PRAJA RESEARCH ADVOCACY AND ANALYSIS GROUP

Laws Governing Apartment Ownership in Karnataka A CASE FOR ADMINISTRATIVE REFORM AND LEGISLATIVE ACTION

Sanjay Vijayaraghavan 4/8/2012

Introduction

Apartments are being built in large numbers in cities all over India today. Karnataka is no exception, and large urban centers such as Bangalore are hot markets. With escalating land prices, and with considerations such as security in mind, many families are opting to stay in apartments, Properties are becoming larger and complicated with some large properties with 500, 1000 or even 3000 apartments being built. Some properties are mixed developments like townships with commercial activity planned as well. In Bangalore, the last ten years have seen an explosion of apartment constructions. A survey of most of these apartments, especially of the resident governing committees will expose myriad problems faced by these communities. While some basic civic issues such as water and power are faced by many in Bangalore, deeper study and analysis reveals that most of these serious problems stem from a lack of compliance with existing law.

While Karnataka has legislation which is as good as any state in India, the poor enforcement of the provisions and flouting of rules by builders, coupled with ignorance of buyers causes the present mess. Further, these legislations are nearly 40 years old and have not been amended even once. The Maharashtra laws ( from which the Karnataka laws were derived) in the meantime have been amended several times. Several shortcomings have been unearthed from practical experience and the law can therefore be improved. The central government has also been making attempts at improving the legal landscape. However, those attempts have been in process for decades and even the latest model draft has serious flaws. Meanwhile well meaning citizens suffer as they go about the task of buying apartments for themselves. Due to non compliance with laws, There are also serious risks of improper titles and to the mortgage-ability of these apartments. Despite all this, apartments are selling like hot cakes and many of them with mortgages.

In the rest of this report, we will list some of the problems in apartment communities, review the legislative landscape and recommend some solutions. The government is urged to take urgent action in the following important directions (1) Take measures to strongly implement existing legislation (2) Educate apartment buyers of the laws and its implication (3) Consider suggestions for amendment to current legislation which will strengthen existing laws and regulate the market better and (4) Find a solution or work around for the thousands of apartment owners who are in properties with deficient titles due to blatant flouting of laws and correct processes today.

Examples of Problems in Current Scenario

The goal of this chapter is to give a picture of some of the problems faced by apartment owners today. For that, it is useful to quickly introduce the apartment concept even though many readers will be familiar with it. In an apartment community, there are one or more multi-storeyed buildings that house multiple living units. Apart from the individual units themselves, the apartment has several common facilities such as lifts, pumps, fire fighting equipment, generators, basement areas, terraces, open land, play areas etc. The whole property is situated in a defined parcel of land. For typical apartments, the ownership concept is that an owner has absolute right over his or her apartment while holding an undivided interest in the land and common facilities.

In apartment properties today it is common to see cases where the sum of the undivided share in all the individual sale deeds exceeds the available area of the parcel of land on which the apartment is built. This amounts to a case of cheating. It is also not uncommon that sale deeds claim that the builder has rights over the terrace areas for use in advertising or to even construct additional apartments when higher FAR becomes available [1]. They claim ownership over the club house or build additional commercial space that is leased out. There are cases where the area sold is not found to be there upon measurement. Many times, it turns out that some of the land has been ceded to government authorities without notifying the purchasers [2], in which case the undivided share computation is even more muddled. Building violations are rampant and once the builder moves out, the residents are left holding the hot potato of building violations. Problems such as this and others are a consequence of blatant violations of the various provisions of law that govern the industry.

Another common problem that apartment buyers face is when trying to form an association of owners to take over and govern the property. The builder typically maintains for couple of years following which the residents are expected to organize and take over the show. However, by law, the builder is obligated to define and organize the associstion of owners to run the affairs of the apartment. Not many builders do this correctly. Many builders refuse to give an accounting of maintenance expenditure during the hand over period [3]. Conventional wisdom upon consulting many lawyers or other apartment owners is that registration under Karnataka Apartment Ownership Act is impossible and that the Karnataka Societies Act is the correct method [4,5]. However, a reading of the law will make clear very quickly that this is a wrong understanding. Deed of conveyance are rarely executed and it is not uncommon to find apartments without any of the original title documents with them.

While there are some references in the public domain to such occurrences, in the authors’ experience, issues like this are extremely common in most communities in Bangalore and presumably in Karnataka, What makes this situation particularly distressing is that if the law is followed, many of these issues will not arise. However, these laws are not being enforced leading to inconvenience and uncertainty for a large section of the apartment dwelling population.

Existing Legislation

There are two key legislations that govern the construction, sale, ownership and transfer of apartments in the state of Karnataka. These are the Karnataka Apartment Ownership Act, 1972 and Karnataka Ownership Flats Act, 1972. Both of these are inter-related laws. Between the two laws there exists a complete framework to regulate and govern the process of construction, sale, ownership, enjoyment and maintenance of apartments. The biggest flaw currently is the non-implementation of the legislation. With some modernization and proper enforcement, these laws have the potential to be the best laws in the country, for others to emulate.

The Karnataka Apartment Ownership Act (KAOA) of 1972 (Act 17 of 1973) is specifically applicable to residential apartments. The Statement of Objects and Reasons for the law states, “Though there is a tendency to construct multi-storeyed flats, apartments and the like on ownership basis, intending persons cannot purchase flats, tenements or apartments in multi-storeyed buildings as they will not have a marketable title thereto and cannot obtain any loan by mortgaging such flats, tenements etc.” Further ahead it goes on to say, “It is, therefore considered expedient that each apartment should for all purposes constitute a heritable and transferable immovable property, and that suitable legislation should provide for all matters connected therewith.” Therefore, it is clear the KAOA is aimed at creating a proper framework for establishing the title, heritability and transferability of apartments and for them to be therefore mortgageable. From the simple fact that majority of apartments today are bought using housing loans, it is amply clear that the KAOA is an important piece of legislation and that apartments being built in the state should be properly registered under it, with very few exceptions.

The Karnataka Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1972, also known as Act 16 of 1973 or in this document as KOFA is a sister act to KAOA. The statement of Objects and reasons of KOFA refers to KAOA by stating that “Separate law is being made to declare that flats or apartments in multistoried building may for all purposes, be heritable and transferable immovable property”. The statement goes on to say that “An enterprising individual or group of individuals may either construct out of his or their own funds multistoried buildings consisting of a number of self-contained flats or apartments and sell them to individuals on ownership basis, or construct such buildings after collecting contributions from intending . purchasers of such flats or apartments “. After establishing this background, the statement goes on to say “In the interest of intending purchasers who advance funds it is necessary to regulate the construction, sale, management and transfer of flats or apartments by individuals or group of individuals who construct such multistoried buildings”. Thus it is clear that KOFA is a companion bill intended to regulate the construction, sale, management and transfer of flats or apartments.

The Karnataka legislations have been modeled on the Maharashtra legisation [6] with the exception that the KAOA is intended for residential properties while the Maharashtra Act covers office and commercial properties as well. The Maharashtra law

itself was modeled on the New York Law [7]. Generally, world over similar legislation regulate the construction and sale as well as ownership, enjoyment and maintenance of apartments with transferable and heritable interest. In India, some states including Maharashtra and Karnataka have two separate laws for ownership as well as regulation. In certain other states, one legislation does a combination of both such as in Andhra Pradesh. Delhi on the other hand has only one legislation. There are other significant differences in requirements between these laws. For example, Karnataka and Maharashtra require a Deed of Declaration while Delhi does not.

Flats or Apartments?

There is no uniform definition to be found to clearly distinguish between a flat and an apartment. The KAOA is clearly for apartments, defined in the KAOA as a part of the property intended for any type of independent use, including one or more rooms or enclosed spaces located on one or more floors (or part or parts thereof) in a building, intended to be used for residential purposes and with a direct exit to public street, road or highway or to a common area leading to such street, road or highway. If this definition sounds a bit contradictory, where the apartment is defined as for “any type of independent use” while the building is defined as intended to be used for “residential purposes”, it is probably because the parent Maharashtra law allows the building to be used for a wide variety of uses, such as residence, office, practise of profession, trade or business or any type of independent use. Only Karnataka law envisions limiting the building purely for residential purposes.

The statement of objects of KOFA clearly identifies it as a companion bill to the KAOA and meant to regulate the sale and transfer process. However, where KOFA differs is the use of the word flats in addition to apartment. The two acts and the use of the terms flat and apartment leads to confusion, even on government websites. For example, the relevant FAQ on the department of stamps and registrations website itself further muddles the issue by calling a flat an independent part of a building for use as a residence [8]. The law (KOFA) defines a “Flat” as a separate and self contained set of premises used or intended to be used for residence or office or show room or shop or godown (and includes a garage), the premises forming part of a building. Thus, clearly KOFA is meant for non-residential properties as well. It is also evident that the definition of a flat includes apartments as a subset. Reading the legislation also makes it clear that KOFA is intended to regulate sale of apartment communities intended to come under the KAOA. Swaminathan also draws the same conclusion in his paper [9].

Legislative History

It is instructive to look at the history of the legislation in India since most states that have laws have something similar. Maharashtra was the first state to begin attempting to elegislate in this area. Piyal [10] has written about the history, especially with respect to the Maharashtra and Delhi legislations. Following partition of the country in 1947 Mumbai (Bombay) saw a large influx of new residents searching for suitable

housing closer to the city centre. This started the trend of co-operative housing societies and multi-storeyed apartment style housing, even though some of these joint housing trends were present before also. This period also saw many instances of builder-promoters violating agreements and also of buyers putting builder-promoters in trouble by, for instance, not making payments on time. In short, as Piyal puts it, “there was no sanctity to agreements”. As a result, the government put together the Paymaster commission to look into these issues and shortly thereafter the Maharashtra Ownership Flats Legislation was passed. The MOFA 1963 was originally intended to be a time bound law; however it has been extended and amended from time to time. One of the problems with MOFA is that it is based on the concept of dual ownership where the title of the building and land is with a co-operative society or Limited company while the flat “owner” is not an owner in the real sense, but one with the right to occupy. This arrangement continued to pose inconsistencies in the governance of properties . This led to passage of the Maharashtra Apartment Ownership Act of 1970 to remedy this situation and confer full transferability and heritability to apartments.

MOFA in the meanwhile has been extended from time to time as well as amended to make sure that its applicability to apartments is unquestioned by adding the word apartment at every point where flat is mentioned. Article 2(f) of the MOFA was also added to make clear that the word apartment and apartment owner are as defined in the MAOA. The Karnataka law unfortunately underwent no such amendment, although legislative intent is still pretty clear to a reasonable reader [9]. In fact [11], the law has been in a state of limbo with the government admitting that enforcement of the legislation having slipped through the cracks. In a KIC hearing dated 20 March 2010 [12], Sri Renukaradya, Under Secretary to the UDD and PIO stated that (a) The KOFA was under the administrative control of the Urban Development Department and that confusion on responsibility was firmly resolved. (b) That the UDD would be taking steps to implement the KOFA and (c) that the Union Ministry of Housing and Urban Affairs had brought out model legislation and that the bill would be amended based on those inputs. However, no action has been taken on its implementation nearly 2 years later. MOFA in the meanwhile was amended several times and most recently, an entirely new law is proposed to be passed which establishes a housing authority to better govern this sector [13], which has cleared the Maharashtra cabinet.

Apartment Ownership Acts

Immovable property in India is governed under the Transfer of Property Act 1882. An apartment however is part of a multi-unit building and consists of the apartment itself along with limited and common areas built on land which is undivided. Therefore, while the apartment itself is under sole and exclusive ownership, the common areas and facilities need to be shared by all apartment owners. These complexities led to the framing of a separate apartment ownership act with the provision that the Apartment Act shall prevail notwithstanding anything to the contrary that may be contained in the Transfer of property Act of 1882 or any other law in force. (See Piyal, p. 32 and Sarkar (Housing Laws, p.100)

In Karnataka, like in Maharashtra a promoter can float a co-operative society or

company and sell the flats on a ‘dual ownership basis’ under KOFA, or make a declaration and submit the property under KAOA and pass free and absolute title to each individual purchaser (purchasers). Under the KAOA, the apartment plus a specified percentage interest in the undivided common areas is equivalent to immovable property as defined in the transfer of property act. However, the construction, sale, management and transfer of apartments under KAOA is still governed by KOFA. It must be noted here that under KOFA clause h of subsection 2 of section 3, a developer/promoter is required to identify clearly and declare in writing the precise nature of the society. This is further made clear in KOFA rules, section 5, which is regarding the disclosures required in the agreement of sale, clause d. Further in the rules clauses of section 5, e, f, g and h are specifically for properties that are intended to be submitted under KAOA. It needs to be pointed out that as described in the statement of objects and reason of the KAOA itself, it is the free and absolute title that comes with the KAOA that makes apartments mortgageable. Without properly following KAOA, strictly speaking, the apartments are not separately mortgageable since they do not have an absolute title. It is also the KAOA that allows the sale or transfer of apartments. Otherwise, under the dual ownership system, this becomes a much more complicated process that we will not explore in detail here.

It should be recognized that for the vast majority of apartments in Karnataka, submitting to the KAOA is the natural and preferable route. However, the current law has some vagueness and inconsistencies which make it easy for the developers to ignore some provisions and makes it difficult for the average consumer to understand the law. Suitable amendments are required to rectify many of these issues. It is the considered opinion of the author of this report that KOFA clearly is applicable to regulate the sale of apartments as well. Hence this report will go on to discuss as to how KAOA and KOFA must be enforced, as well as amended a) in the short term and (b) in the long term for improving the governance of real estate sector, remove some grave problems at this time and to have a robust and thriving sector in place with suitable provisions that allow developers to develop the property and for buyers to get proper title and enjoy their property.

Current Legislative Action

Some relevant legislative action is in progress currently which has a bearing on the apartment ownership legislation in Karnataka. The central government is currently discussing multiple legislations. One is a model Delhi Apartment Ownership Bill by the Ministry of Urban Development [14] and the other is the Draft Real Estate Regulation and Development Bill by the ministry of Housing and Urban Poverty Alleviation [15]. While the model Apartment Ownership bill is along the lines of the Delhi Apartment Ownership bill which has significant differences from the Karnataka law, the Real Estate bill is focussed on creating an authority to protect the interest of consumers.

Maharashtra on the other hand is creating a new law which replaces the MOFA and creates a housing authority that regulates the housing sector, with some possible similarities to the Real Estate bill doing the rounds at the Union government level. Many of these efforts, especially at the central level have been years in the making and have not been able to successfully get passed. The ground reality in Karnataka urgently calls for current legislation to be implemented immediately and improvements made to the law in the near future to update and upgrade the provisions. It is not prudent to wait for all the legislative action elsewhere to settle down for the state of Karnataka to get its act together.

Since the last RTI filing seemed to indicate that the Karnataka government

was examining the model apartment legislation from the central government in order to improve the Karnataka law [12], we will quickly review and comment on that legislation version found here [14].

Model Apartment Ownership Law

Ministry of Urban Development has proposed a Delhi Apartment Ownership Bill, 2011 as a model apartment ownership bill to the states. Since this bill is also meant to be an update to the Delhi Apartment Ownership Bill of 1986, there are certain aspects that are incompatible with the Karnataka law.

The Karnataka law is not for apartments built by the Housing Board, whereas Delhi law covers apartments built by the BDA also. Delhi does not have a separate legislation to regulate the construction and sale part (equivalent of the KOFA). Further, Delhi law does not require a Deed of Declaration to be filed, like in Karnataka (and Maharashtra). For many reasons, a Deed of Declaration is a fairly important document that plays a role in the clarity of the title and percentage of

undivided share and hence, it is the authors' opinion that the requirement should remain in any future amendments. The Delhi law also considers a case where apartment is built on land obtained on a long term lease, something not present in Karnataka law. Table 1 presents a summary

Table 1 : A table commenting on certain provisions of the model law and about suitability to Karnataka

Model Bill Provision Comment 3b – Definition of apartment The definition is much broader in the

model bill and does not only cover residential use. This is something to debate and decide on. However, the bill should be very clear on whether mixed use is allowed since the society becomes more complex.

8 (all subsections) – Regarding land given on lease

This is not an aspect in Karnataka law. The debate required is if this is useful or necessary?

13(2) Promoter to register association with competent authority within six months of 1/3rd of apartments being allotted, sold or otherwise transferred

This is a very useful and important clause. This puts onus on the builder/promoter to register the association in a timely fashion. There is no such clause in either KAOA or KOFA that is crystal clear. It is also important to specify the process in more detail either in the law or rules.

21(3) States that every association shall be liable to collect tax imposed by the govt or a local authority on the non-divisible part of a building

This is an unfair provision. When the apartment ownership act equates an apartment with percentage share in common areas and facilities as the same as an independent property, it is better to put the onus of all taxes on the apartment owner. The non-divisible part of a building is also part of the percentage share. Apartment associations have enough responsibilities without this additional one.

21(4) Regarding tax arrears Again, by the spirit of apartment ownership law, encumbrances should be against individual flat. Section 7 covers this adequately.

Chapter VI on Authorities under the act The act specifies a competent authority as well as an appellate authority. With the proliferation of apartment complexes, establishing such authorities who are

clearly specified and expressly for the purpose of apartment regulation will be required for proper regulation, establishment of association and quick resolution of disputes.

Correct Process as Per Present Law

Given the fact that existing provisions in law are roundly ignored and the government is yet to do anything to remedy this situation, it should be illuminating to present how the system is supposed to work.

When a builder/promoter decides to build an apartment, they would

conceptualize and design the property with its buildings and amenities. They will apply for and secure approvals from local government for their plans as well as utility connections and other such aspects. At the same time, they are required to formulate an ownership scheme and decide what sort of society is being conceptualized. There are three options in Karnataka – Either a cooperative society or a company as envisioned in the KOFA or one under the Karnataka Apartment Ownership Act. The most modern and relevant scheme in Karnataka right now is a society under the Karnataka Apartment Ownership Act. There are two acts regulating the process, namely KOFA and KAOA. KOFA regulates the process of construction, sale, management and transfer. As per provisions of the KOFA, the builder/promoter has several obligations to a potential buyer. Among those is that the kind of society envisioned should be declared and specifically mentioned in the agreement of sale.

Now, as many buyers come and flats get allotted, each allottee is aware through the agreement of sale that the proposed property will be governed by the KAOA. Actually even today many builders mention the KAOA in the agreement of sale, but then do not implement the requirements therein. In addition, according to KOFA, this agreement of sale should be registered.

In due course, as the apartments get built, the sale process will have to be

completed. This is done by registering the Deed of Apartment. In order to do that, the builder has to execute and register a Deed of Declaration (DoD)as specified in the KAOA. The DoD provides the entire ownership details of the scheme. It contains a description of the property, all the apartments and their types, the common areas and facilities, limited common areas and facilities and the percentage of undivided interest in the common areas and facilities for each flat. Along with this, a copy of all the approved building plans, copy of the by-laws and rules of occupation are to be filed as well. By this process, the ownership scheme is explicitly defined and the entire property as well as apartments with their share described.

When the Deed of Apartment is registered, by law it should contain explicit

reference to the DoD (date of registration of DoD, sub registrar’s office where

registered etc.). By doing so the Deed of Apartment is linked to a registered DoD. KAOA also puts obligation on the Registrar to maintain a record of the DoD and the Deeds of Apartment and the relationship between them. It is important to emphasize that the Deed of Declaration has to be registered before even the first Deed of Apartment is registered. Unfortunately, many organizations have this wrong including CREDAI which in its code of ethics states that the DoD is to be registered after all the Deeds of Apartment are registered [17]. The apartment owner is also required to register a declaration in From B where he or she or they agree that they and their heirs and future owners all agree to abide by the provisions of the KAOA.

By filing a copy of the registered DoD, registered Deeds of Apartment and the

Declaration by each apartment owner with the competent authority, namely the registrar of cooperative societies, the process of sale and formation of the association is complete. The law is rather vague on exactly how the first association office bearers have to be elected and exactly at what point the builder is required to take steps to form the association in the case of a KAOA property.

Once the association is formed and the occupancy certificate received and the owners start living there, the provisions of the KAOA address various aspects required for comfortable living. The builder has to hand over the original title documents and other items such as document regarding electricity, water connection, plumbing, electric connections, sewage etc. and convey the property as necessary to the association. The act also covers aspects of maintenance handover and sharing of financial income and expenditure details.

Review of Karnataka Law and Suggestions for Improvements

In this section, we will look at the two key Karnataka apartment laws, looking at the key sections and identify areas of improvement. As is quite common now, a developer (maybe along with a land owner) formulates a plan or design for an apartment, goes through the process of getting the necessary approvals (from the BDA or BBMP) and begins to market the scheme to the general public. It is quite common for people to begin “booking” apartments before the first shovel of soil is excavated for the foundation. It is also common nowadays to have schemes where part of the property is commercial and part of the property is residential (like a township). While the apartment act only includes residential property, KOFA itself does not provide enough details for the setting up such a mixed development. This is a major lacuna that needs to be addressed. Another common situation is when the development is large and built in multiple phases. If the KAOA is implemented properly, there is not sufficient provision for the developer to plan and implement a multi phased development in such a fashion that it is fair to both the consumers as well as the developers. These safeguards have to be built in through suitable amendments. Recommendation: Review and amend KOFA and KAOA to accommodate mixed properties as well as multi stage developments.

For an apartment complex (i.e., consisting only of residential property), it is important to amend KOFA (along the lines of MOFA) to make clear that it is applicable to apartments as well. While this is implied as well as explicitly stated in a few places in the act and the rules, there is a surprising amount of confusion on this among the general public as well as legal experts. Recommendation: Amend the KOFA like the Maharashtra Law (MOFA) to make it explicit that KOFA applies to apartment sales as well. KARNATAKA OWNERSHIP FLATS ACT- Review Section 3 of the KOFA, titled general liabilities of a promoter covers the various basic obligations on the builder. It could be improved a bit further to add some specificity in the apartment context. In many cases, builders try to pass off one or two drawings as an approved plan which can fool gullible buyers. Since the plans and any violations thereof impact the entire property, it is important that a full set of approved plans be provided. It would be further useful to a purchaser to see a suitable certified extract of a masterplan for the area, if one exists, is also provided to a purchaser. Clause 3.2h is also important. Currently the rules implement this by having the precise nature of organization of persons to be constituted specified in the registered sale deed. It would be better if the prospective purchaser is provided this as a self attested statement from the builder while making preliminary enquiries itself.

For a prospective purchaser of an apartment, it is very important to have a complete description of the apartment, as well as the common areas, limited common areas, other facilities such as parking, terrace area, swimming pool, gym, fire protection

equipment, water sumps, water pumps, lighting, roads, office space for maintenance staff, type of transformers, backup generators, sewage treatment plant, water treatment plant etc. all to be properly specified in as much detail as possible. Often, apartment owners find out that, for example, the club house is owned by the original builder or that the sale deed has a clause for the builder using the terrace space for advertisement hoardings, or that the water sump capacity is too small for the apartment well after investing in the property. Recommendation: It is essential that the KOFA section 3 is amended to specify that for apartments proposed under KAOA, details about the apartment, limited common areas and common areas including all facilities from basement areas to terrace areas to gym, pool, STP, WTP, pumps, fire protection systems etc. be provided before the sale deed is signed and registered and any advance not exceeding 20% of the total value paid. It should also be made explicit that for properties intended to come under KAOA, the deed of declaration is registered by the builders/developers before a single deed of apartment is registered and copies provided to all purchasers.

As envisaged in KOFA, agreements of sale are to be entered into and registered before an advance, not exceeding 20% of the sale price is accepted by the promoter. Currently, in this author’s personal experience, the agreement of sale is not registered. It is worth asking if such a practice is followed in Karnataka at all?

Sections 5 and 6 deal with collection and disbursement of funds. It is important to ensure that the various monies collected by the promoter under various heads are used for the purpose. However, the remedy or enforcement options are not well covered. Recent developments (Delhi Apartment Act 2011 as well as amendment to MOFA) all consider the appointment of a board or regulatory agency. That may be an essential step. Such a board or regulatory agency could step in for the needs envisaged in section 7 as well.

Section 7 also deals with an important provision – that no change may be made in the structure of the building (should be extended to say common areas as well) without approval from all the people who agreed to take flats. Similarly would be the case for within a flat. This does not happen in practice. Again, this is an area where a regulatory agency or board can control the situation. It is also important for a prospective buyer to be fully informed about the property he or she is buying either through the amendments proposed above or through a deed of declaration executed in advance and provided to the purchaser which will contain all aspects explained. Recommendation: Considering the large number of apartments being built, appoint a regulatory authority which could also function as the competent authority in order to ensure compliance, resolve disputes and ensure compliance with the laws. Such a system is being recommended in the model apartment bill of the central government and is also in vogue in some other countries such as Singapore.

Section 9 is an important section which needs no amendment. Section 10 however should address the issue of apartments. It is recommended that a mention of the Deed of Declaration being registered well in advance, for apartment properties be mentioned in the KOFA as well to remove ambiguity.. (KAOA already requires this, but it is not implemented) Further, when a certain number, say 20% of owners have taken possession of their flats, the onus should be placed on the builder/promoter to form the association by approaching the competent authority. Recommendation: Set a trigger point for the builder to inform the competent authority and to form the association. Current law states that it happens after ALL apartments are sold for KAOA properties. That is an unreasonable barrier. KAOA itself allows the builders to join in for unsold flats. Such a recommendation is found in the model central law as well.

Section 11 refers to the conveyance of title etc. and transfer of the property to the owners. Nowadays, apartments tend to be larger properties with more complicated and larger facilities. It would be a good idea to revise this section and add that at the same time or before conveyance of the title, the builder should transfer all details of the facilities such as electrical drawings, plumbing details, title of the common area electrical as well as water connections, technical details and occupancy of the sewage treatment plants, and all and any such details to the residents in addition to the audited financial statements for the time period that the builder managed maintenance, as well as any corpus funds collected. Recommendation: Conveyance of properties is a problem area. Expand it to set a deadline and as well as requirements from builders in terms of the information and documents to be transferred to the association formed.

Sections 12 and 13 referring to liabilities of people who take flat as well as responsibilities of the manager are all good items. It would be good to add a line here saying that the provisions of the KAOA apply to apartment takers. The section 13 (5) is especially good since it gives an idea of the legal recourse. Quick solution of disputes is important for smooth running of building societies. It would be a good idea to refer to arbitration as another method of dispute resolution. Arbitration could be performed by a new authority formed for this purpose.

Section 14, Offences by the promoter should be made a bit tougher. A maximum of one year in jail and two thousand rupees fine sounds pretty low when property sells for more than Rs 2000 a square foot. It would be good to link the financial fine to the cost of the property or something similar. Recommendation: Make stringent punishment, especially the monetary fine for builders who do not comply with the KOFA and KAOA. Current fine of Rs 2000/- is a laughable amount.

KARNATAKA APARTMENT OWNERSHIP ACT- Review Until this point, the focus has been on the KOFA and regulating the process of first sale of the apartment and full conveyance of the property to the purchaser and the formation of the association that will govern the community. Now the real challenge begins where many residents have to live together with each other with shared common areas. During the life of the property, there invariably will be regular and extra ordinary maintenance to be done, several disputes will arise all of which will have to be overcome in the interest of all the owners of the community. There will be births, deaths, change in ownership all of which have to be robustly handled by the community. In some extra ordinary circumstances, many other situations can come about. Whole or part of the property can be destroyed. The government may acquire a part of the property for issues such as road widening and other aspects related to eminent domain. All these circumstances have to be handled within the provision of law. The Karnataka Apartment Ownership Act performs two key functions. One is to from a scheme of ownership where the apartment along with its share in the common areas becomes a heritable, transferable and very importantly mortgageable property with a clear title. The second is to set rules for the community to operate until such time that it ceases to exist. There are two general schemes of ownership. In one, like in cooperative societies, the building and land is owned by the cooperative society while the owner is strictly a “tenant” in the flat. Note that the word “tenant” here has a different implication from the regular definition of tenant. The other ownership scheme is where the apartment along with the accompanying share in common areas and undivided share of land is owned by the apartment owner itself. From a clear title and mortgageability perspective, this is preferred. For instance, in the event that the entire building is destroyed, the financial institution giving the loan will have a claim on the undivided share of land at least in the latter case. In the former case, the land belong to the cooperative society and the mortgage holder of an individual unit has nothing in the event of destruction of the property. It is some of these considerations that led to the KAOA being enacted. The Karnataka Apartment Ownership Act could be conceptually divided into two main portions based on objectives of the act. One part establishes the concept of the apartment ownership scheme, clear title and undivided share in property. The other part is aimed at addressing the running of the community as per the by laws and for addressing potential problems that may arise. Clause 2 addresses the application of the act. The act states that “The KAOA is only applicable to property where the sole owner or all of the owners submit the same to the provisions of the Act by duly executing and registering a Declaration as hereinafter provided”. It also states that the KAOA is only applicable to properties that are mainly used or intended to be used mainly for “residential purposes”, on in other words to apartments

This clause is a major source of confusion as the meaning of the term owner is a source of constant confusion. All owners submitting a property to KAOA is a case that

arises when the owners of an existing apartment want a change in their property scheme. Generally, for new apartment being built, the DoD has to be registered by the builder/promoter itself. It is clear that this should be the case from the KAOA act and rules. The first deed of apartment is to be between the party that registered the DoD and the buyer. Recommendation: It is imperative that the act be amended to make clear that for buildings under construction, the builder/promoter is that owner and that they have to submit the property under KAOA by filing a DoD. DoD has to be registered before Deeds of Apartments start being registered. Notifications should go to the registrar’s office to strictly enforce these requirements during registration. Only in the extremely rare case where an existing whole society decides to submit itself to the KAOA is the other case valid where all “owners” together register the deed of declaration. Clause 3 defines various terms under the act. These definitions are important and we will touch upon them during the course of discussion on the rest of the act. Clause 4 equates each apartment together with its undivided interest in common areas and facilities appurtenant to such apartment as equivalent to any other immovable property. The owner can therefore transfer the apartment together with his share of undivided interest by means of sale, mortgage, lease, gift etc. etc. just like any immovable property subject to the same rights, privileges, obligations and liabilities. This clause therefore gives shape to the apartment vis a vis the Transfer of Property Act. Clause 5 deals with the Ownership of Apartments. Each apartment owner while being entitled to exclusive ownership and possession of his apartment has to execute a declaration that he submits his apartment to the provisions of the act and a deed of apartment as prescribed in the rules. Clause 6 is regarding the common area and facilities. It states that each apartment owner shall be entitled to an undivided interest in the common areas and facilities in the percentage declared in the (Deed of) Declaration. It also specifies that such percentage shall be computed by taking as a basis the value of the apartment in relation to the value of the property; and such percentage shall reflect limited common area and facilities. Any change in the above percentages as expressed in the declaration cannot be altered without the consent of all owners and by executing and registering an amended declaration. Further it is made clear that the undivided interest is an integral part of the apartment. It cannot be separated and any sale of the apartment included this undivided interest, even if not explicitly mentioned in the instrument of transfer. Rest of clause 6 deals with reasonable use and upkeep of the common areas. Problems with Clause 6: There are few problems with clause 6. Saying that percentage of ownership will be computed based on value of the property is very tricky. For some apartments which are sold over few years, some may be sold at a

much more expensive rate than an equivalent apartment sold earlier. It is better to relate the percentage share to another measure such as the carpet area or built up area of the apartment. Similarly, limited common areas must be identified. Many well written laws, such as the South African sectional titles law clearly explains how to compute built up area. For example, if there is a shared wall, the built up area should only include half the thickness of the wall. Clause 7 and 8 are more addressed towards aspects of smooth running of the association. Clause 7 requires all owners to comply with various bye-laws, administrative rules and regulations and other rules and restrictions, failing which suitable damages can be claimed or injunctive relief can be sought by the Manager, Board of Managers or aggrieved apartment owner. Similarly, clause 8 restricts apartment owners from doing any unsafe work or any structural additions to the property without seeking unanimous consent form all owners. Clauses 9 and 10 are regarding encumbrances against the apartment as well as sharing common profit and expenses respectively. Once the Deed of Declaration is recorded, non new encumbrance can be effective against the property. Instead, encumbrance can only happen against individual apartments. The key point here is that each apartment along with its undivided interest is treated as equivalent to a separate parcel of property subject to individual ownership. In case encumbrance is as a result of work commissioned by the association following due process, it is assumed that all apartments have consented to itand the encumbrance will be against all the apartments in proportion to their share in undivided interest. Individual apartments can remove themselves from this encumbrance by paying off their share of the encumbrance. Similarly, clause 10 says that common profits and expenses are to be apportioned according to the share of undivided interest in the common areas and facilities. Clauses 11, 12 and 13 are some of the most important sections of this act. They are also some of the clauses that seem to be much misunderstood, either because of lack of clarity or wilful negligence. The Deed of Declaration is a fundamental document that defines the scheme of the community. The DoD along with the Deed of Apartment, once registered establishes clear, traceable title to the property. By linking the undivided share to the apartment to be treated as equivalent to a parcel of property, it becomes possible to mortgage the property and obtain a bank loan, i.e., obtain a bank loan. Clause 11 details the contents of the deed of declaration. The act requires the declaration to contain a description of the land, building, number of apartments, material of construction, apartment number, location and proper description of each apartment, description of common area and facilities and so on so forth. Clause 11 also specifies that a true copy of the Deed of Declaration, by-laws as well as amendments to those should be filed with the office of the competent authority, defined as the registrar of cooperative societies. This aspect will be discussed further shortly. Clause 12 details the contents of the Deed of Apartments. A key component is that the Deed of Apartment is to contain information identifying the Deed of Declaration. It is to

contain the book, page and date of execution of the Deed of Declaration as well as the date and serial number of its registration and also any reference of its filing with the competent authority. A true copy of the Deed of Apartment also has to be filed with the office of the competent authority. Clause 13 makes it mandatory to register the Deed of Declaration, Deed of Apartments as well as Copy of Floor plans under the Registration Act 1908. Along with the Deed of Declaration, a copy of approved plans as well as the certificate from an architect that the construction is according to the plans. If such a certificate from an architect is not filed along with a DoD, such a statement is to be filed by the time of first conveyance. The registrar’s office is required to maintain a “book” called register of Declarations and Deeds of Apartments under Karnataka Apartment Ownership Act 1972 and an Index thereto is to be maintained. Clause 13(4) is a problematic section. It imposes on the Manager or Board of Managers of the apartment the duty of providing the Registrar of the district with a copy of the declaration as well as deed of apartment made in respect of every apartment in the buildings forming part of the property. This clause is confusing and needs to be clarified. As envisaged in the act as well as rules, the Deed of Declaration has to be registered first before even a single Deed of Apartment is registered, since the Manager or Board of Managers comes into the picture only after the association starts functioning. Clause 14 allows for the property to be removed from the KAOA provided the holders of encumbrance against any flat agree. However, in such a situation, the entire property is deemed to be owned in common by all owners with an undivided interest in proportion to the original share. Clause 15 allows resubmittal even if the property has been removed prior. Clause 16 refers to the bye-laws for administration of the property. A copy of the by-laws is to be annexed to the Deed of Declaration and any amendments to the same are only valid if set forth in an amendment to the declaration and suitably registered and a copy filed with the competent authority. The rest of Clause 16 specifies details of what the bye-laws should provide for. Clause 17 is an important clause that does not allow owners to exempt themselves from liability of their contributions towards common expenses by waiving enjoyment of the common facilities or abandoning the apartment. Clause 18 is a very important part of the law with implication that extends to local taxation as well as one that re-emphasizes the fact that the KAOA attempts to relate the apartment as equivalent of a separate parcel of property. It states that for the purposes of assessment of tax on lands and buildings leviable under local law (property tax for example), the apartment along with its percentage of undivided interest in the common areas and facilities is to be treated as separate property. This means that the apartment owner is to pay taxes on the apartment area along with that on the appurtenant undivided share of common areas and facilities. This practice is not necessarily being followed leading to loss of revenue to the government.

Clause 19 establishes that any sums assessed by the Association of Apartment Owners that are left unpaid constitute a charge on the apartment prior to all other charges except (i) charges on apartment due to unpaid govt and local taxes and (ii) Sums unpaid on mortgage of the apartment. One of the existing problems for apartment associations is in collecting payments in a timely fashion in order to meet expenses. There is generally no easy way for associations to recover expenses from truant owners. Piyal [10] has recommended that to remedy this problem, it would be a good idea to give the charge due to a small amount of unpaid common expenses, say for a period of 6 months, as being prior to all charges including those due to unpaid taxes and mortgage. This allows an association the ability to at least recover some of their liabilities. Recommendation: Recovering dues from members is a big problem for associations. There should be a defined process for fast disposal of such disputes. It is also recommended that as regards charges against apartments, be a good idea to give the charge due to a small amount of unpaid common expenses, say for a period of 6 months, as being prior to all charges including those due to unpaid taxes and mortgage Clause 20 establishes a process for when an apartment is sold when unpaid dues remain on it. Clause 21 sets out a process for purchase of insurance for the property. Clause 22 covers a situation for when the property is destroyed or damaged as a result of occurrences such as fire, earthquake or other catastrophic event. There is however one event that is not covered here. It is possible that a community may lose some land, common areas or even some units as a result of land acquisition by the government. In such circumstances, the undivided interest in common area and facilities has to be re-apportioned and the unit holders directly impacted by loss of part or whole of their apartments compensated. This aspect has to be included in the law as it is part of most modern international laws. Recommendation: Include a provision for recomputation of ownership share of common areas and land in the event that (a) portion of property is acquired by the government for road widening etc. (b) Part of property is lost to fire or other damage. Clauses 23, 24, 25 and 27 are fairly standard clauses which we will not discuss. Clause 26 titled removal of doubt once again seeks to clarify that the provisions of the transfer of property act of 1882 apply to every apartment together with its undivided interest in common areas and facilities as long as they are not inconsistent with the provisions of the KAOA. Recommendation: An overarching recommendation. Several apartments that have been sold till date have not been correctly registered following provisions of the law. It is important to provide measures by which these “non compliant” properties can easily become compliant.

Concluding Remarks The state of Karnataka has excellent legislation already on the books in the form of the KOFA and KAOA. It is of utmost importance that these two legislations be enforced urgently by the Urban Development Department in order to curb several malpractices in the sector. The department should give wide publicity to the correct provisions in the law and urge builders and their associations such as CREDAI to follow the process. Instructions should be sent to registrar’s offices to only register deeds of apartment if the deed of declaration is correctly registered and referred to in deed of apartment.

Further, these laws are all about 40 years old. Law in India and elsewhere have been modified to improve them. Karnataka law is no exception, and changes are required here as well. This report identifies several possible changes to existing law. The laws should be amended and structures put in place for effective implementation of the laws. While making amendments, it is important to recognize that several apartments have been developed where by the builders not following the right provisions, have not been sold as properties envisaged in the KOFA or KAOA. It is critical to formulate remedies so that these existing properties can take the necessary measures to become compliant and under the fold of the KAOA.

References

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Karnataka Law Journal Publications, Bangalore 17. http://credaikarnataka.com/codeofethics.htm accessed Dec 14, 2010. This

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