may be specifically enforced and observed that in order to grant specific performance of the development agreement, it is essential to determine inter alia whether the developer, pursuant to the development agreement, has an interest in the land.

In the matter at hand, the Appellant was permitted to carry out the construction of the building and in consideration thereof, was to be paid an agreed remuneration by the Respondent. It was also noted that the Appellant did not have any interest in the land. The security interest so created was merely to secure payment of the remuneration. In the event the remuneration was paid to the Appellant; no security would arise.

Whilst determining the scope of Section 14 (3) (c) of the Act, the court noted that in the event the provision is given a literal interpretation, the same would never have been able to be enforced by the developer. This is because the words used under Section 13 (3) (c) (iii) is “the Defendant has, by virtue of the agreement, obtained possession of the whole or any part of the land”. In the event this section is invoked by the developer, thereby making him the plaintiff in the suit, the defendant, being the owner of the land, will not satisfy this requirement in light of the fact that he would also be in legal possession of the land and have a lawful title thereto, even prior to the execution of the agreement, thereby falling short of the requirement of “…by virtue of the agreement…” stipulated thereunder. This would essentially fall short of the intent of the Act and the developer, notwithstanding having interest in an immoveable property, will be deprived of its rights to enforce performance of a contract whereby such interest is created.

Further, it was also observed that in the event the provision is given a purposive interpretation, a developer who has an interest in the land, may seek specific enforcement of contract pursuant to which the same was vested upon him. However, in such a case, the provisions of Section 14 (3) (c) (iii) will have no role to play in enforcement thereof and the court, whilst exercising its discretionary power, will have to satisfy itself whether provisions of Section 14 (3) (c) (i) and Section 14 (3) (c) (ii) of the Act have been satisfied.

In additions to finding that the Appellant has no interest in the land and the alleged losses / damages caused to the Appellant can be quantified, the court also observed that another essential requirement of Section 14 (3) (c) of the Act, namely, that the building to be constructed or the work to be executed is described in such a manner in the contract so as to enable the court to determine the exact nature of works, is not satisfied either. In view thereof, it held that specific performance cannot be granted.

With effect from 1st October, 2018, Section 14 of the Act stood amended to have the effect of limiting it only to listing out of four categories of contracts which cannot be specifically enforced. Whilst the Hon’ble Supreme Court has not examined the effect of the amended provision in the matter, however, it will be interesting to see the holding of the purposive interpretation given by the Hon’ble Supreme Court (to give effect to the intention of the Act) in cases where development agreements are sought to be specifically enforced by developers having interest in immoveable properties.

It appears that it is intended that in the event a development agreement is executed whereby the developer is not only entitled to construct the building but also receive considerations / cash flows therefrom and consequently, a power of attorney is executed in favor of the developer in order to enable to inter alia obtain approvals, sell units and receive consideration, the same becomes irrevocable in its essence in view of provisions of Section 202 of Indian Contract Act, 1872 and thereby, in its nature, even in the absence of provisions of Section 14 (3) (c) of the Act, becomes a contract in respect of which an aggrieved developer may claim specific performance therefor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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