The Builder Defaulted on His Project Loan and the Bank Is Auctioning Our Flats: Can It Take the Flat I Paid For?

The bank can sell what the builder mortgaged to it, and whether that includes your flat turns on two dates: the date of the mortgage and the date of your registered agreement for sale. Section 11(4)(h) of the Real Estate (Regulation and Development) Act, 2016 bars a promoter from mortgaging an apartment after he has signed an agreement for sale for it, and says that any such mortgage, whatever any other law provides, "shall not affect the right and interest of the allottee". A mortgage created before your agreement turns instead on whether it was disclosed to you. What you cannot count on is a writ petition: on 6 October 2026, in Voyeger Apartment Pre-Owners Association v Canara Bank, the Karnataka High Court dismissed a writ by an association and twelve buyers because "there is no contractual obligation between the Bank and the petitioners". What remains is K-RERA, the Debts Recovery Tribunal within forty-five days of the bank's measure, and a civil court against the builder.

Part of the RERA and homebuyer disputes practice at S Jain & Attorneys, Bangalore.

This page is for a buyer in Bengaluru with a registered agreement for sale who has paid most of the price and has found a notice from the builder's bank or an asset reconstruction company covering the building. It is about the builder's own project loan. If the loan being enforced is your home loan under a subvention agreement, read our guide on the builder who stopped paying your pre-EMI. If you are a tenant in the flat, the guide on a tenant's rights when the landlord's flat is auctioned is yours.

Where you stand depends on the order in which the mortgage, your agreement and the bank's notice happened.

Deadline warning. Section 17(1) of the SARFAESI Act gives "any person (including borrower)" aggrieved by a measure under Section 13(4) forty-five days from the date of the measure to apply to the Debts Recovery Tribunal. The possession notice on the building and the e-auction notice in the newspaper are each such a measure.

Four facts frame everything that follows.

Is my flat part of the bank's security if the builder mortgaged it after my agreement?

Not as against you, on the words of the Act. Section 11(4)(h) of the Real Estate (Regulation and Development) Act, 2016 requires the promoter, "after he executes an agreement for sale for any apartment, plot or building", not to "mortgage or create a charge" on it, and continues: "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". The words "agreed to take" protect a buyer with an agreement as much as one with a sale deed.

What the section does not say is that the bank's mortgage is void. On our reading it leaves the mortgage standing over the rest of the project and takes your flat out of what the lender can enforce against you, which is why the two dates must be proved from registered documents. One trap: Section 13(13) of the SARFAESI Act bars the borrower, after receiving the demand notice under Section 13(2), from transferring any secured asset named in it, other than in the ordinary course of his business, without the bank's prior written consent, so a bank will say an agreement signed in that window needed its consent and a buyer will answer that selling flats is a builder's ordinary business.

What if the builder mortgaged the project before I signed?

Then the question becomes what you were told, and when the mortgage was made. The Supreme Court's order of 14 February 2022 in Union Bank of India v Rajasthan Real Estate Regulatory Authority recorded "complete agreement" with the Rajasthan High Court that RERA prevails over SARFAESI in a conflict but does not apply to a bank's pre-Act security "unless and until it is found that the creation of such mortgage or such transaction is fraudulent or collusive". A mortgage created before the Act came into force is therefore the bank's strongest ground. One created after the Act but before your agreement is governed by disclosure: Section 4(2)(l)(B) requires every promoter, at registration, to declare on affidavit "that the land is free from all encumbrances, or as the case may be details of the encumbrances on such land", and rule 15(1) of the Karnataka Real Estate (Regulation and Development) Rules, 2017 puts "details of mortgage or charge, if any, created on the land and the project" on the project's K-RERA page.

K-RERA used that suppression to restrain a lender's assignee. In Complaint No. 00816/2023, decided by the full bench on 17 October 2025, the buyer of two flats in the Aswani Sunshine project at Sarjapura held registered sale agreements of 5 March 2021. The project had been mortgaged to Indiabulls Housing Finance Ltd before those agreements, and after the promoter's default the loan was assigned to Edelweiss Asset Reconstruction Company, which moved to take possession of the flats. The promoter and both lenders stayed away and were placed ex parte. The Authority held that suppressing the mortgage violated Section 4(2)(l)(B), and that "once the project has been registered under RERA, and flats have been sold to genuine purchasers, any coercive possession or auction by a financial institution would directly defeat the purpose of the RERA Act". It restrained Edelweiss ARC from taking possession of or auctioning the two flats "without due process of law", and directed the promoter to disclose every loan and mortgage on the project within thirty days.

The other path is the lender's own provisional no-objection certificate for your unit, which permits its sale if the price is paid into a designated account and promises a final certificate on full payment. In Complaint No. 00351/2023, decided the same day in the same project, the buyers had paid the whole price through the escrow account named in the provisional certificate and held a registered sale deed, yet the final certificate never came. The Authority held that the financing institution, "being a party to the NOC and having directly influenced the title transfer conditions", fell within its directions, and ordered Indiabulls Housing Finance Ltd to issue the final certificate and remove the lien within thirty days.

How do I find out whether my flat is mortgaged, and to whom?

Start with the bank's own notices, because the Act makes them specific. Section 13(3) of the SARFAESI Act requires the demand notice to "give details of the amount payable by the borrower and the secured assets intended to be enforced", the possession notice under rule 8(1) of the Security Interest (Enforcement) Rules, 2002 describes the property taken, and rule 8(7) requires the sale terms uploaded on the bank's website to carry "the details of the encumbrances known to the secured creditor" and the reserve price. Read the schedule in each notice against your flat number. Then check the record: the K-RERA project page under rule 15(1), an encumbrance certificate for the project land, and a written request to the promoter and the lender for the security documents and any unit-wise no-objection certificate.

Can K-RERA stop the bank, and when?

Only after the bank has moved under Section 13(4), and only in a complaint you bring to protect your rights as an allottee. Section 31(1) allows a complaint "against any promoter, allottee or real estate agent", and a lender is none of them. The Rajasthan High Court bridged that gap on 14 December 2021: once the bank takes a Section 13(4) measure, "for all purposes thus the secured creditor steps in the shoes of the borrower in relation to the secured asset", and the Authority "has the jurisdiction to entertain a complaint by an aggrieved person against the bank as a secured creditor". Until then the bank is outside RERA. The Supreme Court dismissed the bank's petitions with one clarification, that this applies where the proceedings before the authority are initiated by the home buyers "to protect their rights".

Two decisions mark the edges of that rule. The Maharashtra Real Estate Appellate Tribunal, in an interim order of 24 April 2026, pending its decision of Appeal No. AT06/01035/2025 and connected appeals against Shree Siddhivinayak Infrastructure and Realty, read Union Bank as a case where "the bank has lent loan to the promoter", so that on Section 13(4) action "the bank steps into the shoes of the promoter and therefore the RERA assumes jurisdiction", and refused to extend it to loans given to the allottees themselves, which is the project-loan buyer's good news. The Madras High Court marked the other edge on 26 November 2025 in C.M.S.A. No. 76 of 2025, a case against Axis Finance Ltd: buyers who had paid in full and held possession obtained a stay of the lender's e-auction from the Tamil Nadu authority and lost it in the Appellate Tribunal, and the High Court held that the Tribunal "rightly concluded that the Regulatory Authority ought not to have stayed the e-auction notice issued by the Bank".

Between those edges sit the orders a buyer relies on. K-RERA's restraint of Edelweiss ARC rested on Sections 35, 36 and 38 and on the Authority's view that it "is empowered to issue directions to any party, including financial institutions, to protect the interests of allottees". The Odisha Real Estate Appellate Tribunal, in an order of 24 November 2025 reported on 4 December 2025, decided Punjab National Bank's appeal in a stalled project near Bhubaneswar by holding, as reported, that a bank in Section 13(4) possession of the project land has stepped into the shoes of the promoter as its assignee, and, the mortgage having been found collusive in earlier appeals, kept the restraint on auctioning the buyer's flat while lifting the direction that the bank itself complete the project. Two cautions. Section 2(zk) says a promoter "includes his assignees", which is the hook for that reasoning, but no Karnataka High Court decision deciding whether K-RERA can restrain a project lender was found at the time of writing, so a K-RERA restraint is an order a lender can and will contest at the Appellate Tribunal. And the Aswani order was passed with the lender absent, so a contested complaint must carry the two dates, the non-disclosure and the Section 13(4) measure on evidence.

Common mistake. Filing only at K-RERA and treating the auction date as suspended. Nothing in the RERA Act stays a SARFAESI sale by itself, and a K-RERA restraint can be appealed under Section 44 within sixty days. The forty-five days at the Tribunal keep running while K-RERA issues notice.

Why did the Karnataka High Court refuse a writ, and where do I go instead?

Because the buyers had no contract with the bank, and a High Court does not decide private disputes between buyers and a builder in writ jurisdiction. In Voyeger, the builder of an apartment complex in Udupi had taken a project loan from Canara Bank and defaulted, and on 15 July 2025 the bank issued an e-auction sale notice fixing the auction for 22 August 2025. The buyers said they had paid almost the entire price and were in possession, and had already gone to the consumer forum and to a civil court for specific performance.

The court agreed on the threshold point: "there is no contractual obligation between the Bank and the petitioners. In that case, the question of filing a writ petition against the Bank will not arise." It added that "The private disputes between the petitioners and the 2nd respondent cannot be decided by this Court, and a writ petition under Articles 226 and 227 is not maintainable", dismissed the petition with liberty "to avail the appropriate remedy in accordance with law", and said nothing about the RERA Act, Section 17 of the SARFAESI Act, the Tribunal or who owns the flats.

So the remedies are three, and they run together. The Debts Recovery Tribunal under Section 17 is the forum the SARFAESI Act provides for "any person" aggrieved by a Section 13(4) measure, and Section 17(3) lets it declare the measure invalid and "restore the possession of secured assets" to the borrower "or such other aggrieved person". K-RERA is the forum against the promoter, with the lender joined once it has acted under Section 13(4). A civil court is the forum for specific performance against the builder, as our guide on a seller who will not register after taking the price explains, but Section 34 of the SARFAESI Act bars "any Court or other authority" from granting an injunction "in respect of any action taken or to be taken" under that Act, so the suit cannot be aimed at the bank's sale.

What does the e-auction notice mean, and what are the dates in it?

It means the bank has passed the two earlier stages and is at the sale. Section 13(2) gives the borrower sixty days from the demand notice to pay in full, Section 13(4)(a) then lets the creditor "take possession of the secured assets of the borrower", with the possession notice under rule 8(1) affixed on the property, and rule 8(6) requires "a notice of thirty days for sale" to the borrower with a public notice in two newspapers, and rule 9(1) of the Security Interest (Enforcement) Rules, 2002 provides that no sale "in first instance shall take place before the expiry of thirty days from the date on which the public notice of sale is published". The date that matters most to a buyer is in Section 13(8): if the creditor's dues with its costs are tendered "at any time before the date of publication of notice for public auction", the asset shall not be sold. After that publication the right to redeem is gone, so a buyers' group that wants to settle must do it before the sale notice appears, not before the auction date. Once the sale is confirmed, Section 13(6) vests the flat in the purchaser "as if the transfer had been made by the owner": your money claim against the builder survives, and your claim to the flat becomes a contest with the purchaser.

Can the bank make me pay my remaining instalments to it instead of the builder?

Yes, once the sixty days have run. Section 13(4)(d) lets the secured creditor require by written notice "any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower" to pay the creditor so much of it as is enough to clear the secured debt, and Section 13(5) gives a person who pays under such a notice "a valid discharge as if he has made payment to the borrower". The Voyeger buyers offered exactly this to the High Court, and the offer failed only because a writ was not the place to make it. Make it to the authorised officer in writing, conditional on the bank's written no-objection certificate for your unit and its consent to the sale deed, and pay the builder nothing after the Section 13(2) notice, because money paid to the builder after the demand discharges nothing against the bank.

What if I have no registered sale deed?

You are still an allottee, and the Act protects you as one, but the paper you hold decides how much that is worth. Section 2(d) defines an allottee as the person to whom an apartment "has been allotted, sold (whether as freehold or leasehold) or otherwise transferred by the promoter", and Section 11(4)(h) protects the allottee who has "taken or agreed to take" the apartment, so an agreement for sale is enough for RERA purposes. Section 17(1) obliges the promoter to execute a registered conveyance deed, and K-RERA's full bench order of 3 June 2026 in the same Aswani Sunshine project directed the promoter to execute the sale deed and "obtain NOC from the financier" within sixty days, because the promoter "has to clear the loan raised for the project".

Outside RERA the picture is harder. Section 54 of the Transfer of Property Act, 1882 says a contract for the sale of immovable property "does not, of itself, create any interest in or charge on such property". Section 53A answers it for a buyer in possession under a written contract who has performed or is willing to perform: the transferor "or any person claiming under him" is debarred from enforcing any right in the property against him, save for a transferee for consideration without notice. Since 24 September 2001, Section 17(1A) of the Registration Act, 1908 denies that protection to an unregistered contract, so the registered agreement that Section 13 of the RERA Act requires is also your Section 53A document. Whether an auction purchaser claims "under" the builder for this purpose is open, and no court was found deciding it. If your agreement was never registered, read our guide on an agreement for sale that was never registered first.

Can the buyers complete the project themselves?

In law yes, through Section 8, and in practice only after the lender's charge has been dealt with. On lapse or revocation of the registration, Section 8 lets the Authority, after consulting the State Government, have the remaining work done by the competent authority, the association of allottees or anyone else it determines. The route, the account freeze and the money are in our guide on a buyers' takeover of a stalled project under Section 8. The Odisha order of 24 November 2025, as reported, used that machinery against a bank, directing completion through an external developer or the allottees' association in consultation with the bank. The Act, on our reading, gives the Authority no power to extinguish a registered mortgage, so a completion plan has to price the bank in, with the secured debt, the unsold inventory, the balance instalments that can go to the bank under Section 13(4)(d) and the cost to complete, before the Section 13(8) deadline.

What is my claim, and against whom?

Your money claim is against the builder, and it is for the money that actually left your account. Section 18(1) makes a promoter who fails to give possession in accordance with the agreement "liable on demand" to return "the amount received by him in respect of that apartment" with interest if you withdraw, and to pay interest for every month of delay if you stay. Rule 16 of the Karnataka Rules fixes the rate at the State Bank of India highest marginal cost of lending rate plus two percent, rule 17 requires payment within sixty days of the refund becoming due, and the monthly working is in our guide on the K-RERA interest calculation. Compensation for the suppression and for the cost of defending the flat is a separate head under Sections 18(3) and 71, before the adjudicating officer.

Count only what you paid: the booking cheque and every transfer on your bank statement. Not the agreed price, not a credit the builder gave you for delay, not a GST adjustment on a cost sheet, and not an instalment that fell due and was never paid. Against the bank you hold no money claim at all, because there is no contract between you, and the sale proceeds are applied under Section 13(7) first to the bank's costs, then to its dues, with only the residue going "to the person entitled thereto", normally the borrower. A K-RERA order against the builder is executed as arrears of land revenue, as our guide on executing a K-RERA order through the Deputy Commissioner explains.

Step by step: the next forty-five days

1. Photograph the possession notice on the building and the newspaper publication with the dates visible. The forty-five days under Section 17(1) run from the measure.
2. Collect the registered agreement, every receipt and bank statement, the allotment letter, and any provisional no-objection certificate from the lender.
3. Obtain an encumbrance certificate for the project land and the promoter's declaration under Section 4(2)(l)(B), and fix the date of the mortgage against the date of your agreement.
4. Write to the authorised officer within days, stating your agreement date, payments and possession, and, where your agreement came first, recording that your flat is not available for sale against you under Section 11(4)(h).
5. File the application under Section 17(1) before the Debts Recovery Tribunal within the forty-five days, with an interim prayer.
6. File a complaint at K-RERA in Form N under rule 29 of the Karnataka Rules against the promoter, joining the lender and any assignee, asking for an interim restraint under Section 36, disclosure, the no-objection certificate and the conveyance, and in the alternative the refund under Section 18(1).
7. Join the other buyers, and if the bank serves a notice under Section 13(4)(d), pay your balance to it only against its written no-objection for your unit, keeping the Section 13(5) discharge.

What we see go wrong

In our practice the buyers who lose these contests are rarely wrong on the law. The possession notice is read as the builder's problem, and the forty-five days go while the builder promises a settlement. Instalments keep going to the builder after the bank's demand notice, which discharges nothing. The registered agreement is produced but the mortgage date is not, and the bank fills the silence with a memorandum of deposit that predates everything. Buyers file at K-RERA alone and discover at the auction that no restraint reached the authorised officer. The first task on these files is a dated chronology of mortgage, agreement, payments and notices, built from registered documents, because every forum will ask for it.

What it costs and how long it takes

A complaint to K-RERA in Form N carries a fee of one thousand rupees under rule 29(1) of the Karnataka Rules. A Tribunal application by an aggrieved party other than the borrower carries a fee under rule 13(2) of the Security Interest (Enforcement) Rules of Rs 125 for every Rs 1 lakh, or part of it, of the debt due, capped at Rs 50,000. Section 17(5) asks the Tribunal to decide within sixty days and sets four months as the outer limit, and an appeal lies within thirty days under Section 18. K-RERA's Aswani restraint was filed on 23 May 2023 and decided on 17 October 2025. Professional fees turn on how many buyers file together and how hard the lender contests the dates, and any figure is indicative only.

The clocks that decide the outcome, on one card each.

Frequently Asked Questions

This article is for general informational purposes only and does not constitute legal advice. Consult a qualified advocate for advice on your specific situation.

Related Guides

The firm's RERA and homebuyer disputes practice handles complaints at K-RERA against promoters and their lenders, and the property and real estate law practice covers Debts Recovery Tribunal applications and suits for specific performance against a builder.

• Our Project Has Stalled and the RERA Registration Has Lapsed: Can the Buyers Take It Over Under Section 8?
• The Builder Has Stopped Paying My Pre-EMI: What a Subvention Scheme Buyer Can Claim at K-RERA
• The Bank Is Auctioning My Landlord's Flat: What Happens to My Tenancy and My Deposit?