Court says outstanding home loan dues alone do not constitute a criminal offence; banks must exercise caution before initiating criminal proceedings against borrowers.
By The Realty Times | Real Estate News Services
BENGALURU : The
Karnataka High Court has quashed criminal proceedings initiated by the State
Bank of India (SBI) against a Mumbai-based homebuyer who stopped paying his
home loan instalments after discovering that the builder had sold his allotted
apartment to another buyer without his consent.
In a significant ruling for homebuyers facing disputes
with developers, Justice Suraj Govindaraj observed that a financial
institution, particularly a public sector bank, must exercise due care before
invoking criminal law against a customer. The court held that an outstanding
loan or the failure of a property transaction cannot, by itself, be treated as
a criminal offence.
This judgment, delivered highlights the distinction
between a borrower's financial liability and criminal culpability, particularly
when the underlying property transaction has failed because of the developer's
actions.
₹39.92 lakh home loan for a Bengaluru
apartment
The case concerns Pritesh Bari, a resident of Sion
East, Mumbai, who obtained a home loan of ₹39.92 lakh from SBI during the
financial year 2019–20 to purchase apartment B-306 in the Grandeur Park project
in Bengaluru, Karnataka.
As part of the transaction, Bari entered into a
tripartite agreement with the bank and the developer on February 8, 2020. Such
agreements establish the respective obligations of the homebuyer, lender and
builder in a property purchase financed through a housing loan.
Although Bari lived in Mumbai and could not regularly
visit the project site, he continued paying his equated monthly instalments
(EMIs) while awaiting completion of the transaction.
However, the situation changed when he discovered that
the builder had sold the same apartment to a third party on March 27, 2023,
without obtaining the consent of either Bari or SBI. Bari had not received a
registered sale deed or legal title to the apartment.
Why did the homebuyer stop paying EMIs?
After discovering that the apartment he had booked had
been sold to another buyer, Bari stopped making further loan repayments.
The outstanding loan amount, however, remained unpaid.
SBI subsequently initiated criminal proceedings against Bari and the
developers, alleging that the bank had suffered financial losses.
The bank claimed that Bari had obtained the loan after
assuring it that a registered sale deed would be executed in his favour. When
the loan remained unpaid despite reminders, SBI alleged that he had committed
offences including cheating, criminal breach of trust and misappropriation of
funds.
An FIR was registered against Bari in September 2024
at Shankarapura Police Station in Bengaluru, following proceedings arising from
a private complaint filed on behalf of the bank.
Bari challenged the criminal proceedings before the
Karnataka High Court, arguing that he was himself a victim of the developer's
conduct and should not be criminally prosecuted for a transaction in which he
had neither received the property nor participated in its subsequent sale.
What did the tripartite agreement say?
A key element in the High Court's decision was the
agreement signed by the homebuyer, bank and developer.
According to the court record, the agreement contained
provisions addressing situations in which the project was not completed or the
booking was cancelled. It also placed obligations on the builder to repay
amounts received from the borrower to the bank in specified circumstances.
The agreement prohibited the transfer of the apartment
to another buyer without the bank's prior written consent.
The court noted that the developer had sold the
apartment to a third party without completing the original transaction or
executing a sale deed in Bari's favour.
The contractual provisions were therefore important in
determining whether the allegations against the homebuyer disclosed the
elements of a criminal offence.
High Court criticises SBI's approach
The High Court found that the allegations and material
before it did not establish the necessary criminal elements against Bari.
The court noted that he had taken the loan to purchase
an apartment, had not obtained legal title to the property and had not
participated in the subsequent sale to the third party. There was also no
material indicating that he had acted in collusion with the developers or
gained any benefit from the resale.
The court expressed concern that the bank had
initiated criminal proceedings against its customer despite the circumstances
surrounding the failed property transaction and the obligations contained in
the tripartite agreement.
It observed that a public sector financial institution
is expected to exercise caution before setting the criminal justice system in
motion against a borrower.
The court consequently quashed the criminal
proceedings and the FIR insofar as they concerned Bari. It did not determine
the criminal liability of the developers in these proceedings.
Important lessons for homebuyers
The case offers several practical lessons for people
purchasing apartments through bank financing.
- Read
the tripartite agreement carefully: Understand the responsibilities of the
buyer, bank and developer if construction is delayed, a booking is
cancelled or the project fails.
- Maintain
payment records: Keep receipts for EMIs, booking advances, instalments and
all other payments made to the builder.
- Document
communications: Preserve emails, letters and notices exchanged with the
developer and lender, especially when a dispute arises.
- Act
promptly when a builder defaults: Notify the bank in writing, seek legal
advice and explore appropriate remedies rather than allowing the dispute
to remain unresolved.
- Verify
property documentation: Check the project's approvals, the status of the
apartment, the agreement for sale and the relevant registration documents
before committing to a purchase.
These precautions can help buyers establish their
position if a developer fails to fulfil contractual obligations.
A significant ruling for property buyers
The Karnataka High Court's decision provides important
relief to a homebuyer who found himself without the apartment he had financed
while also facing criminal proceedings over the unpaid loan.
By quashing the case against Bari, the court
reinforced the principle that a failed property transaction and outstanding
financial dues do not automatically make a borrower a criminal offender.
The ruling also underscores the need for banks to
examine the facts of a dispute carefully before initiating criminal action
against customers, particularly when the developer's conduct and the terms of
the tripartite agreement are central to the matter.
For India's real estate sector, the judgment serves as
a reminder that protecting homebuyers requires not only effective regulation of
developers but also careful consideration of the contractual relationships
between buyers, banks and builders.
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