Developer Mortgaged the Project: Flat Buyer Rights

Almost every under-construction project in Mumbai is financed, and almost every construction loan is secured by a mortgage of the project land and the building rising on it. So when a flat purchaser learns that the developer mortgaged the project to a bank, the anxious question follows quickly: if the developer defaults and the bank enforces, what happens to my flat? Where a developer mortgaged the project, flat buyer rights depend on three things: whether the project is registered under the Real Estate (Regulation and Development) Act, 2016 (RERA), when the mortgage was created relative to your agreement, and whether your agreement is registered.

Why developers mortgage projects in the first place

A mortgage of the project is not, by itself, a warning sign, and RERA anticipates it. When a promoter applies to register a project, Section 4(2)(l)(B) requires a declaration, supported by an affidavit, that the land is free from all encumbrances or, as the case may be, giving details of the encumbrances on it. Those details are disclosed on the project’s registration page with the regulator, which in Maharashtra is MahaRERA.

The real questions are therefore narrower. Which units does the mortgage cover? Was it created before or after you signed your agreement? And what happens to the purchaser if the lender later enforces its security under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI)?

Section 11(4)(h): no mortgage of your flat after your agreement

The central protection is Section 11(4)(h) of RERA. It provides that the promoter shall, after he executes an agreement for sale for any apartment, plot or building, not mortgage or create a charge on such apartment, plot or building, and if any such mortgage or charge is made or created then notwithstanding anything contained in any other law for the time being in force, it shall not affect the right and interest of the allottee who has taken or agreed to take such apartment, plot or building.

Three features of this clause matter in practice:

• It is unit-specific and time-specific. The prohibition bites once the agreement for sale for that particular unit has been executed. A mortgage over unsold inventory is not touched by it.
• It operates despite any other law. The non-obstante words mean that a lender cannot rely on general mortgage law or on SARFAESI to defeat the allottee’s interest in a unit charged after the agreement.
• It protects the allottee’s right, not the developer. The developer remains in breach for creating the charge, and the lender takes its security subject to the allottee’s interest.

Two related duties reinforce this. Section 11(4)(g) requires the promoter to pay all outgoings collected from allottees, which expressly include mortgage loans and interest on mortgages related to the project, until physical possession is transferred; and where the promoter fails to pay them before transfer, the promoter continues to be liable even after transfer. Section 89 gives RERA overriding effect over anything inconsistent in any other law.

Union Bank of India v. Rajasthan RERA (2022): RERA and SARFAESI

The leading decision on the clash between homebuyers and secured lenders is Union Bank of India v. Rajasthan Real Estate Regulatory Authority, decided by the Supreme Court on 14 February 2022 (Justices M.R. Shah and B.V. Nagarathna; reported as 2022 LiveLaw (SC) 171). The Supreme Court agreed with the Rajasthan High Court on three points:

• The RERA authority has jurisdiction against banks. A RERA authority can entertain a complaint by an aggrieved person against a bank as a secured creditor where the bank takes recourse to Section 13(4) of SARFAESI, provided the proceedings before the authority are initiated by homebuyers to protect their rights.
• RERA prevails in a conflict. Where the provisions of RERA and SARFAESI conflict, RERA prevails.
• Pre-RERA security is treated differently. RERA does not apply to the transaction between the borrower and the bank where the security interest was created by mortgaging the property before RERA came into force, unless the creation of the mortgage or the transaction is found to be fraudulent or collusive.

What the limits mean for purchasers

The third point is the one most often overlooked. A purchaser in a project whose land was mortgaged before RERA cannot assume that the RERA authority will override the bank’s security merely because RERA prevails over SARFAESI in general. In such a case the purchaser must either show that the mortgage or the transaction was fraudulent or collusive, or look to other remedies, including any rights under the agreement itself and any consent or no-objection the lender gave to the sale. For security created after RERA, and particularly for charges created on a unit after its agreement for sale, Section 11(4)(h) and the Supreme Court’s ruling give the allottee a strong position.

The 70% separate account: protecting the money, not just the flat

A mortgage is only part of the risk. The other is that purchase money is diverted elsewhere while the bank’s loan remains unpaid. Section 4(2)(l)(D) of RERA addresses this. The promoter must declare that seventy per cent of the amounts realised for the project from allottees, from time to time, will be deposited in a separate account maintained in a scheduled bank, to cover the cost of construction and the land cost, and used only for that purpose.

The provisos add the controls:

• withdrawals must be in proportion to the percentage of completion of the project;
• each withdrawal must be certified by an engineer, an architect and a chartered accountant in practice as being in proportion to completion; and
• the promoter’s accounts must be audited within six months after the end of every financial year by a chartered accountant in practice, who must verify that the amounts collected for the project were used for it and that withdrawals complied with the proportion to completion.

For a buyer, the practical lesson is simple: pay into the account designated for the project, as stated in the agreement and the registration details, and not into any other account the developer suggests.

Section 15: the developer cannot simply hand over the project

Enforcement by a lender is sometimes followed by an attempt to bring in a new developer. Section 15(1) of RERA provides that the promoter shall not transfer or assign his majority rights and liabilities in respect of a real estate project to a third party without obtaining prior written consent from two-thirds of the allottees (excluding the promoter) and the prior written approval of the Authority. For counting, an allottee is treated as one allottee irrespective of the number of units booked by him or his family.

Two further protections follow. The proviso to Section 15(1) says that any permitted transfer shall not affect the allotment or sale of units already made by the earlier promoter. Section 15(2) requires the incoming promoter to comply independently with all pending obligations under the Act and under the earlier promoter’s agreements, and states that a permitted transfer does not extend the time to complete the project.

Projects outside RERA: MOFA Section 9

Not every project is registered under RERA. Section 3(2)(a) exempts projects where the land does not exceed five hundred square metres or the number of apartments does not exceed eight, inclusive of all phases, and Section 3(2)(b) exempts projects that received a completion certificate before the Act commenced. For buildings in Maharashtra outside RERA, the Maharashtra Ownership Flats Act, 1963 (MOFA) remains relevant.

Section 9 of MOFA provides that no promoter shall, after executing an agreement to sell any flat, mortgage or create a charge on the flat or the land without the previous consent of the persons who take or agree to take the flats. If such a mortgage or charge is created without that consent after the agreement referred to in Section 4 is registered, it does not affect the right and interest of those persons. Registration of the agreement is therefore built into the protection itself.

The 2025 amendment to MOFA

The Maharashtra Ownership Flats (Amendment and Validation) Act, 2025, enacted on 31 December 2025, inserted Section 1A. With retrospective effect from 1 May 2016, MOFA does not apply to projects registered under RERA, except for Sections 5A, 11A, 13B, 13C and 13D and the provisions relating to the MOFA Competent Authority. Section 9 is not among the saved provisions. For a RERA-registered project, the protection against a post-agreement mortgage therefore comes from Section 11(4)(h) of RERA; for an unregistered building to which MOFA applies, it comes from Section 9 of MOFA.

Practical checks for buyers

Before booking, and again before each major payment, a purchaser can carry out the following checks:

1. Read the project’s RERA registration page. Look at the encumbrance declaration under Section 4(2)(l)(B), the identity of the lender and the period of the project.
2. Ask about the lender’s no-objection. Where the project is mortgaged, ask whether the lender has consented to the sale of your unit and will release it from its charge.
3. Register your agreement. Section 13(1) of RERA bars a promoter from accepting more than ten per cent of the cost as an advance or application fee without first entering into a written agreement for sale and registering it. Under MOFA, Section 4 also requires registration, and Section 9’s protection is tied to it.
4. Search beyond the Sub-Registrar. A search on the Central Registry (CERSAI) shows security interests registered by banks and financial institutions; under Section 26D of SARFAESI, a secured creditor cannot use the SARFAESI enforcement route unless its security interest is registered there.
5. Pay only into the designated account. Keep receipts and bank records showing the payee account for every instalment.
6. Watch for a SARFAESI notice on the site. If a lender issues a demand notice or takes possession, purchasers, individually or through an association of allottees, may complain to the RERA authority under Section 31, as recognised in the Union Bank decision.

Frequently Asked Questions

Can a developer mortgage my flat after I sign the agreement for sale?

Not under RERA. Section 11(4)(h) prohibits the promoter from mortgaging or charging a unit after executing the agreement for sale for it, and says any such mortgage or charge shall not affect the allottee’s right and interest, notwithstanding any other law.

The bank has started SARFAESI action against the project. Can I approach MahaRERA?

Yes. In Union Bank of India v. Rajasthan Real Estate Regulatory Authority (14 February 2022), the Supreme Court held that a RERA authority can entertain a homebuyer’s complaint against a bank that has invoked Section 13(4) of SARFAESI, and that RERA prevails over SARFAESI in case of conflict.

Does RERA protect me if the land was mortgaged before RERA came into force?

Not automatically. The Supreme Court agreed with the Rajasthan High Court that RERA does not apply to the transaction between the borrower and the bank where the mortgage was created before RERA, unless the mortgage or transaction is found to be fraudulent or collusive. Buyers in such projects should examine the lender’s consent to sales and their own agreement carefully.

Can the developer sell the whole project to another builder?

Not freely. Section 15 of RERA requires the prior written consent of two-thirds of the allottees and the prior written approval of the Authority, and the incoming promoter must honour existing allotments and complete pending obligations without any extension of time.

My building is small and not registered under RERA. What protects me?

MOFA Section 9 may apply. It prohibits a promoter from mortgaging the flat or land after an agreement to sell without the purchasers’ prior consent, and a charge created without that consent after the agreement is registered does not affect the purchaser’s rights.

This article is for general information and is not legal advice.

This article is for general information only and is not legal advice or an invitation to engage the firm. Laws and judgments change; please obtain specific legal advice before acting.