Explained: Why developers and housing societies impose excessive transfer charges

Sellers have reported that transfer charges have been hefty, ranging from 2-4 percent of the transaction value

If someone owns a real estate asset, he or she should be able to sell it to a buyer of their choice, at an agreed price. Right? Not always, if an ever-increasing number of complaints are to be believed, especially in Mumbai.

According to a number of sellers in the secondary market, developers are imposing what are called ‘transfer charges’ - often written into the primary sale agreement - if the existing homebuyer wants to sell the property to buyers in the open market.

The charge is also imposed by managing committees of housing societies, and a non-payment often holds up no-objection certificates in case of sales, sellers in Mumbai have alleged.

For housing societies in Mumbai, transfer charges are capped by the Maharashtra Department of Cooperation at Rs 25,000 for any transaction, referred to as a transfer ‘premium’. However, some home sellers have reported to being forced to pay over and above the cap as a ‘donation’ to the society's corpus. Home sellers said that without the additional donation, no-objection certificates required for the sale to be completed have often been delayed.

According to sector observers, the Rs 25,000 fee acts as a contribution to the society's corpus for maintenance and other related expenses.

"Under the Maharashtra Co-operative Societies Act, 1960 and the rules/by-laws framed under it, a transfer premium is basically a one-time fee that a housing society charges when a member transfers (sells or gifts) their flat to someone else. Model by-laws issued under the Act, allow charging of this premium when there is a transfer of shares or interest in the property. It is intended as a contribution to the society’s common funds to cover administrative costs, documentation, updating records, and future repairs or improvements to the building," said Ashish Goel, Director, Mumbai Housing Federation.

Some observers of the Mumbai real estate market said that besides smaller and local developers, a number of large and listed developers too continue to impose transfer charges in Mumbai and its suburbs, as well as in the peripheral Mumbai metropolitan region. This is generally done through tripartite agreements, where developers effectively get a veto on secondary sale, even if the deed has been completed, often years ago.

According to people familiar with the Mumbai real estate market, some developers have become known for transfer charges, imposing as much as Rs 3-4 lakh per transaction. This includes one listed developer which has residential and commercial projects in areas such as Bandra Kurla Complex, Andheri, south Mumbai and the peripheries of the Mumbai metropolitan region.

A secondary market seller told Moneycontrol that he paid up transfer charges despite a significant hit in the realisation from the sale to avoid a legal confrontation with the developer that could run for years.

While developers are not allowed to impose such charges once a project receives its Occupation Certificate and once the housing society has been formed, investors and sellers said such charges are common, especially prior to the formation of the society. These clauses in the primary sale agreement often impose rights-of-first-refusal, as well as transfer charges ranging from 2-4 percent of the total transaction value, or on a per square foot basis.

The only legal basis for the imposition of transfer charges by the developer exists if a sale is not registered, and the primary buyer wants to cash out on the investment prior to the registration, according to a lawyer who deals with real estate matters.

Seconday sellers and buyers - who often share the burden of high transfer charges - have often gone to consumer courts or to state/union territory-level Real Estate Regulatory Authority if charges are deemed to be excessive or outside the purview of the primary or secondary sale agreement.

No specific clause in the Real Estate Regulatory Act deals with transfer charges or the quantum allowed to be charged by the developer, although, according to the Transfer of Property Act, the developer has no rights to the secondary sale of the property once the primary sale is registered and the consideration is paid in full, according to legal experts.

According to real estate developers, some of the charges help protect the per unit price of the project, in order to discourage sale before the building is completed, or when significant capital and price appreciation is realised on the part of the developer.

“In certain circumstances, developers are granted the right of first refusal, allowing them to purchase secondary sale apartments at market price, a practice we implement for our projects. Typically, developers enter into tripartite agreements involving themselves, the seller, and the prospective buyer. Furthermore, it is common for developers to impose restrictions on sales that occur below a specified threshold, particularly when the occupation certificate is still pending... This approach is adopted to maintain the price integrity of the project, as transactions conducted below the established threshold may adversely impact the project’s viability and market appeal," said Chintan Vasani, partner at Wisebiz Developers, a Mumbai-based real estate firm.

However, these charges also serve another purpose - to maintain the ‘character’ of a project. According to one developer who spoke on the condition of anonymity, the charge - as well as agreements such as right-of-first-refusal, or the developer or society having a say in the ultimate secondary buyer - is intended to keep a project's prospective residents from ‘within particular communities’, in regard to community, caste, or religion.

Industry observers have noted that such fees are holding back real estate’s potential as an avenue for investment, even after the growth of in the sector after the pandemic. One property consultant said that despite returns that are better than equity or debt in many cases, investors avoid the real estate sector for investments due to such ‘hidden’ liabilities.