– By Kashyap N. Naik, Partner

Twin enactments – The Karnataka Apartment Ownership Act, 1972 (hereinafter referred to as “KAOA” for short) and the Karnataka Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1972 (hereinafter referred to as “KOFA” for short),[1] have failed in achieving their objective due to lack of clarity and due to the anomaly, they have created. The KOFA has often been followed in breach than in compliance and the flat purchasers are blissfully ignorant of the rights armed by this statute against the property developers. Resultantly, these enactments are undernourished for want of sound judicial precedents.

The statement of objects and reasons of these two enactments make it amply clear that the KOFA was enacted to regulate the construction, sale, management and transfer of flats or apartments by individuals or group of individuals who construct such multi-story buildings. The KAOA was enacted, amongst other objectives, to declare the flats or apartments in multi-storied buildings to be heritable and transferable immovable property. Provisions were made for owners of apartments to enjoy exclusive ownership of their flats while retaining their undivided interest in the common areas and facilities.

The provisions of KOFA cast numerous responsibilities and liabilities on the promoter, who intends to construct a block or building of flats and also provide for certain general liabilities of a person who takes a flat. The provisions of this Act do not venture into the rights of an apartment owner and/or the matters concerning the joint use of common areas, the nature of its usage, the making of byelaws, etc., All these aspects stand covered under KAOA.

A cursory look at some of the salient features of the often ignored KOFA would reflect the nature of responsibilities cast on the promoter/ developer. Section 3 of KOFA makes a promoter responsible to make full and true disclosure of the title to the property, its encumbrances, to allow inspection of plans and specifications as approved by the local authorities, disclose the nature of fixtures, fittings, the particulars of design and material used in the construction, etc. He is required to disclose all agreements entered by him with the architect and contractors, specify the date of possession of the flat, prepare and maintain a list of the flats with the names and addresses of the parties, etc.

Section 4 mandates the promoter to enter into written agreements with the proposed buyers for the sale of flats and it also makes it mandatory for the promoter to register such sale agreements. Since Section 4 also commences with a non-obstante clause, the sale agreements that are optional for registration in terms of Section 18 of the Registration Act, becomes mandatory under the KOFA. It also restricts the promoter from receiving an amount not more than 20 percent of the sale price as advance payment and deposit. Sections 5 and 6 deal with the promoters’ responsibilities pertaining to finances and maintaining the account. Section 7 restricts the promoter from making any alterations in the structures after obtaining the approval of the local authorities for the specifications of the building. Section 8 requires the promoter to refund the advance received with interest at the rate of 9 percent per annum in the event he defaults in handing over of possession of the property in terms of the sale agreement. Section 9 restricts the promoter from mortgaging any flat or the land after executing the sale agreement, without obtaining the previous consent of the parties in writing.

Section 14 makes it a punishable offence for the promoter in the event he contravenes the provisions of KOFA. Section 17 of the Act provides that the KOFA would be in addition to the provisions of the Transfer of Property Act, 1882 and override the terms of any contract.

The provisions of KAOA on the other hand do not deal with the responsibilities  and liabilities or of the promoter. KAOA provides for status and ownership of apartments, regulation of common areas and facilities, distribution of profits and expenses, submission of declarations, deed of apartments and byelaws, the contents of byelaws, etc. By virtue of Section 26 of KAOA, the provisions of this enactment would override the provisions of Transfer of Property Act, 1882 and to the terms of any contract.

 

Registration of Associations

It was often noticed that developers or landowners or sometimes, the apartment owners, would submit a Deed of Declaration under the provisions of KAOA and assume that to be sufficient to form an association. Sometimes, by circumventing the provisions of these enactments, some had even registered a society under the provisions of the Karnataka Societies Registration Act, 1960 (hereinafter referred to as “KSRA” for short) for the purposes of maintaining and running the apartment association. In law, such formations are illegal and inadequate.

The KOFA clearly mandated under Section 10 that the promoter had to register either a cooperative society or a company. No provision was made in either of the enactments to register an association under the KSRA. Moreover, Section 3 of KSRA clearly provides that the Act applies only to societies established for the promotion of charity, sports, education, science, literature, fine arts, etc. It is clear from the wordings of Section 3 of KSRA that an apartment association could never be registered under the provisions of this Act. However, in violation of the said provisions and in surprising ignorance of law, the Registrar of Societies mechanically registered several apartment associations under KSRA and issued registration certificate thereto. One such action of the Registrar of Societies was challenged before the High Court of Karnataka in the case of Praveen Prakash & Ors. vs. State of Karnataka & Ors[2]. By an order dated 15.02.2019, the Hon’ble High Court (SB) held that the association had to be formed as provided under KAOA and not under KSRA. This Order was challenged before the Division Bench of the Hon’ble High Court in the case of VDB Celadon Apartment Owners Association vs. Praveen Prakash & Ors[3]. By an Order dated 06.11.2019, the Division Bench headed by the Chief Justice held that the objects of the Apartment Association were not covered by Section 3 of KSRA and therefore no registration could have been done under the said enactment. Accordingly, the writ appeals were dismissed.

Only after the Hon’ble High Court of Karnataka woke up the Registrar of Societies from a deep slumber did he find an opportunity to read the plain wordings of the enactment that created his office and notice the objects for which that legislation was made. After that nudge, a circular was issued by the Registrar of Societies stopping further registrations of apartment associations under KSRA. However, the entire episode of the above mentioned litigation and the subsequent action taken by the Registrar of Societies only stopped the Registrar from perpetuating further illegality but did not do enough to rectify the improper and illegal registrations of apartment associations that had already taken place till then. All the associations which were registered under KSRA are continuing their affairs at the risk of losing their registration on the strength of an existing precedent mentioned above. All that takes now is a proactive or a disgruntled member of such association to initiate an action against and the registration under KSRA would tumble over. With great respect to the decisions of the Hon’ble High Court, I would like to express my dissatisfaction over the non indulgence of the bench to the provisions of KOFA and for having limited their scope of the judgment only to the provisions of KAOA. Perhaps, none who appeared in the case even cited the twin legislations for the Court to ponder over. For them, missing the blow appears to have taken precedence over assisting the court to settle the law.

Most of the apartment associations, after the passing of the above judgement and issuance of circular, restricted themselves in submitting a deed of declaration and the byelaws, in terms of the provisions of KAOA, before the jurisdictional sub-registrar. This, they assumed, complied with the laws. Although, Section 13 of KAOA provides for registration of declarations and deed of apartments, that alone would not make the association a legal entity, having a common seal. Since the tax department permits such associations to obtain a PAN and several banks recognise them to open and operate bank accounts, the apartment owners appear to be under a misplaced notion that an entity is formed, and all laws complied. This legal error has seldom been rectified even by lawyers who advise such associations. It is a matter of general understanding that a group of individuals could at best be called as an association of persons (“AOP”) and nothing more. For any association to be called as a legal entity, the statute must specifically provide for it. Companies, Limited Liability Partnerships, Societies and cooperative societies are the only recognised kinds of legal entities in India. All other forms of associations like clubs, partnerships (under the Partnerships Act, 1932), trusts, HUF, proprietary concern, AOP are not legal entities. These non-entities cannot sue or be sued unless all the members or partners or trustees join in initiating or defending legal proceedings. Same would also apply while entering into contracts. Section 23 of the KAOA empowers the Manager or Board of Managers to bring an action on behalf of two or more of the apartment owners in respect of any cause of action relating to common areas or facilities. A reading of Section 23 also makes it clear that the association formed under this statute cannot be considered as a legal entity. Therefore, any apartment association which is not registered as a legal entity cannot sue or be sued unless and until the Board of Managers bring an action or otherwise all the members join in the legal proceedings, or an application is filed to sue in representative capacity as per Order 1 Rule 8 of Civil Procedure Code, 1908 (“CPC”).

The mandatory provision as per Section 10 of the KOFA cannot be ignored by any promoter/ developer. It is necessary for the promoter/developer to either form a cooperative society or a company under the respective provisions of the Karnataka Cooperative Societies Act, 1959 (hereinafter referred to as “KCSA” for short) or the Companies Act, 2013 as soon as the minimum number of persons required to form a society, or a company have taken flats. Since, limited liability partnerships did not exist at the time of this enactment in 1972, it could not have found its place in Section 10. However, it would be advisable for the legislature to include the same. Formation of a cooperative society or a company under KOFA would obviously not dispense with the responsibility of the promoter/developer or the apartment owners in submitting a deed of declaration as per Section 13 of KAOA.

However, the effect of such a registration and submission of deed of declaration and byelaws is that it gives rise to a legal anomaly. For any cooperative society or a Company to be registered, byelaws or articles of association would be mandatory. Thus, for any set of apartment owners, there would be two byelaws placed in their hand. One under the KCSA and another under KAOA. Similar maybe the issue with the Articles of Association and the byelaws. The provisions of KAOA should have contemplated this anomaly and should have tried to address the same. In view of the absence of any specific provision pertaining to this, the best mode available would be to ensure that the contents of the byelaws under the two enactments are similarly worded and do not suffer from contradiction. The collective skill of the lawyers who draft two bye laws for any given apartment association should cure the anomaly created by the state legislature. A classic example where the skill of legislature is inversely proportional to the requirement of the skill of judiciary in interpreting the law and delivering justice.

On a plain reading of the two enactments, it also becomes clear as to why the KOFA required formation of a cooperative society or a company. In the event of there being any disputes by and between the members of the society or company or in the event of there being an act of misappropriation of funds, etc., the Registrar of cooperative societies or companies could accordingly be approached by the aggrieved  member seeking an action against the management. In the absence of formation of an entity as provided under KOFA, the apartment owners would have to approach the civil court claiming for damages or injunction or of refund, as the case may be, alleging violation of the terms of the byelaws formed under KAOA. This would obviously dilute the rights of apartment owners and also give an unfettered right at the hands of the management of association which claims to be formed only under the provisions of KAOA. Therefore, it follows from the above discussion that all apartment associations would have to necessarily form an entity in the form of cooperative society or company as mandated under Section 10 of KOFA and also submit the deed of declaration and byelaws before the jurisdictional sub-registrar in terms of Section 13 and 16 of KAOA. Both are mandatory in nature and not optional.

 

Status of membership of an apartment owner to the Association

Section 5(2) of KAOA provides that each apartment owner shall execute a declaration that he submits his apartment to the provisions of KAOA. Section 4 of KAOA makes the apartment heritable and transferrable immovable property. It would therefore follow that when an apartment owner transfers his apartment by way of sale, gift, exchange, etc., the subsequent owner of the said owner would automatically be bound by the byelaws of the association formed under KAOA. Section 17 of KAOA prohibits the apartment owner from exempting himself from liability for his contribution towards common expenses, etc.

Another anomaly that the enactment creates is that the transfer of an apartment would not automatically change the membership under the KCSA or Companies Act. To address this, the association should require every apartment owner to submit an application for transfer of membership of the society or company as the case may be, together with a copy of the sale deed.

 

Formation of management board under different enactments

Another anomalous situation that these statutes give rise to is the formation of the board of management. The provisions of KCSA provide for the election of office bearers who would be required to manage the society and conduct its affairs. Provisions are also made in detail for the election of office bearers, their qualification and disqualifications, etc. Similarly, the Companies Act, 2013 also makes provisions for the formation of the Board of Directors. Section 16 of KAOA, read with Rule 5 and Chapter 3 and 4 of Karnataka Apartment Ownership Rules provides for formation and election of board of managers, their duties, powers etc.

In order to ensure that the conduct of the affairs of this governing body, in whatever name called, is smooth and is not in contradiction with the express provisions of byelaws under two different enactments (i.e., KAOA & KSCA, or KAOA & Companies Act, as the case maybe), efforts will have to be made by draftsmen to ensure similarity of language, commonality of elections and similarity of working.

 

Need for Amendment and Judicial Scrutiny:

It would be surprising if one is not confused by these enactments. Varied legal opinions and whims of property developers have often left the apartment owners in lurch, with each of them banking on their individual judgment of the proper purport of the laws. Unless the legislators take a sabbatical from party politics and indulge in prompt rectification of such laws, much is left at the hands of lawyers and judges to address this anomaly. A sound judicial interpretation with an overview of all the above enactments by the Courts is perhaps more likely than expecting the legislature to address this issue. Some disputes pertaining to the formation of apartment association are pending consideration in courts. One would truly hope that the Courts address this anomaly while deciding such cases.

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[1] Both these statutes received the assent of the President on 26.06.1973, published in the Gazette on 23.07.1973 and were brought into force on and from 01.04.1975.

[2] W.P. Nos. 34660 of 2017 and 35719-35724 of 2017

[3] WA No. 974/2019 and 1206-1211 of 2019