ANOMALIES IN THE LAWS PERTAINING TO APARTMENT ASSOCIATIONS IN KARNATAKA

With the rapid increase of apartments in several cities and towns in Karnataka, the laws governing the construction of apartments, co – sharing and co – owning of the property, formation of an association, maintenance of common areas and properties and the relationship inter-se between the owners of such apartment complex, have gained and is continuing to gain importance. 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] were enacted to address several aspects mentioned above. However, these two enactments 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.

1. KAOA and KOFA – An analysis:

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.

1. 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 of Karnataka (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. All that takes now is a proactive or a disgruntled member of such association to initiate an action against the association and the registration under KSRA would tumble over on the basis of the above mentioned precedent.

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. 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.

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, in my view, 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.

1. Recent Judgment on these two legislations – A criticism:

In the recent case of Shantaram Prabhu and another vs. K. Dayanand Rai and Others[4], the Hon’ble High Court of Karnataka held as follows:

• The provisions of KAOA and KOFA are neither mutually exclusive nor supplementary to each other
• Once an apartment is submitted to KAOA by executing DoD, the provisions of KOFA would not apply
• However, if no such DoD is executed, then the provisions of KOFA would apply for the purpose of formation of a company or co-operative society, as the case may be
• KAOA would apply only for residential buildings. KOFA would apply for an office or showroom or shops or godowns since they cannot be subjected to KAOA. But if a residential building is not brought within the purview of KAOA by executing a DoD and bye laws or if such a building is removed from the purview of KAOA, then provisions of KOFA would apply. Other enactments like RERA would also be applicable. Also, DoD and bye laws could be executed at any given point of time and not necessarily when the apartment is made ready or is being sold.
• Purchasers need not be signatories to declaration, DoD or bye laws. The promoters or land owners, as the case may be, could execute the declarations, DoD or bye laws and that would bind the purchasers.

Several other aspects were also discussed in the case, but I am referring to these points as it directly involves to the issues discussed in this article.

The Hon’ble judge of the High Court has concluded that both the legislations do not supplement each other by mainly relying on Rule 9 of the KOF Rules, 1975. Rule 9 states as follows: “9. Period for submission of application for Registration of Co-operative Society or Company of flat purchasers: – Where a cooperative society or a company of persons taking the flats is to be constituted, the promoter shall submit an application to the Registrar for registration of the Co-operative Society or the company, as the case may be, within four months from the date on which the minimum number of persons required to form such organisation have taken flats. Where the apartment takers propose to submit the apartments to the provisions of Karnataka Apartment Ownership Act, 1972 by executing Declaration and Deeds of Apartment as required by that Act, the promoter shall inform the Registrar as defined in the Karnataka Cooperative Societies Act, 1959 as soon as possible after the date on which all the apartment owners (being not less than five) have executed such Declarations and Deeds of Apartment.”

The learned judge opines that this Rule makes it clear that it is not necessary to form a co-operative society or a company and that the decision is of the owners to either submit themselves to the provision of KAOA or form a society or company for the purposes of KOFA.

The learned judge further states in Para 18.3 that “Though the said Rule or any other provisions of KOFA or Rules framed thereunder do not specifically indicate that when such Declaration and Deeds of Apartment is executed under KAOA the Jurisdiction of KOFA is excluded, a meaningful reading would indicate that if Declaration and deeds of Apartment is executed under KAOA and Apartment is subjected to the provisions of KAOA, it is only information that is required to be provided to the Registrar of Co-operative Societies. Such providing of information would essentially imply that there is no registration of a co-operative society which is contemplated since this is an exception created under the said Rule.”

In my humble submission, this view is erroneous. Rule 9 could not have been read independent to the provisions of KOFA. Section 10 of KOFA clearly mandated the formation of a co-operative society or a company by the promoter. While it is true that submission of DoD under KAOA is optional and under Section 14 of KAOA, an apartment complex could even be taken out from the purview of the Act, nothing contained in KOFA makes it appear that the submission to the provision of KAOA would be to the exclusion of KOFA. Rule 9, as mentioned above, does not specify that if the apartment takers propose to submit a declaration under KAOA, it would exclude the obligation on part of promoters to form a co-operative society or a company. Rule 9 only provides two different obligations of the promoter, i.e., (a) the promoter is required to form an organisation within 4 months from the date of flats being purchased by minimum number of persons and (b) the promoter shall inform the Registrar once the declaration and deed of apartments are submitted under the KAOA. By what possible interpretation could these two obligations be held contradictory or exclusive to each other? In my respectful submission, these are two different and distinct obligations that are mentioned in Rule 9 and nothing more could be read into this provision to negate the obligation of promoter to form a society or a company. Also, the provisions contained in Rules has to subserve the provisions of the Act and not the contrary. If such an interpretation is to be accepted, then various provisions of KOFA, including Section 10, would be rendered otiose.

Moreover, when two legislations are taken together for interpretation, efforts should be made to harmoniously read the provisions between the two statutes and not render one contrary to other[5]. The preamble, statement of objects and reasons and several provisions contained in both these enactments do not even remotely suggest that these enactments were made for the option of the promoters or apartment owners to choose a legislation of their choice. Where has legislature ever given such an option in the history of legislations?

All further questions were answered by the Court on the strength of this conclusion that both these enactments are a matter of choice for the promoters and apartment owners, as the case maybe.

1. Conclusion:

The discussion made in the article above clearly shows that the two enactments have to be interpreted harmoniously and the purposes of two enactments are indeed different and distinct. No part of the two enactments could have ever held to be optional as several rights and obligations of apartment owners are separate in the two legislations. One fails to understand as to why the rights included in one statute should prohibit the apartment owners to enjoy the rights in another statute.

The view of the Hon’ble Court that provisions of KAOA applies only to residential units while the provisions of KOFA is applicable to residential, office, commercial buildings, godown, etc are indeed correct. However, the further position in the judgment that on filing of a declaration under the KAOA, the provisions of KOFA would not apply to such residential buildings do not appear to be well founded and I respectfully differ thereto. I also respectfully concur with the Hon’ble Court’s judgment in so far as the ratio regarding the right of the promoter to execute the declaration and bye laws and bind the purchasers to the provisions of KAOA before the sale of apartments, and also regarding the jurisdiction of the courts (small causes court and city civil court) to entertain the nature of disputes mentioned therein.

While I have expressed my criticism on certain portions of the judgment, it is matter of some relief that there is at last, a judgment, which takes pain to address the anomaly of the two statutes, albeit partially incorrect.

(I thank Mr. Nagesh Moro and Ms.Vaishnavi Naik for their valuable inputs and feedback)