Mortgage Disputes and Flat Purchaser Rights: Supreme Court’s Verdict in Madhav Prasad Aggarwal v. Axis Bank

The Supreme Court of India recently delivered a landmark judgment in Madhav Prasad Aggarwal & Anr. v. Axis Bank Ltd. & Anr., addressing the contentious issue of mortgage disputes and the rights of flat purchasers when developers default on loans. This case revolves around the legal complexities faced by home buyers who had paid substantial amounts to a builder, only to later discover that the property had been mortgaged to a bank without their knowledge.

Background of the Case

The appellants, Madhav Prasad Aggarwal and others, had booked flats in a residential project named ‘Orbit Heaven’ developed by Orbit Corporation Ltd. in Nepean Sea Road, Mumbai. The buyers had paid several crores of rupees towards the purchase of these flats, believing that their rights were secure. However, they later discovered that the developer had mortgaged the property to Axis Bank Ltd. in 2013, securing a loan of ₹150 crores. The mortgage was not disclosed to the buyers at the time of their transactions.

The buyers only became aware of the mortgage when Axis Bank issued a public notice in September 2016, asserting its rights over the property due to the builder’s loan default. In response, the homebuyers filed suits seeking specific performance of their agreements and an injunction to prevent the bank from enforcing its mortgage.

Key Issues Before the Supreme Court

• Whether the bank’s mortgage had priority over the rights of homebuyers who had paid in advance for their flats.
• Whether the suit by the homebuyers was barred by Section 34 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
• Whether the failure of the builder to register sale agreements affected the legal standing of the buyers.
• Whether the bank was obligated to verify pre-existing claims before granting the loan.

Arguments by the Petitioners (Flat Buyers)

The flat buyers argued:

• They had paid substantial amounts towards the purchase of their flats and had valid agreements with the builder.
• The bank’s mortgage was created in bad faith, as it was executed without disclosing the rights of the flat buyers.
• The Maharashtra Ownership Flats Act (MOFA), 1963, gave them statutory protection, ensuring that the builder could not unilaterally mortgage the property after accepting substantial payments.
• Their suits were maintainable and were not barred under the SARFAESI Act, as they were asserting independent rights.

Arguments by the Respondents (Axis Bank)

Axis Bank contended:

• The mortgage was created in 2013, before the buyers had registered their agreements, and thus took precedence.
• The bank had a valid security interest in the property and was entitled to enforce its rights under the SARFAESI Act.
• The buyers were investors who had taken commercial risks, rather than genuine home buyers entitled to protection under MOFA.
• The SARFAESI Act barred civil courts from entertaining the buyers’ suits, as only the Debt Recovery Tribunal (DRT) had jurisdiction.

Supreme Court’s Judgment

The Supreme Court ruled in favor of the flat buyers, holding that:

On the Rights of Home Buyers

“Home buyers who have made substantial payments have an equitable interest in the property, even if formal sale agreements were not registered.”

On the Bank’s Mortgage

“A bank granting a loan must conduct due diligence and ascertain pre-existing rights in a mortgaged property. If a bank fails to verify this, its mortgage rights may be subordinate to those of the buyers.”

On the Applicability of the SARFAESI Act

“The SARFAESI Act does not bar suits filed by home buyers seeking to enforce independent rights under MOFA. The buyers are not ‘borrowers’ under the Act and thus cannot be forced to approach the DRT.”

On Relief Granted

• The bank’s mortgage was declared subordinate to the rights of home buyers.
• The home buyers were granted legal protection and could proceed with claims against the builder.
• Axis Bank was directed to verify pre-existing property interests before enforcing mortgage rights.

Key Takeaways

• Home Buyers’ Rights Strengthened: This ruling provides a major boost to flat buyers who face similar issues due to fraudulent builder practices.
• Banks Must Conduct Due Diligence: Lenders cannot claim priority over homebuyers without verifying property claims.
• MOFA Provides Strong Buyer Protections: The Maharashtra Ownership Flats Act safeguards buyers, even in cases of unregistered agreements.
• SARFAESI Act is Not Absolute: Home buyers can assert their rights in civil courts, independent of DRT proceedings.

Conclusion

The Supreme Court’s decision in this case is a significant victory for home buyers facing legal disputes over fraudulent mortgages. It reinforces the principle that home buyers cannot be unfairly displaced by banks enforcing security interests without due diligence. The ruling sets a precedent for similar disputes, ensuring greater accountability in real estate and banking transactions.

Petitioner Name: Madhav Prasad Aggarwal & Anr..
Respondent Name: Axis Bank Ltd. & Anr..
Judgment By: Justice A. M. Khanwilkar, Justice Ajay Rastogi.
Place Of Incident: Mumbai, Maharashtra.
Judgment Date: 01-07-2019.

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