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VALUATION OF RIGHTS IN COMMON AREAS, TERRACES & PARKING SPACES

Jigesh J. MehtaSurat (Gujarat)

B.E.(Civil), M.S. (USA), LL.B.M.Val (ISTAR, V.V.nagar)

(F – 18099)

1. INTRODUCTION

Immovable properties bear the characteristics of heterogeneity from various angles - such as location and amenities, title and tenure, applicability of Development Control Regulations (DCR) and many other legislations, rules and regulations. This makes valuation of immovable properties an interestingprofession. Practically, a valuer who ignores these facts takes it very lightly, as a simple multiplication of area and unit rate and continues his practice without any hurdle or resistance over a long period. However, with the fast developing economy, increasing number of financial frauds and NPA cases, the profession of valuation is gaining more importance and at the same time, more and more liabilities are being casted over the valuers. Civil, criminal and disciplinary actions against the valuers are rising in our country. Reaching the value opinion and its reporting demands great care and caution by a valuer to safeguard the interests of financial institutions as well as his own personal and professional reputation.Personal inspection of site, verification ofrelevant documents and other good practices are accepted as standard procedure in each and every case of valuation.

One of the most important concept that valuers need to understand is that ‘What is being valued is the rights and interests of the titleholder in the tangible asset’ and not the physical

asset itself. ‘Interest’ is defined as the ‘Right to derive benefits by use of a property’. Thus, real estate or plant & machineries are physical concepts while Real Property is a legal concept. This issue is dealt in detail under IVS 230 (Real Property Interests) and IV 310 (Valuations of Property Interests for Secured Lending). IVS thus defines Real Propertyas all rights, interests and benefits related to the ownership of real estate. It is,

therefore, essential for valuers to primarily identify the type of real property interest (superior, subordinate or right to use land or buildings but without a right of exclusive possession and control) of the title-holder for the subject asset under valuation.

Absolute ownership is not practical because the rights of titleholder are restricted by the laws of the land. It is the valuer’s task to find out the limitations imposed by the law on the right-to-use,how much right is reduced and the maximum economic benefit that can be derived after considering the effect of legal factors.

In this situation now, ignorance cannot be bliss in our profession but it is rather imperative for valuers to stay abreast with the principles that evolve from judicial pronouncements in addition to the three established (market, income, cost) approaches to valuation and closely follow the changing rules and regulations.Thorough understanding of some of the court judgments clears many a doubts of a professional valuer.

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Even the IBA Handbook on Real Estate Valuation under pt. 2.4 (Standard 3 -Valuation Reporting) has acknowledged the relevance of judicial pronouncements in arriving at proper valuation.

2. COMMON AREAS IN DEVELOPMENT SCHEMES

‘Market is supreme’…….but valuers ought to know whether the titleholder has a legal right to hold the asset or a part thereof under possession which is the subject matter of valuation. For example, though it may be a market norm to transfer the area of roof-top terrace in a multistoried building at 1/3rd the composite rate of the flat below, it is the duty of the valuer to ascertain whether it is legally valid to transfer common areas such as terraces and parking spaces. If the transfer of such a common area is rendered void-ab-initio by any court verdict, the valuer should not assign a value to exclusive right to use though it is passed on to a flatholder through conveyance deed.

3. COURT JUDGEMENTS

There are several case laws on the topic of stilt parking and common areas of society, many of which are decided by the Consumer Disputes Redressal Commissions. Some of the more publicized court rulings on the topic of common areas include :

Nahalchand Laloochand Vs. Panchali Co-operative Housing Society Ltd. [(2010) 9 SCC 536, (judgement delivered by Hon’ble Supreme Court on 31-08-2010].

DLF Ltd. Vs. Manmohan Lowe and others [Supreme Court, 10-12-2013].

Belaire Owners' Association Vs. DLF Ltd., HUDA & other [Competition Commission of India, 3-01-2013].

The Tamil Nadu Housing Board Vs. Mrs. Mary Rani Immanual [Madras High Court, 26-04-2013].

Laxmi Narayana Villa Residents Welfare Association Vs. M/s. P. Suryaprakash & Co. [A.P. Consumer Disputes Redressal Commission, 24 April, 2014].

Of these, the case of Nahalchand Laloochand Vs. Panchali Co-operative Housing Society Ltd. constitutes a landmark ruling that developers/promoterscannot sell parking spaces as independent real-estate units as these are ‘common areas and facilities’. This implies that roof-top terraces, parking, passages and all other designated common spaces cannot be transferred as separate units. Since this judgement has direct effect on the approach to a valuation assignment, it is the focus of this article.

4. NAHALCHAND LALOOCHAND CASE

Out of seven appeals which arose from the judgement dated 25 April 2008 passed by Bombay High Court, five were at the instance of the original plaintiff and the other two are by parties, who were not parties to the proceedings before the High Court or the trial Court but they are aggrieved by the findings recorded by the High Court as they claim that these findings are affecting their rights.

As a promoter, Nahalchand Laloochand Pvt Ltd. developed few properties in Anand Nagar, Dahisar (East), Mumbai and entered into agreements for sale of flats with purchasers. The flat purchasers are members of Panchali Co-operative Housing Society Ltd. In 2004, the promoter (appellant) filed a suit before the Bombay City Civil Court for permanent injunction restraining the society

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(defendant) from encroaching upon, tresspassing and/or in any manner disturbing, obstructing, interfering with its possession in respect of 25 parking spaces in the stilt portion of the building. The promoter set up the case in the plaint that under the agreements for sale it had sold flats in its building and each flat purchaser has right in respect of the flat sold to him and to no other portion. It was averred in the plaint that each flat purchaser has executed a declaration / undertaking in its favour to the effect that stilt parking spaces / open parking spaces shown in the plan exclusively belong to the promoter and that the declarant has no objection to the sale of spaces by it. The defendant (Society) traversed the claim and set up the plea that the promoter has no right to sell or dispose of spaces in the stilt portion and that the undertakings given by the flat purchasers are not binding being contrary to law and based on such undertakings, the promoter has not acquired any right to sell stilt parking spaces.

On 4-April 2007, the presiding Judge of City Civil Court, Greater Bombay dismissed the suit with costs. The promoter preferred first appeal before the High Court which was dismissed on April 25, 2008.

The following Acts/regulations were referred by the High Court while giving this order:

Maharashtra Ownership Flats (Regulation of the promotion of construction, sale Management and Transfer) Act-1963 or‘MOFA’, Maharashtra Ownership Flats (Regulation of the promotion of construction, etc) Rules-1964 or ‘1964 Rules’, Development Control Regulations for Greater Bombay-1991 or ‘DCR’, Maharashtra Apartment Ownership Act-

1970 or ‘MAOA’, The Maharashtra Regional and Town Planning Act-1966 or‘MRTP Act’ and Transfer of Property Act or ‘T.P. Act.’

While dismissing the appeal, the High Court recorded the following findings.

1. The parking space either enclosed or unenclosed, covered or open cannot be a building.

2. It is compulsory requirement to provide parking spaces under DCR.

3. It is obligatory on the part of the promoter to follow DCR. The agreement signed under MOFA between the developer and the flat purchaser must be in conformity with the model form of agreement prescribed by State Government.

4. The model agreement does not contemplate the flat purchasers to separately purchase the stilt parking spaces.

5. The rights arising from the agreement signed under the MOFA between the promoter and the flat purchasers cannot be diluted by any contract or an undertaking to the contrary.

6. As soon as the corporation issues the occupation certificate and the society is registered, the building as well as the stilt parking space, open spaces and all common amenities become the property of the society. The stilt parking spaces cannot be treated as ‘open / covered garages’. It is immaterial if the purchase agreement does not include stilt parking spaces in the common area of amenities. The stilt parking space is part of common amenities and it cannot be treated to be a separate premise / garage which could be sold by the developer to any of the members of

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the society or an outsider. Under MOFA, the developer’s right is restricted to the extent of disposal of flats, shops and garages, which means that any premises which is in included in the Floor Space Index (FSI) can be sold by the developer / promoter. The stilt parking space is not included in FSI nor it is assessable for the corporation taxes.

7. Mr. Tanmay Mehta appearing for the promoter favoured the concept that promoter has right to sell stilt parking space to outsiders. The stilt/covered/ open parking spaces do not figure as part of common areas and facilities in any project and remain within the contractual, legal and fundamental rights of the promoter to dispose of the same in the manner in which he proposes and his customers accept. If stilt parking spaces are treated as ‘common areas’, then the proportionate price for the same would have to be paid by each flat purchaser, irrespective of whether he requires the parking space or not and there may be situations where the number of parking spaces will not be equal to the number of flats and thus, a person who has paid proportionate price for the common parking space may find himself without parking space, even though he has paid for the same. In any event, the promoter undertakes that the parking spaces shall be sold only to persons purchasing the flats in the same housing project.

8. Mr. Pravin K. Samdani, learned senior counsel for one of the appellants, viz. Maharashtra Chamber of Housing Industry adopted a different line of argument. He submitted that it is wholly

irrelevant whether stilt/podium/ basement/covered car park attracts FSI or not, but the only relevant criteria is whether the promoter has listed it as a part of common area or not and if he has not done so then it is sellable. If he has listed it, then every flat purchaser is proportionately required to contribute for the same.

9. On the other land, learned senior counsels for the society strongly supported the view of the High Court.

Relevant Provisions of MOFA:

“S.3 (2)(m) - A promoter shall, when the flats are advertised for sale, disclose inter alia in the advertisement the following particulars, namely :-

(i) the extent of carpet area of the flat including the area of the balconies which should be shown separately;

(ii) the price of the flat including the proportionate price of the common areas and facilities which should be shown separately, to be paid by the purchaser of flat; and the intervals at which the installments thereof may be paid;

(iii) the nature, extent and description of the common areas and facilities;

(iv) the nature, extent and description of limited common areas and facilities, if any.

(n) sell flat on the basis of the carpet area only:Provided that, the promoter may separately charge for the common areas and facilities in proportion ‘to the carpet area of the flat’.

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Sec.3 (1) of MAOA defines common areas and facilities as follows:-

“3 (f) Common areas and facilities” unless otherwise provided in the Declaration of lawful amendments, there to means –

(1) The land on which the building is located;

(2) The foundations, columns, girders, beams, supports, main walls, roofs, halls, corridors, lobbies, stairs, stairways, fire escapes and entrances and exits of the building.

(3) The basement, cellars, yards, gardens, parking areas and storage spaces, elevators, tanks, pumps, motors, fans, compressors, ducts and in general all apparatus and installations existing for common use.

The promoter has no right to sell any portion of such building which is not flat within the meaning of section 2 (a-1) and the entire land and building has to be conveyed to the organization; the only right remains with the promoter is to sell unsold flats. It is, thus, clear that the promoter has no right to sell ‘stilt parking spaces’ as these are neither flat nor apartment or attachment to a flat.

5. INFERENCE

As per section 10 of The Indian Contract Act-1872, all agreements are contracts if they are made by free consent of parties competent to contract, for a lawful consideration and with lawful object, and are not expressly declared to be void under the Act.

Thus, the essential elements of a valid contract enforceable by law, include:

1) Offer and Acceptance of atleast two parties;

2) Intention to create legal relationship;3) Free consent;4) Lawful consideration;5) Capacity or legal competency of

parties to contract;6) Legality of object, i.e. object of

agreement should not be unlawful;7) Certainty of meaning – the terms of

agreement must not be vague, ambiguous or uncertain;

8) Possibility of performance – terms of contract must be capable of being performed and not impossible;

9) Legal formalities - The agreement must comply with the necessary formalities as to writing, registration, stamping etc. if any required in order to make it enforceable by law.

The application of these tests to a conveyance deed will lead the valuer to check the legality of transfer of common areas as mentioned in the documents.

6. CONCLUSION

As Paul Barter analyses in his post on www.reinventingparking.org dated 2nd

September 2010, this ruling should not be misunderstood that unbundling of parking has been forbidden completely or charging for parking has been outlawed. The cost of parking for residential and commercial units is often passed on to the occupants indirectly through the rent or purchase price ("bundled") rather than directly through a separate charge. For example, a three bedroom unit might come with two parking spaces included in the purchase price or rent. This means that tenants or owners are not able to purchase only as much parking as they need, and are not given the opportunity to

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save money by using fewer parking spaces. The alternative is to unbundle parking - rent or sell parking spaces separately, rather than automatically including them with building space. This is not only more equitable, but can also reduce the total amount of parking required for the building.

The instant ruling of Supreme Court just outlaws one specific kind of unbundling, viz. only the option of buying and selling parking separately as real-estate. But other options are still open, e.g. managing parking as 'common areas' is compatible with having a system of parking permits for occupiers at a charge. The bottom line is that the developers of residential apartments or commercial buildings must hand the parking areas over to the management organization (such as the 'housing society'). Building management committees (but NOT the developers) can still unbundle parking and charge for it if they choose to. Such committees will find that charging/unbundling is a useful way to manage conflict over their on-site parking.

Summarily, the Apex Court rules that the promoter has no right to sell any portion of the building which is not a ‘flat’, and the entire land and building has to be conveyed to the association/society. But as columnist Divya Malcolm explains in her article of 9-12-2013 in ‘MoneyLife’, this does not mean that everything else, other than a flat, is a freebie. The correct interpretation being that builders cannot independently sell to outsiders common areas and facilities nor can they extract additional sums from the purchasers for purported sale of such common areas and facilities; the price stated in the Agreement to Sell as per the provisions of ‘Ownership of Flats Act’

being inclusive of the proportionate price of the common areas and facilities.

One should remember that no agreement or declaration executed can override the law of the land. According to Section 23 of the Indian Contract Act, “the objectis considered lawful unless it is forbidden by law or is fraudulent or involves or implies injury to the person or property of another or is immoral or is opposed to public policy.”

‘Legality of Object’ is a significant element of a valid contract that has to be minutely considered vis-à-vis court judgements that are referred in valuation exercise.

Many a times developers/promoters get transfer deeds for built units inked by purchasers including conveyance of open roof-top terrace above top floor flat / parking spaces or other common areas, or do not convey undivided share (UDS) in land either partly or fully with the malafide intention to transfer it after future development (authorized or unauthorized) or due to legal constraint. A valuer should not simply estimate value for the extent/area mentioned in the sale deed, but rather first determine whether the area transferred is ‘lawful’ because only then will that transfer be a valid contract in the eyes of law. If common areas which are meant for the joint use of all occupants of the project is transferred to an individual buyer, it amounts to an unlawful act and when challenged in court of law, the possession of such common area would have to be delivered to the society. It is generally an accepted fact that ‘market is supreme’ and therefore value has to be determined considering market norms; however, the valuer has to first test the validity of contract/sale agreement. For example, developer may be selling open terrace at one-third the rate of the builtup

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area of flat and that may be the market trend/behavior, but since terrace is a common area in technical parlance, a valuer should not consider it in valuation. Similarly, basements approved as household storage (exempt from FSI as can be deciphered from approved plan) are also meant for the common use of the residents of the building and cannot be transferred to an outsider. The understanding of landmark judicial decisions gives the valuer an insight to analyse the validity of conveyance deeds so as to arrive at the correct estimate of market value.

Every challenging situation can usually be addressed primarily by the application of Ten Commandments of valuation. viz.

4 factors – legal, economic, social, physical/technical;

4 ingredients – utility, scarcity, transferability, demand/supply;

Value means ‘Present Worth of Future Benefits’, and

In any valuation exercise of tangible assets, what is valued is not the tangible thing but the rights and interests arising out of ownership and/or use of tangibleassets.

7. ILLUSTRATIONS

The application of the principles that evolve from the above discussed Supreme Court judgement can be lucidly understood by considering three typical examples of valuation for immovable properties.

The author can be contacted on

jigeshj@yahoo.com

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Example 1 : Valuation of only self-occupied Ground floor in lowrise commercial building (on 475.36 sq. m. freehold land) approved as parking in basement + ground floor and offices on upper five floors.

Front View of building Ground floor

1. Floorwise Area of construction. Basement (10’3” ht.) = 219.375 sq. m.Ground floor (10’ ht.) = 158.32 sq. m.First floor (10’ ht.) = 158.32 sq. m.Second floor (10’ ht.) = 158.32 sq. m.Third floor (10’ ht.) = 158.32 sq. m.Fourth floor (10’ ht.) = 158.32 sq. m.Fifth floor (10’ ht.) = 158.32 sq. m

2. Adherence to Sanctioned Plan. Whether building-use certificate obtained?

Construction at site is according to sanctioned plan and Building-use Certificate is issued by Surat Municipal Corporation vide TDO no.40 dtd.28-06-2010.

3. Deviation from sanction plan/building byelaws and legal issues.

Ground floor is approved as parking space (similar to basement) meant for the common use of the occupants of the upper five floors of the building. It cannot therefore be conveyed separately.

4. Approach to valuation. As pronounced by the Hon’ble Supreme Court in the case of Nahalchand Laloochand Vs. Panchali Co-op. Housing Society Ltd., parking space falls in the ambit of common area which the developer is obliged to provide to all the occupants of the building in proportion to the area of individual units. It is not an additional area that the developer is authorized to sell it to a member/purchaser or to an outsider.Ground floor (approved as parking space) is part and parcel of the building and it cannot be a separatepremises available for sale/transfer. Therefore, valuation report for ground floor approved as parking cannot be issued for secured lending purpose due to restrictions imposed by Supreme Court on its transfer as a separate unit.

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Example 2 : Valuation of self-occupied topfloor flat with exclusive roof-top terrace in posh highrise residential campus of 23 apartments with superior amenities.

View of campus View of roof-top terrace

1. Project details with amenities and special features.

23 highrise apartment buildings with parking in basement, foyer and parking space on ground floor and flats on 11 upper floors.

Basement of all the buildings along the periphery of this complex are interconnected. A huge open space in central portion of the complex has a garden with gentle slope on the roof slab of the common utility structure (centrally air-conditioned) having a banquet hall, a children’s playspace (hall), gents’ gymnasium, ladieshealth club, senior citizens’ recreation hall. A swimming pool is provided in central part of the utility area. A Jain temple is also constructed in the campus.

2. Flat under consideration 1950 sq. ft. (Carpet Area of 11th floor)+ 320 sq. ft. room and 1575 sq. ft. open area @ terrace

Internal layout of the flat consists of living room, diningwith pooja space-storeroom and internal steps to terrace, guest room, kitchen with attached washplace, southeast bedroom with attached toilet & corner balcony, southwest bedroom with attached toilet & corner balcony, parents’ (west) bedroom with attached toilet. Terrace floor has one room with attached toilet besides the staircabin and a separate toilet.

Specifications of finishes are of superior quality. This campus has, by far, one of the best amenities in town.

3. Adherence to Sanctioned Plan/building byelaws. Whether building-use certificate (BUC) obtained?

B.U.C. is obtained for construction upto 11th floor. Terrace floor room is not approved and hence excluded from this valuation.

4. Deviation from sanction plan/building byelaws and legal issues.

Terraces over the roof of the apartment (excluding terrace attached at flat level) are meant for the common use of residents of the whole building and cannot be transferred to any flatholder(s) for their exclusive use.

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5. Approach to valuation. The decision of The Hon’ble Supreme Court (in the case of Nahalchand Laloochand Pvt. Ltd. vs. Panchali Co-op. Housing Society Ltd. pronounced on 31-08-2010) indicates that the sale of common spaces in apartment buildings is prohibited. The Apex Court has clarified that basement/cellars/terraces in apartments are also included in the definition of the term ‘common areas of building’ and developers cannot sell such common areas. The right to exclusive use of terrace above 11th floor flat is therefore not considered in valuation.

Example 3 : Valuation of self-occupied basement in lowrise apartment in walled city area.

View of building Basement under consideration

1. Neighbourhood details. Densely populated residential with wall-to-wall construction. One of the noteworthy aspects is the presence of numerous wholesale traders in medical/pharmaceutical/surgical items in this area occupying ground floor as well as basement premises along major streets.

2. Basement under consideration. 400 sq. ft. (Carpet Area)

3. Adherence to Sanctioned Plan/building byelaws. Whether building-use certificate (BUC) obtained?

Built-up area of construction (more than 25 years old) is according to sanctioned plan. Basement is approved as household storage.

4. Deviation from sanction plan/building byelaws and legal issues.

Basements in residential apartments of walled city are approved as household storage but used commercially.

5. Approach to valuation. The Apex Court (in the case of Nahalchand Laloochand Pvt. Ltd. vs. Panchali Co-op. Housing Society Ltd.) has clarified that basement/cellars in apartments are also included in the definition of the term ‘common areas of building’ and developers/promoters have no right to sell such common areas.

The bank is advised not to consider this basement property as a security towards loan and rather obtain a legal opinion in view of this judicial decision.

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