The Competition Commission of India (CCI) passed a landmark order against DLF Ltd, and modified several clauses in residential property agreements. It has fined the company Rs. 630 Cr for violation of the Competition Act 2002. DLF filed a petition with COMPAT contesting the ruling.
The Competition Commission of India (CCI) passed a landmark order against DLF Ltd, and modified several clauses in residential property agreements. It has fined the company Rs 630 crore for violation of the Competition Act 2002. DLF filed a petition with COMPAT contesting the ruling.
Highlights of the ruling:
• The CCI has disallowed any additional construction beyond the approved building plan given to the buyers
• The builder will no longer have sole ownership of open spaces within the residential project area not sold. The CCI has instead suggested a joint ownership mechanism among the owners of the project
• The “time of essence clause”, which was typically in contracts to enable one party liable in the event that the other party defaults in their contractual obligation, will now be applicable to both builder and allottee. Till date the agreements are skewed in favour of the builder - with only the buyer being liable for any defaults
• The CCI has dropped the indemnification clause from the agreement. This clause was used to hedge owners from legal issues due to the builder’s contractual obligations
• The new agreement also stipulates that all payments made by the buyers must be based on construction milestones and not ‘on demand’ as is the current practice with most builders
• The CCI has also removed the clause stating that the builder will form the ‘owner’s association’ on the behalf of the owners
Traditionally, builders have prepared residential property agreements in their favour, and the buyer has borne most of the risk - be it costs overrun due to additional construction beyond what was disclosed, legal issues pertaining to building approvals, or payments being made without any milestone commitments. This ruling will lay the foundation for the buyers to assert their rights and will lead to demand for more transparency from builders.
Although DLF will dispute the order, and it is likely that the quantum of the fine will be finally be a much smaller figure, in our view this is a landmark ruling and will benefit property owners across the country. Most builders will be put on notice by this ruling, with increasing regulatory approvals required prior to launching a residential project.
The clause which is likely to cause most distress to the builders is regarding the ownership of open spaces, as this will result in a direct financial implication. This is an area of high profitability for the builder and we expect DLF / builders to strongly contest this clause.
We believe that with the legal precedent being set, the foundation is laid for property owners to get a better deal from builders in terms of transparency, fairness, and equal rights in the agreement. In the coming days, there are also likely to be a number of cases wherein existing property owners take their builders to court over one-sided agreements.
DLF stock price
On August 22, 2014, DLF closed at Rs 177.65, down Rs 5.4, or 2.95 percent. The 52-week high of the share was Rs 242.80 and the 52-week low was Rs 121.00.
The company's trailing 12-month (TTM) EPS was at Rs 2.52 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 70.5. The latest book value of the company is Rs 93.41 per share. At current value, the price-to-book value of the company is 1.90.
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