All eyes now on CCI

DLF appealed against the order with the Competition Appellate Tribunal (Compat). After a series of hearings,the tribunal on July 18,directed the CCI to complete the modification of the buyer’s agreement by September.

By modification,the tribunal asked CCI to initiate the process of removing the allegedly abusive clauses in the agreement that the buyers of DLF’s

‘Belaire’ project entered into with the company.

If the CCI is able to achieve closure of the case by the deadline,it would set a new standard in the manner in which buyer’s agreements are drafted by developers,and could make the developer-buyer relationship more equitable.

“The DLF is the test case on the basis of which this new contractual regime will be evolved. All other cases will eventually find that whatever is decided here will apply to them,” says Ranjeev Dubey,managing partner,NSouth Advocates.

CASE HISTORY

To understand the importance of the order,a quick recap of the case is necessary,for the activities encountered here,is found across the sector.

DLF,in 2006,launched a project called ‘Belaire’,a premium development in Gurgaon. The developer was to have delivered possession in three years,i.e. 2009. That,however,did not happen and the project was delayed and as of today,finishing works remain and would be complete only by November,a gap of six years.

The developer,meanwhile,arbitrarily increased the number of floors to 29,while the buyers had made bookings on the understanding that it would be 19. Further the agreement DLF entered into with the buyers,had several clauses that empowered DLF to make changes without taking the buyer’s consent or even allowing them a say.

Further,the company accepted bookings without getting all approvals in place. The buyers had paid instalments as per schedule,while the construction was delayed on account of this reason.

The buyers then organised themselves into the Belaire Owner’s Association,and in 2010,filed a petition before the CCI alleging abuse of dominance by the realty major.

The CCI,after investigation held that DLF was in contravention of the Competition Act,as it had imposed unfair conditions on its buyers.

FOUR GROUNDS

DLF is not the only real estate player to have been dragged to the CCI. Several others have come for scrutiny,but this stood out because this was the first instance involving the sector where the competition watchdog could make out a clear case on four established grounds.

Issue of Jurisdiction: The first issue was whether the Act applied to the case. DLF had said the Act does not apply as the agreement was entered into before 2009,the year the Act came into force. It added that the allegedly unfair conditions were not imposed thereafter. Further,it said that the clauses of the agreement were ‘industry practice’,and it cannot be singled out for alleged abuse of dominance. The commission held that the Act applied as the company had cancelled allotments as per the same clauses after it came into force.

Assessment of Relevant Market: The CCI,took into account the ‘relevant geographic market’ and the ‘relevant product market’ under the provisions of the Act. The relevant product market was determined to be high-end residential apartment in Gurgaon. While determining the ‘relevant geographical market’ the commission considered factors such as “local specification requirements and consumer preferences” given as determining factors under the Act,based on which it zeroed in on Gurgaon.

Dominance in the relevant market: In assessing dominance,CCI looked at cases of dominance defined as “a position of strength that enables the enterprise to operate independently of competitive forces prevailing in the relevant market” or to “affect its competitors or consumers or the relevant market in its favour”. It investigated the company’s financials,its land assets,strength of its competitors and held that DLF without doubt had a dominant position in the relevant market.

Abuse of Dominance: The commission in its evaluation of the buyer’s agreement,found several clauses that were blatantly unfair to the buyer,and the company could get away with this only because of the position it enjoyed in the market.

THE WAY AHEAD

It is not clear,as yet,the process by which the modifications would take place. The CCI is set to begin hearings on this soon. Whatever form the modified agreement may take,it is clear that the “industry practice” of one-sided agreements would undergo a change,now that the market leader is in the dock.

The commission’s order says,“We have already observed that industry practices emanate from market leaders and are followed by the rest. Such a market leader is not constrained to adopt practices initiated by minor players… If DLF were to modify the format of its agreement and make it more buyer friendly,it would be able to assert sufficient pressure on its competitors to follow suit.”

Adds Dubey,“We can add that in our experience,most builders have flat buyers agreements that are as,if not more,onerous than that encountered in this case. This is a very good time to have all flat buyer contracts reviewed without delay and conform to this evolving new standard of even handedness.”

The key question,however,is will it spur other players to give in and modify their agreements?

“A standard set by a body such as CCI,would more or less be the working standard for the sector. It would have a salutary effect in evolving good practices and could be the foundation for the soon to be established regulator,” says RR Singh,director general,National Real Estate Development Council (NAREDCO).

The issue one again brings to focus the lack of a regulator for the real estate sector. “The sector has neither been given industry nor infrastructure status. There are malpractices both by the developer and the buyer/investor that need to be weeded out. This will take time,and the CCI verdict is an important milestone and can be the basis for a regulatory regime,” says Singh.

“Transparency is an essential prerequisite for rapid growth of the real estate sector. I believe self-regulation by developers is the most effective means of ensuring that the stakeholders’ confidence in the organised real estate business grows. Developers have to honour commitments in letter and spirit leaving no room for failure on the ethical front. Nevertheless,there ought to be a statutory external mechanism to safeguard the interests of the buyers,” says SK Sayal,director and CEO,Alpha G:Corp Developers.

One will have to wait and see if the CCI is successful in spurring reforms in the realty sector,by giving Belaire’s buyers their due.

—L.Ramakrishnan@expressindia.com