Tripartite Agreements in Real Estate
A few must-know things for consumers
When Raghav and Anjali were planning a family, owning a house was the first thing on their mind. They realized that they would be able to afford the monthly instalments of the housing loan only if they stopped paying the rent of their house. Considering that most real estate developers booked houses at least two years in advance – which meant two years of loan instalments for a house being constructed – the couple gave up the idea of buying a house. On their part, when the developers realized that they were losing out on hundreds of buyers like Raghav and Anjali, they came up with an interesting idea – that there would be ‘no EMI till possession’. They started a scheme wherein they would pay the instalments of a buyer’s loan until the possession was given to the buyer. Sounds like an ideal arrangement, does it? Let’s find out what the real deal is.
Volatility in prices of real estate has kept developers on tenterhooks and most of them are sort of desperate to sell their houses even before the beginning of their construction. They keep coming up with attractive schemes to lure buyers. That is how the concept of the tripartite agreement originated. You take a loan for a house and enter into an agreement with a bank wherein it is clearly stated that the equated monthly instalments (EMI) of the loan will be paid by the developer for a set period. As the term ‘tripartite’ suggests, the three parties – the buyer, the seller (developer) and the lender (bank) – get into an agreement.
On the face of it, this sounds like a win-win situation for all. However, the murkier realities of such
agreements come to light when you realize that the developer is not keeping his promise – either he stops paying the EMIs or he fails to give you the possession of the house on a committed date. In such cases, the loser is primarily the buyer as real estate companies do not mind sending their battery of lawyers to justify their unjustifiable stances. Moreover, it is the buyer and not the developer who has borrowed from the bank, so the buyer has to ensure that the EMIs are paid in time in case the developer is not paying them.
Here are a few significant points that you must consider before getting into a tripartite agreement: This scheme is helpful if you are renting a house since paying the pre-EMI and the rent can strain your finances. However, before opting for it, you should make sure that the builder hasn’t padded up the cost. He may not offer any discounts or throw in any freebies in the deal. You should first bargain to lower the price of the house and then opt for the scheme. Another risk is that if the construction of the property is delayed, your pre-EMI payment period may stretch for more than two years, and you will have to make the balance payments yourself. This will negate any benefit that you may have derived on the payments made by the builder. You will also have to check whether the builder has successfully completed such a scheme in an earlier project. It is always better to go for a scheme that has been successfully implemented by the same developer in the past. Another thing you need to check with the builder is if he will pay the interest at a predetermined rate. If this is the case and the home loan is on a floating rate, the liability for any increase in rate would be on you. This is the most important clause in the tripartite agreement – whether the builder will pay a penalty for delay in construction/possession. You must check the timeline for which the developer will pay the EMI. Many builders cap the number of years at two, irrespective of whether the construction will be complete or not within two years. This may not work in your favour. Always keep in mind that if the developer defaults on the EMI payment, then you will be liable to pay the same and the bank will hold you accountable. In case the bank is lending directly to the developer through part payments based on the progress of the construction, it may stop releasing payments if the developer fails to construct (reasons may be any: delayed or cancelled permissions/ clearances or objections by the government). In such cases, builders usually threaten buyers with cancelling their booking and even ask for higher down payments citing price rise, etc. Such terms are generally written in the agreements and consumers must always be careful of the same. Mostly, such agreements are quite lengthy with dozens of clauses. Consumers must try spending a day or two and even take an expert’s help to review such agreements clause by clause, and not hesitate in questioning the developer or the bank in case of any doubt. As a consumer and a paying party in the agreement, you have the right to object to, and ask for an amendment in, any clause. In case you are not satisfied with the clauses or they seem to be a sort of trap, it is always better to look for other options. There being such intense competition among real estate developers, another one may give you a better deal.