Redevelopment projects: 8 common mistakes housing societies make when embarking on redevelopment, how to avoid it

Twelve years after initiating redevelopment, members of a housing complex in south Mumbai’s prime sea-facing locality are still far from seeing their cherished homes restored. Enticed into signing with a developer of dubious reputation, the former residents are regretting their decision. Mismanagement by the developer has brought the entire project to a standstill. Danish Patel, a 58-year-old resident, laments, “The developer went out of his way to pitch for our society’s redevelopment when others were showing limited interest. However, he abandoned the project midway when it became unviable for him due to his own mismanagement.”

On paper, redevelopment promises a big opportunity for members of a housing society. Alas, it often becomes a noose around their necks. Many redevelopment projects today are paralysed, with developers known to abandoning ongoing projects or delaying work indefinitely due to lack of funds or unviability. Society members are left at the mercy of the developer, without a home for years and forced to rent alternative accommodations. In this story, we dissect the typical mistakes housing societies make when embarking on redevelopment.

Alluring proposition
Redevelopment is currently a hotbed of activity in India’s major residential markets. Both older residential societies and standalone plot owners are increasingly opting for redevelopment. Anuj Puri, Chairman, ANAROCK Group, says, “Redevelopment, particularly in urban areas, where space is scarce, is a very active trend as it enhances the quality of life, optimises land use efficiency, and renovates dilapidated structures.”

Mumbai is witnessing the highest redevelopment activity, with over 31,000 projects approved as of May 2024. In Pune and Delhi/NCR, many ageing colonies and bungalows are opting for redevelopment. Ahmedabad and Surat are also seeing a surge in such projects. While redevelopment has generally been executed by tier 2 and tier 3 developers, several leading developers, including Ajmera Realty, Mahindra Lifespaces, Puravankara, and Rustomjee, have now entered the fray with the financial capability to handle these projects. Builders are attracted by the significant profit potential from selling the extra inventory left after allocating units to original members, allowing them to pocket the gains from the saleable area.

The push for redevelopment among housing societies is well-founded. Old housing societies face numerous issues, including low resale value due to poor building conditions, lack of common amenities like elevators, absence of safe play areas for children, and a history of leaks, notes Neha Gupta, Principal Associate, Athena Legal. When executed correctly, redevelopment offers a host of benefits to society members, with the primary goal being safer living conditions for the residents. Shubhi Jain, Principal Partner & Head of CRM, Square Yards, remarks, “Redevelopment is crucial for older societies grappling with unsafe infrastructure and outdated construction standards, ensuring resident safety and compliance with modern building codes.”

The lifestyle transformation is another pull factor. “When land prices soar, redevelopment becomes an attractive option for societies to unlock the value of their land and get bigger, more modern apartments,” says Samir Jasuja, CEO, PropEquity. Government regulations in some areas permit a higher Floor Space Index (FSI) during redevelopment, enabling societies to construct additional floors and increase the total living area. Additionally, redevelopment facilitates the inclusion of modern amenities such as gyms, swimming pools, improved waste management systems, and enhanced parking facilities, notes Swapnil Anil, Executive Director & Head, Advisory Services, Colliers India. This not only boosts the resale value of individual units, but also offers significant gains for those looking to sell.

Despite its benefits, redevelopment can be fraught with challenges. Here are some common mistakes to avoid so that redevelopment does not become costly and problematic.

MISTAKE 1
Mistrust and non-cooperation among existing flat owners
REDEVELOPMENT OF a housing society cannot succeed without full cooperation from its residents. The entire process can be derailed by internal discord or lack of trust in the builder. Jasuja emphasises that a breakdown in communication is a major stumbling block in redevelopment projects. “Lack of transparency and clear communication with residents about project goals, expectations, and potential challenges can breed mistrust and hinder co-operation,” Jasuja cautions. “Poor communication and consensus-building among stakeholders often result in resistance and increased costs,” contends Jain. Regular updates, clear communication of timelines and costs, and open forums for questions are crucial, insists Anil.

Housing societies sometimes proceed with redevelopment without securing adequate consent from existing members. “Legally, most jurisdictions require a supermajority (typically 75% or more) of member approval. Failing to achieve this can lead to legal challenges from dissenting members,” remarks Gupta. While it is best to get everyone on board to avoid hiccups later, the law usually favours the majority in disputes. “Numerous judgements have upheld that members of a cooperative housing society who are in a minority cannot obstruct a redevelopment project unless they can prove that there is some prejudice caused to them or there are elements of fraud in the process of redevelopment,” observes Dilip Shah, Senior Counsellor and Analyst for Redevelopment of Housing Societies.

MISTAKE 2
Blind faith in society officials
IF MISTRUST IS a ticking time bomb, placing blind faith in representatives is akin to stepping on a banana peel. Society members often yield to the decisions of the managing committee, whether willingly or under pressure. Experts caution against trusting housing society office-bearers blindly, especially in matters of redevelopment. Shah points out, “There are numerous instances where members of the managing committee are enticed with unlawful gratifications by unscrupulous developers, who use these members as agents to push through rosy dreams to innocent society residents.” Such members cannot be trusted to finalise any agreements with the developer in a transparent manner. Residents must stay vigilant to ensure their interests are properly represented. It’s also crucial for committee members not to be weak. Lacking knowledge and negotiation skills could jeopardise the society’s interests, according to Jasuja.

MISTAKE 3
Setting unrealistic expectations
MANY REDEVELOPMENT projects fail because housing societies become too greedy. While reviewing proposals, some choose the developer promising the largest living space and highest rental payouts. However, it is essential to question whether this generosity is viable for the developer and if he can deliver on his commitment. “The success of redevelopment projects is closely tied to their financial viability,” insists Jasuja. If the developer is offering bigger living space than others, it could leave him with less saleable area for the new buyers in the revamped complex. If the finances don’t work out for the builder, the project could ultimately get derailed. Similarly, demanding higher rental commitments or a larger corpus fund from a builder may cause problems if his cash flows don’t materialise as expected.

Before getting carried away by a lucrative offer, get a feasibility study done, insists Jayesh Rathod, Director, The Guardians Real Estate Advisory. “Unless the developer makes money on it, the project cannot get completed.” Determine the market value of the property after redevelopment to avoid quoting unrealistic figures that could deter builders or lead to dissatisfaction, Anil advises. In Danish Patel’s housing complex, members were enticed by the high rental payout offered by the builder, but no feasibility study was conducted. After a few years, the rental payouts stopped. This is a common experience for many housing societies.

Reasons why redevelopment is catching on
High prices in land-starved areas
Redevelopment will accelerate as demand exceeds supply in metros.
Source: ANAROCK Research

Delay in execution of new housing projects
Housing societies must be careful in their choice of developer.
Number of projects delayed by more than 24 months

Source: PropEquity

MISTAKE 4
Not vetting the developer
SELECTING THE right developer is critical in the redevelopment process, and many societies err here. Experts advise prioritising a developer’s reputation for timely execution over maximum gains. “Never select a developer simply on the basis of his financial offers of increase in carpet area or promises to provide world class amenities,” says Shah.

Choose on merit, reputation, technical capability, experience and financial status. “Partnering with an inexperienced or unreliable developer can lead to poor construction quality, delays and financial trouble,” warns Jasuja.

Review the builder’s finances, including income-tax returns, with a trusted chartered accountant. Determine if the developer plans to self-fund the project or take a loan, as a higher loan increases risk. Rathod suggests society members meet with representatives from other societies that have worked with the builder to better understand their credentials.

MISTAKE 5
Don’t rush the process
MANY HOUSING societies rush into redevelopment projects without proper legal framework in place. First, it is critical that the society’s managing committee be elected as per legal provisions. Second, after lawful elections, every committee member must file an indemnity bond within 15 days of assuming charge. Without these, the entire society can be considered non-existent, making any redevelopment efforts legally untenable. “Any resolutions passed and execution of documents can be considered void. Handing over of the society property to the developer for redevelopment could also be considered unauthorised,” points out Shah.

Further, the process can get derailed if the society does not conduct general body meetings with the required quorum and other legal necessities. Among other things, a structural audit report is essential for deciding between redevelopment or major repairs; without it, the general body meeting cannot legally approve redevelopment, remarks Anil. Additionally, if the society doesn’t have the plot conveyed in its name via a conveyance deed, it must first get it executed. Without a conveyance deed, the housing society is not considered the owner of the property. If the earlier developer is not cooperating, the society can secure a deemed conveyance after a lengthy legal process.

MISTAKE 6
Leaving legal loopholes
NEXT, BE meticulous in drafting the agreement with the developer. Weak, hurriedly drafted contracts are at the heart of most disputed projects. “Without a solid legal foundation, disputes are almost inevitable. Contracts that lack clarity or are poorly drafted can lead to significant misunderstandings and conflicts,” remarks Gupta. It is essential for housing societies to engage experienced legal professionals to draft contracts that cover all possible scenarios, including timelines, financial terms, and dispute resolution mechanisms. Do not proceed with any agreement drafted by the builder without approval from a trusted lawyer.

Ensure individual agreements are secured from each member with the developer before vacating the premises. Ensure that rights to additional FSI/TDR are exclusively in the name of the housing society. Specify the timeline for possession handover and penalties for delays in the development agreement. Include an exit clause, allowing the society to terminate the agreement in case of non-performance. Clearly outline amenities and allocate car parking spaces to existing members. Include a clause stipulating that all construction-related expenses are borne by the developer. Define rental compensation terms for existing members during the construction period.

Pros & cons of redevelopment
Find out if it is worth taking up the project for your housing society
Advantages

• Enhanced safety and living standards: Older buildings may have structural issues, outdated amenities, and lack accessibility features. Redevelopment can create safer, more modern living spaces.
• Increased property value: Residents receive new, potentially larger apartments in a redeveloped building, which can significantly increase their property value.
• Improved infrastructure: Redevelopment allows for incorporating modern amenities like gyms, swimming pools, better waste management systems, and improved parking facilities.

Disadvantages

• Disruption and displacement:Residents face temporary displacement during construction, which can be stressful and inconvenient.
• Financial and legal complexities:The process can be lengthy and complex, involving negotiations with developers, legal agreements, and potential financial burden for residents.
• Loss of community: Large-scale redevelopment projects can disrupt established communities within older societies.

Source: Colliers India

Checklist for a successful project
Each of these four stages of redevelopment calls for cautionary steps to ensure satisfactory completion of the housing project.
Stage 1: Pre-development
Structural audit: A structural audit report is essential; without it, the society committee cannot legally approve redevelopment over repairs.
Resident education & communication: Hold meetings to explain the redevelopment process, benefits and potential challenges.
Feasibility study: Conduct a thorough study to determine the project’s viability, including market analysis, FSI calculations and estimated costs.
Legal consultation: Seek legal advice to understand regulations, approvals needed, and draft agreements.

Stage 2: Developer selection
Shortlist reputable developers: Research developer reputation, track record, financial stability, and experience with similar projects.
Request proposals (RFP): Issue an RFP outlining project details, expectations and evaluation criteria for selecting the best developer.
Negotiate agreement: Carefully negotiate the contract with a strong committee, covering timelines, costs, resident relocation plans, and dispute resolution mechanisms.

Stage 3: Construction
Form a project monitoring committee: Assign residents to oversee construction progress, quality control, and adherence to agreed upon plans.
Regular communication: Maintain open communication with residents, addressing concerns and providing updates on the project’s progress.
Financial transparency: Track project finances, ensuring funds are used efficiently and allocated according to the agreement.

Stage 4: Post-construction phase
Final inspection: Conduct a thorough inspection with a qualified professional to ensure the project meets agreed upon standards.
Handover and occupancy: Clearly define procedures for handover of flats to residents, including resolving any outstanding issues.
Long-term maintenance plan: Establish a clear plan for ongoing maintenance of the redeveloped building and common areas.

MISTAKE 7
Failure to obtain necessary approvals
A REDEVELOPMENT project cannot go through without obtaining the necessary approvals from municipal authorities and regulatory bodies. Housing societies often neglect this, leading to legal complications that can halt the project. “Ensuring that all necessary permits and approvals are in place before starting the project is crucial,” insists Gupta. In many jurisdictions, obtaining environmental clearances is mandatory for redevelopment projects. Failure to secure these clearances can prompt legal action from environmental agencies and NGOs, resulting in substantial delays and financial repercussions, according to Gupta. Similarly, noncompliance with local building codes and regulations may lead to legal repercussions from municipal authorities. Therefore, it is crucial for housing societies to ensure strict adherence to all applicable building codes, zoning laws, and safety regulations during the redevelopment process.

MISTAKE 8
Allowing illegal constructions or altering plans
AT TIMES, unscrupulous developers may make unauthorised alterations to the proposed layout or infrastructure, including encroaching on neighbouring properties or public land. These violations often surface only after significant progress. Such actions can prove detrimental to the housing society, potentially leading to lawsuits from affected parties or refusal by municipal authorities to issue a completion certificate. “Blatant violation of rules by the builder through unlawful planning and construction of additional, unauthorised areas beyond their entitlement impels the society towards litigation at a later date,” Shah warns. To avoid future issues, the society should ensure they obtain written consent from the cooperative society’s architect before making any alterations to flat layouts, building plans, parking spaces, or recreational areas.

By taking these precautionary steps, older housing societies can approach this complex exercise with more confidence and ensure the project remains on track.

What to include in developer agreement
To avoid being misled by the developer, sign the contract only after checking these essentials.

• The developer should hold rights as a licensee, not an owner. Ownership of both land and buildings should remain with the housing society, and any additional FSI/TDR (transferable development rights) should exclusively belong to the society.
• Time period for completion of project, along with a penalty clause for failure to deliver within timeline.
• Particulars of existing flats, along with area of the plot, as per the Property Register Card.
• Specifications of new flats to be handed over to members, along with the type of materials to be used.
• Total estimated buildable area using premium FSI or TDR on the plot.
• Schedule of payment for corpus fund, rentals, brokerage, transportation, etc.
• Number of open, stilt or stacked car parking spaces.
• All expenses related to construction to be borne by the developer, including municipal taxes.
• Specify the amount collected from new flat buyers for the society’s corpus.
• Right to terminate agreement if project not completed or stalled should be with the housing society.

Note: The above list is not exhaustive