[The following post is contributed by Bhushan Shah and Labdhi Shah from Mansukhlal Hiralal & Company. The views expressed herein are personal]
Parliament of India has passed the much awaited Real Estate (Regulation and Development) Bill, 2016(Regulation) in the ongoing Budget Session. The Regulation has been enacted with the intention of protecting buyers, bringing transparency and plugging the flow of unaccounted monies, which in turn will provide a much needed boost to the real estate sector. In this post, we seek to highlight the key features of the Regulation and its implications on the builders, buyers and the real estate sector in general.
Key Highlights of the Regulation
1. Establishment of the Real Estate Regulatory Authority (RERA/Authority):The Regulation mandates establishment of RERA in every state/union territory. The Authority will act as a watchdog as it will oversee the compliance of the Regulation in all real estate transactions. Functions of RERA include: (a) ensuring that real estate projects are registered and their details uploaded on RERA website, (b) ensuring that buyers, sellers and agents comply with obligations under the Regulation, and (c) advising the government on matters related to the development of real estate. The establishment of RERA is a positive step taken by the Government in order to bring the much needed credibility and transparency to the real estate sector.
2. Registration of all the Real Estate Projects: The Regulation mandates registration of all the real estate projects with RERA. If the project is to be developed in phases, then registration is mandatory for each phase. Pursuant to the registration, the builders will be provided a login ID and password in order to create their webpage and make available all the information related to the project, such as brief description of their enterprise, layout plan of the proposed project, estimated timelines for completion of the project, etc available in the public domain. With regards to ongoing projects, a window of 3 months (from the notification of the Regulation) has been given to the developers for registration of their projects before the Authority.
Exemption: The following projects are exempted from registration with the Authority:
- If the area of land proposed to be developed does not exceed 500 square meters; or
- If the number of apartments proposed to be developed does not exceed 8;
- If the promoter has received all the requisite approvals and completion certificate prior to the commencement of the Regulations.
3. Ensuring timely approvals for housing projects: The Regulation also provides for creation of a single window system for ensuring that time bound project approvals and clearances are given for timely completion of projects. The developer will therefore not be required to approach separate regulatory departments such as environment, aviation, defence, etc for separate approvals, which will cut down the substantial delays in completion of the housing projects.
4. Registration of Real Estate Agents: The Regulation mandates registration of all real estate agents with the Authority. The failure to comply with the aforesaid registration requirement will lead to a real estate agent not being able to facilitate the sale or purchase of any real estate property. The Regulation also prohibits a real estate agent from involving in any unfair trade practices and making false representations. This prohibition will keep the real estate agents on guard, and they will have to think twice before inducing buyers into buying properties by making false representations.
5. Construction Cost: As per the provisions contained in the Regulation, every developer/builder is required to compulsorily deposit 70% of the amount raised from buyers into an escrow account maintained with a scheduled bank within a period of 15 days of receipt of money to cover the construction cost of the project. This amount can be used to fund cost of construction of that particular project only. While this is aimed at preventing developers from diverting the funds raised from the allotees to other activities and ensuring timely completion of the project, it may actually end up increasing the cost of the project. It is pertinent to note that the cost of a real estate project is inclusive of the cost of land and the cost of construction. In the event, the cost of land turns out to be higher than 30% and the cost of construction less than 70% of the total cost of the project, then the developer may need to borrow funds from third parties in order to finance the cost of purchasing land. This may increase the project cost and will put additional pressure on the buyer, thus affecting its purchasing power. This could also lead to part of the money (i.e. out of the 70% of the amount raised and deposited) collected remaining unutilised. Thus, it will be interesting to see if the mandatory allocation towards construction cost will benefit the buyer or the developer/builder.
6. Consumer is King: Many provisions in the Regulation are buyer friendly. A few of them are:
(a) Post registration, the Regulation requires the builder to provide quarterly updates on the status of the project on its website.
(b) The builders will have to complete the project within the stipulated timelines and in accordance with the terms of the agreement entered into with the buyers, failing which they will have to return the amounts received from the buyers, along with interest at such rates as is prescribed under the Regulation and even provide adequate compensation to the buyers. If there is still a considerable delay in the completion of the project then the Real Estate Appellate Tribunal (Tribunal) would intervene and slap fines on the builders within 60 days of receipt of an application from the aggrieved buyer. In a worst case scenario, the Tribunal can send a developer found guilty of fraud to jail for three years.
(c) The builders cannot take a sum of more than 10% of the cost of the apartment, plot or building by way of advance or otherwise, without entering into an agreement for sale with the buyers.
(d) The builders are required to adhere to the proposed structural plan and will have to obtain prior written consent of at least two-thirds of the buyers to make any alterations or additions to the plan. Also, if within two years from the date of handing over the possession, any structural defects are found, then the builder is required to make good the defect and even provide appropriate compensation to the buyers.
(e) The Regulation defines the term carpet area, which means that the buyers will only be paying for the carpet area and not the super built up area, which was fraught with confusion earlier.
7. Powers of RERA: In the event of any non-compliance with the provisions of the Regulations by the builders or real estate agents, RERA has been vested with very wide powers, including powers to enquire and investigate the affairs of a promoter, allottee or a real estate agent. Further, RERA has been vested with the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (CPC). As a result, in the event of any fraud by the builders, buyers can take recourse with this Authority.
8. Fast Track Dispute Resolution: Regulation also establishes a fast-track dispute resolution mechanism through adjudication and establishment of the Tribunal.The Regulation imposes an obligation on the said Tribunal to dispose of appeals as expeditiously as possible and at the maximum within 60 days from the date of receipt of the appeal. Any person aggrieved by the order, direction or decision of the Authority can make an appeal before the Tribunal. However, an appeal from the builder/developer will not be entertained by the said Tribunal unless it deposits at least 30% of the penalty amount or such higher percentage as may be determined with the said Tribunal. The Tribunal shall not be bound by the procedure laid down under CPC and shall have the power to regulate its own procedure. The Tribunal shall also not be bound by the rules of evidence contained under the Indian Evidence Act, 1872. The Authority/ Tribunal has also been vested with the powers to punish a person with imprisonment in the event of non-compliance with the orders, decisions or directions issued under the Regulation. A person aggrieved by the order or decision of the Tribunal can make an appeal to the High Court. It is pertinent to mention herein that the Regulation bars civil courts from entertaining any suit or proceeding in respect of matters which the Authority or adjudicating officer or the Appellate Tribunal is empowered under the said Regulations.
The real estate sector is the second largest sector (after agriculture) in India, which generates employment and also contributes significantly to the country’s GDP. Inspite of this, the sector has been opaque, lacks clarity, has been infested with fraudulent practices and riddled with consumer disputes. Thus, the passage of the Bill in the Parliament has raised a lot of expectations, especially from the buyers’ community and it will hopefully lead to ensuring better regulatory oversight and orderly growth of real estate in the industry. Further, we believe that time bound approvals and transparency will also lead to greater flow of investments, both domestic and foreign in the sector, resulting in reduction in cost of borrowing for real estate projects.
- Bhushan Shah & Labdhi Shah