Legal steps for recovering IFMS & Sinking Fund from a builder by AOA.

This article discusses the legal position specific to Uttar Pradesh. The article is also published as Legal Opinion: How to recover IFMS from builder? – NOFAA on website of NOFAA

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Introduction

It has become a very common problem that on the formation of the Apartment Owners Association, the builders in U.P. are not refunding the Interest-Free Maintenance Security (IFMS) to the said association.

To understand the recovery of IFMS, first of all, we need to understand what is IFMS.  IFMS is security money taken by builders at the time of handing over of the apartment.   This security money is utilized by the builder in case the apartment owner is unable to pay the monthly common area maintenance charges.  Under U.P. Apartment Act, common area maintenance charges are known as common expenses.  This IFMS money is to be kept with the builder till it maintains the concerned Group Housing complex i.e. up to occupancy of 60% of apartments in the concerned group housing.  As per law, IFMS money is to be handed over to the Association of Apartment Owners (AOA) because an AOA, as per the law of the land, is the authorized body to maintain common areas and facilities of a Group Housing as soon as there is the occupancy of more than 60% in concerned group housing.  As per Second Proviso to Sub-section (5) of Section 14 of the UP Apartment Act, the IFMS money is required to be transferred to an AOA by the promoter at the time of handing over of the common areas and facilities.

However, despite there being U.P. Apartment Act, neither formation of an Apartment Owners Association is easy nor taking handover of common areas facilities and IFMS is easy for innocent apartment owners.

This article would be helpful for these Apartment Owners Associations, which have taken the handover of the common areas and facilities, but still the promoter is not handing over the IFMS and sinking fund.

Certain Definitions

As per the definition of ‘Apartment Owner’ under sub-section (d) of Section 3 of U.P. Apartment Act, an apartment owner includes the lessee of the land on which the building containing such apartment has been constructed, where the lease of such land is for a period of 30 years or more.  Going by this definition, the promoters of Group Housings in cities like Noida, Greater Noida i.e. cities where land is given on lease to the promoters, are also apartment owners.

As per sub-section (j) of Section 3 of the U.P. Apartment Act, common expenses means, amongst others, expenses declared as common expenses by the provisions of the UP Apartment Act or by the Bye-Laws or agreed upon by the Association of Apartment Owners.   By utilizing the definition of ‘Common Expenses’ the AOA can call a General Body Meeting of the members and declare the IFMS pending with the builder as common expenses and declare it as arrears against the promoter.

As per law and the U.P. Apartment Act, the promoter is owner of unsold apartments and is liable to proportionately share the maintenance cost of common areas and facilities against such apartments.  From the conjoined reading of the definition of Apartment Owner, Common Expenses and liability of promoter to share the maintenance cost against the unsold flats, the Apartment Owners Association, in its General Body Meeting, has full rights to create charge against the unsold apartments of the promoter by declaring the IFMS as unpaid common expenses chargeable to the unsold apartments of the promoters.

Steps to Recovery

Once through a General Body Meeting IFMS and Sinking Fund is declared as common expenses chargeable to the unsold apartments of the promoter then the same, as per Section 20 of the U.P. Apartment Act, shall constitute a charge on such apartments prior to all other charges except government taxes and all the sums unpaid on the First Mortgage of the apartment. 

After creating charge as per Section 20(1) on unsold apartments of the promoter the AOA should approach the competent authority under Section 20(2) with a request for recovery of the IFMS (now charge) amount from the promoter.  Whenever an AOA is taking an action under 20(2) it also needs to mention the judgment of the Hon’ble High Court in the case of Shipra Shristi Apartments vs. State of U.P. with a request to take action against the promoter within three months.  The competent authority will issue a Recovery Certificate of the amount equivalent to the pending IFMS and Sinking Fund (now Charge) recoverable from the promoter.  The Recovery Certificate shall be executed by the District Magistrate / Collector of the concerned District where the properties & group housing of the promoter are located as per the provisions of U.P. Revenue Code, 2006.

In case recovery citation / certificate is not being honored by the District Magistrate / Collector then an association may approach the Hon’ble High Court praying for a writ of mandamus against the Collector to enforce the statury duty of the Collector to enforce the recovery citation.

The above process can be followed only after 12 months from the date of formation of the AOA and after the issuance of several demand notice for payment of the IFMS to the builder/Promoter.

The interest should also be demanded from the promoter from the date of the formation of the AOA.

DISCLAIMER: Above content is for informational purposes only and should in no way be considered legal advice by any party whatsoever. One should not rely on the above and must consult their legal advisors before taking any legal step.