Real Estate – One Sided Agreements

Supreme Court directs DLF to pay Rs 630 cr fine imposed by CCI

The Court also directed DLF to file a fresh undertaking that in the event of dismissal of the appeal it will pay such amount as directed by the court.

In terms of the new law, its time for Real Estate Companies to change terms of selling Flats. All Standard Agreements will be held to be One Sided and Anti-Competitive.

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http://businesstoday.intoday.in/story/supreme-court-dlf-fine-cci/1/209722.html

CASE ANALYZED

PRINCIPLE OF ASSESSING ABUSE OF DOMINANT MARKET POWER

  • The projects, namely, Belaire, Park Place and Magnolia were in the market
  • segment of ‘high-end’ or ‘luxury’ residential accommodation.

 Gurgaon was seen to be the relevant geographic market where Apartments of the DLF projects had the same characteristics in terms of value of land, rates being charged from Flat buyers – with similar attributes such as proximity to Delhi, proximity to Airports and a distinct brand image. Thus, the “ product” or “Apartment” being sold could not be compared to any other area for the simple reason that buyers could not switch to any other similar product. Thus, Apartments sold in these projects had no substitutes as choices in adjoining areas if price changes.

DOMINANCE

Dominant Position” may be acquired due to several factors even outside the “relevant market” but, “for the purpose of Abuse of dominance ( AOD), this “position of strength” must give the enterprise an ability to operate independently of competitive forces

  • The CCI also referred to factors like government policy or regulations, demographic factors and natural conditions of land availability
  • The CCI held that the two commonly used measures for defining market share in the real estate business were – (a) sales figures (value terms) and (b) active stock (volume terms).
  • The turnover of the Appellant for the year 2009 was Rs. 10, 035.39 crores which was 300% higher than that of Unitech and 700% higher than that of Parshvanath.
  • In view of the CMIE data being most reliable the CCI chose to rely on CMIE data that the superior market share of the Appellant was about 44%, Forbes’ list of global 2000 companies published for the year 2010 which included the name of the Appellant, which was the only Indian real estate company at a significant position of 923.

The concept of dominance, generally requires a high degree of market power both with respect to the level to which price can be profitably raised and to the duration that price can be maintained at such a level.

  • Dominance thus requires that market power be substantial and durable.
  • Assessing dominance is a demanding task; it requires analytical discipline and certain determinations based on considered and developed judgment, consistent with a competition regime’s policy objectives.
  • By highlighting that market power must be substantial and durable and that a firm must enjoy appreciable freedom from competitive discipline imposed by rivals, these concepts of dominance provide a useful analytical framework. For example, when entry is easy, market power is likely not durable; this explains why entry barrier analysis is considered one of the most important steps in the assessment of dominance (or the absence thereof).
  • Many jurisdictions emphasize behavioral aspects in their definitions of dominance and focus on the extent of a firm’s competitive constraints or ability to act in ways that a competitively constrained firm could not.

ABUSE OF DOMINANCE AND UNFAIR TRADE PRACTICE

There were certain clauses in the Apartment Buyer’s Agreement (ABA) which were unfair and amounted to abuse of dominant position. They were as follows:

EXPLOITATIVE NATURE

  • By constructing additional floors on the three residential housing schemes without the necessary approvals and remaining tight-lipped about the total number of floors;
  • There is a clear cut admission that the Appellant had constructed 22 floors on that day “with a view not to waste time”. This construction certainly was without any official approval from the DTCP, Haryana constructed and applied for.
  • DLF counsels were not in a position to know whether the addition made in all the three schemes were final additions or not and whether there would be further additions possible or not.
  • The Court said that in our opinion, the Appellant cannot hide itself behind Clause No.9.1 of the ABA, which itself is as vague as it could be.
  • Further, that It was not expected by a responsible leading and number one real-estate company in the world to flout various provisions of DTCP, Haryana and relevant statutes in this regard.

TOTAL DISCRETION OF BUILDER

  • On the basis of Clause 9.1 of the ABA, DLF could still go up, thereby adding to the woes of the allottees, who have been and still are in a position of a trapped customer.
  • The Court said that In our opinion, though Clause 9.1 of the ABA authorizes the Appellant to increase the number of floors by constructing additional floors, but this imposition of additional construction by addition of floors on the apartments of the allottees of all the three residential societies without any intimation and consent amounts to abuse of dominant position by the Appellant. The element of secrecy and also vagueness strikes us.
  • The original allottees were given an assurance that they could move to a higher floor in the sense they could, instead of their previously selected apartment, can select an apartment out of the added floor. If they had done this, they were certainly required to forego their claims on the improvements made in the originally selected apartment, the special features, which were added to their apartments as also the expenditure for the same.
  • This “magnanimous” offer was also not in absolute terms and it was only indicated in the aforementioned letter dated 25th November, 2009, that the Appellant could consider moving the allottees on to a higher floor.
  • Here also the Appellant was becoming vague, as it could accept moving some of the allottees to a higher floor and could reject the claim of some of the allottes to move on to a higher floor, thereby, offering this, the Appellant had kept the power to discriminate between allottees.
  • This offer itself amounts to an imposition of discriminatory condition.  

UNILATERAL CHANGES IN THE AGREEMENT

  • The total price payable for an apartment, car parking and undivided proportionate share in the land included super area comprised of the apartment area, pro-rata share of the common area as also the facilities within and outside the said building only and proportionate share of other common facilities, if any, which may be located anywhere in the complex.
  • Another clause provides that the apartment allottee shall have ownership of the undivided proportionate share in the land underneath the said building calculated in the ratio of super area of the said apartment to the total super area of all apartments within the same complex. Clause 9.2 of the ABA, which provides for major alteration or modification in the super area. This clause is brings in a ceiling of +/- 5% for a change in the super area.
  • The undivided proportionate share in the common area could not have been decreased to the disadvantage of the allottees, even if the height of the towers were increased from 17to 22 or 26 in case of Magnolia.
  • This was held as imposition of an unfair condition.
  • This breach was possible only on account of its dominance, as it
  • Was well aware that allottees had no other choice, but to accept the

CONTROL OVER OTHER PEOPLE’S RIGHTS

  • Clauses relating to holding charges – provides that if there was a delay on the part of the allottee to take possession after the same was offered by the Appellant, the Appellant would charge Rs.5 per sq. ft. per month for the total period of delay occurring on the part of the allottee.
  • However, such allottee would also not be entitled to increased compensation for delay in construction. These two things are quite apart from each other, because the delay in construction has got nothing to do with the inability of the allottee to make the proper payment in time, so as to be able to take the possession.
  • The Court said that this is nothing but a ruse to avoid the payment of compensation on account of delayed construction. All the allottees were actually clamouring for on account of the delay in completion of the project. If some allottees had not sent the concurrence either accidentally or otherwise, they would automatically loose the right to receive compensation for the delayed construction.

In view of the Court, such unilateral increase in the holding charges and the threatened consequence did amount to abuse of dominance by the Appellant.

BUYERS RIGHTS RISKY/PREJUDICED

  • Clause 1.1 of the ABA – DLF agreed to sell and the apartment allottee agreed to purchase the semi-finished apartment having specifications in the ABA.
  • It was, therefore, urged that every allottee in accordance with Clause 1.6 of the ABA had pro-rata undivided share in the club area and facilities proportionate to their respective shares in the property.
  • It was therefore clarified that there could not be a charge towards the entrance fee or membership fee for exclusive Magnolia club as every allottee has a right to use the same. It was then complained that by letter dated 16.08.2013, DLF had demanded onetime non-transferrable, non-refundable entrance fee of Rs.3,50,000/- along with a non-refundable annual subscription fee etc. adding up to a total sum of Rs.4,96,350/-.

 SUPPRESSING / CAMOUFLAGING OF TERMS

  • At least when the Act came into force, DLF was bound to inform the allottees about the proposed increase in the number of floors and could not have relied on Clause 9.1 of the ABA, which was as vague as could be, without any indication about the number of floors that could be added under the rules. DLF conveniently kept quiet.
  • On the date when the approvals were sought for, DLF knew the strength of their construction that the building could bear the load of additional 10 floors. It is apparent from the correspondence sent by them that the letters were sent only after the advent of the Act, wherein also probably there was no indication of the exact proposed increase in number of floors.
  • The allottees were constantly asking for the building and construction plans, so as to know the number of floors to be added. This according to us amounts to an imposition of unfair condition.
  • Therefore, there was a duty on the part of DLF to let the allottees know about proposed increase and obtain their views about the same. If DLF had a duty not to be unfair, the allottees certainly had a right to expect fair behaviour.
  • The Court Opined that it is in this sense that we are viewing this unfair action on the part of DLF, in first not disclosing the number of floors and then in proceeding with the construction of additional floors, increasing the number of apartments by 53% in case of Belaire, Park Place and Magnolia.

The unfairness lies in the sinister silence on the part of DLF. The allottees should not have been kept on the suspended animation on the spacious and broad plea that the Appellant could add additional construction.

CHARGING STEEPLY BUT SIMILAR OBLIGATIONS OF BUILDER MISSING

  •  The argument that DLF had given substantial discount of 20% is also without any substance for the simple reason that ultimately the allottee had to pay extra only on account of the increase in the super area, which was the result of the addition of the floors.
  • On the whole, it was only DLF who was going to be benefited and not the allottee, who had to cough out substantial amount in order to continue with the residential scheme. One cannot forget that even after giving the discount, the Appellant would be in a position to charge extra amounts.
  • The Court said that:

We have therefore, no hesitation in accepting the argument that the hefty increase in the super area amounted to an abuse of dominance                       

 ARBITRARY PUNITIVE IMPOSITION

  • DLF not only attempted to charge but also handed out a threat for the allottee to quit the scheme. It was argued that if there was a substantial increase in super area of about 5%, the consent of the allottee would be sought and if allottee objected and did not agree to take the increase super area, then the allottee would be given refund of the entire amount paid by him together with interest of 9% and the agreement would stand cancelled.

 FINALLY,

The Court said that

In our opinion such unauthorized construction after the advent of section 4 on the legal anvil also amount to the abuse of dominance by the Appellant, as what was being offered by DLF to the allottees was a piece of illegal land unauthorized construction, which amounts to imposing unfair conditions against the wishes of the consumer (buyers/ allottees in this case). We cannot imagine as to what would have happened had the approvals not come in the year 2009 by which time, the 29 floors of Belaire residential housing scheme was already over. Unfortunately, this aspect was not taken into consideration by the CCI, which it was bound to consider.

For all these reasons, we are of the firm opinion that the Appellant had abused its dominant position and committed breach of section 4(2)(a)(i) and section 4(2)(a)(ii) of the Act. We accordingly confirm the findings of CCI.

An abuse of dominance whether it is on one count or on many remains an abuse and therefore it must be dealt with iron hands.

Issues on how to do business in this scenario?

Reflecting on cases of dominance and its possible abuse raises several issues that need consideration –

  • Besides, Market share, When is it that a company is considered dominant – what all is factored in to conclude that it is able to act entirely independently of its competitors? Is size the determinative factor for ensuring abuse?
  • Concerns that emerge from actions where firms often eliminate competitors, control the market – when do pricing strategies signify anti-competitiveness?.
  • Does mere dominance preclude a firm from offering discounts that benefit consumers?
  • Pricing discrimination per se is not anti-competitive?


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