In this blogpost, Ayushi Mishra, Student, National Law University, Jodhpur, writes about, Real Estate (Regulation and Development) Act, 2016. The article contains a comprehensive analysis of the Act, a concise critique and ways of further strengthening the Act.
Introduction
The Real Estate (Regulation and Development) Act, 2016 (‘Act’) came into force on May 1, 2016 with 69 out of 90 sections notified by Ministry of Housing and Urban Poverty Alleviation.[1] It will set in motion the process of making necessary operational rules and creation of institutional infrastructure for protecting the interests of consumers.[2]
The Act aims to regulate the real estate sector, bring clarity for both the buyers and sellers and reform the sector. It envisages establishment of a regulatory and appellate authority for settlement of grievances, registration of real estate projects and contains various pro-allottee/ pro-buyer provisions. Further, the Act aims to increase transparency and accountability in real estate sector by regulating the buying and selling of commercial and residential units or projects and timely completion of project by the promoters. It is expected to boost the confidence of the home-buyers and is touted by many as a step in the right direction and a major game-changer. The salient provisions of the Act have been discussed below.
Salient provisions of the Act
Establishment of Real Estate Regulatory Authority (‘RERA’) and Real Estate Appellate Tribunal (‘REAT’)
The central and state governments must establish RERA[3] which will consist of a Chairman and at least two whole time members to be appointed by state government.[4] RERA can hear complaints filed by aggrieved persons for contravention or violation of provisions of the Act by any promoter, allottee or real estate agent.[5]
RERA’s broad objectives and functions includes inter alia, ensuring transparency by registering and maintaining a database of real estate projects and publishing it on its website for public viewing, protection of interest of promoters, allottes and real estate agents, development of environmentally sustainable and affordable housing, rendering advice to the government and ensuring compliance with its Regulations and the Act in general.[6] It can further govern both commercial and real estate transactions.[7]
The persons aggrieved by the decision of RERA can approach REAT within 60days of former’s order.[8] REAT must dispose off the appeal within 60 days[9] and will have all powers of a civil court.[10]
Registration of real estate project with RERA
Every real estate project having a planning area of more than 500 square meters or more than eight proposed number of apartments must be registered with RERA.[11] The promoter must deposit 70% of the amount realized from the allottees in an escrow account, maintained by a scheduled bank to cover the cost of construction and the land cost and the amount must be used for that purpose only.[12] The amount withdrawn should be in proportion to the percentage of completion of project.[13] This discourages the developers from notoriously diverting funds. It will also prevents delay in completion of project and handover to the consumers.[14]
Definition of carpet area
Carpet area has been defined[15] under the Act and developers can sell units only on carpet area which means the net usable floor area of an apartment. This excludes the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment.[16]
This will enable the buyers get the clear picture of the usable space.
Cap on the receiving of advance payment
A promoter cannot accept more than 10% of the cost of the plot, apartment or building as an advance payment or an application fee from a person without first entering into a written agreement of sale with such person and register the said agreement of sale, under any law for the time being in force.[17] This is an aim towards curbing embezzlement of funds by notorious builders.
Adherence to sanctioned plans
The promoter cannot make changes (additions or alterations) in sanctioned plans, layout designs or specifications as approved by RERA without the consent of person who has agreed to take one or more of the plot, apartment or building.[18]
For any other additions, alterations or assigning or transferring of majority rights and liabilities of the promoter, the consent of at least two-thirds of the allottees who have agreed to take apartments in such buildings and RERA should be taken, except the promoter himself.[19]
This will discourage the developers from increasing the cost of the project midway or acting against the interest of the consumers.
Compensation to the allottees
If the promoter fails to complete the project or is unable to give the possession of apartment, plot or building then
in case the allottee wishes to withdraw from project then he should receive interest and compensation as given in the Act or
in case the allottee does not wish to withdraw from project then he should be paid interest for every month of delay at specified rate, till the handling of the possession.[20]
Further, in case of a structural defect, defect in workmanship, quality or provision of services or other obligations of the promoter as per the sale agreement when brought to the notice of the promoter by the allottee within 5 years of handling of the possession should be rectified by the promoter within 30 days without any cost. Failure to do the same by the promoter entitles the allottee to compensation.[21]
This is a refreshing change from the previous position where the developers were not penalized or held responsible.
Penal provisions for promoters
There is a penalty of 10% of estimated cost of project or an imprisonment of three years for a promoter[22] who advertises, markets, books, sells or invites people to purchase any plot, apartment or building without registration with RERA.[23]
However, there are several projects that are exempted from registration such as where the land proposed to be developed is less than 500 square meters, where the promoter receives completion certificate prior to the commencement of Act or where the renovation, repair or re-development does not involve marketing, advertising, selling or new allotment of any plot, apartment or building.[24]
There is a further penalty which may extend to 5% of the cost of project for providing false information to RERA while registration[25] under the Act.[26]
The miscellaneous penalty can extend up to 5% of estimated cost of the project.[27]
This will discourage developers from indulging in under-hand dealings and come down heavily on those who do the same.
Hurdles in implementation of the Act
Despite being a well-drafted piece of legislation due to various stages of negotiations that the Act has undergone in the past 9 years, there are many lacunae that it suffers from which has been discussed below:
The requirement of depositing 70% of project money in an escrow account is a likely source of confusion. The onus of informing about the transactions in on the builder which can be manipulated. Further, the requirement of certification by an engineer, an architect and a chartered accountant before withdrawing any amount is futile since they are all paid by builders and are likely to make reports in favor of the builders. Hence, there is an obvious conflict of interest. Further delays and disputes in withdrawal of amounts might lead to litigations jeopardizing the projects.[28] Hence, the Act fails to address the problem of black money investment in real estate business.[29] Further, the cost of land and construction of the project might be higher than 70% of total cost of the project. This may lead to borrowing of funds to raise the cost of the project with interest cost which will ultimately increase the cost of the project and burden the consumers.
It will be difficult for builders to sell units based on carpet area for buildings which are under construction and where some units have already been sold under super built up area. Therefore, an exemption to this effect may be inserted under section 4(h) of the Act to resolve the conflict. Further the word ‘net usable floor area’ must be defined in the Act for greater clarity.
There is a provision on monetarily penalizing the promoter for delay in completion of projects.[30] However, in case such a delay is caused due to delayed governmental approvals then the promoter should not be penalized. Hence, such an exemption should be added under the relevant provision.
The time limit for the adjudication process by RERA and REAT might not work as expected. There were time limits for adjudication of real estate disputes on the consumer courts as well, however, no complaint was disposed off within the time frame of 90 days. Hence, the time limits under the Act are also unlikely to work.
The allottees can receive benefits under the Act only after one year[31] which is the time frame for the respective governments to establish RERA[32] and REAT.[33] There is also a time limit of six months for different states to make rules for carrying out provisions of the Act.[34] Looking at the political will and stability of governments in different states, the adherence to the timelines might be patchy with some governments establishing efficient bodies while some may not.[35]
Many departments and processes will have to streamlined along with up-gradation of land records and bringing parity between circle rate and market rate.[36] Since, most of documents in real estate sector are hand-written, it will be a herculean task to capture all that on an online database which will also demand a lot of time. Moreover, understanding the ownership pattern would be critical for ensuring transparency under the Act.
The Act may not be implemented efficiently due to dilly-dallying tactics in implementation of the provisions of the Act. This may be due to conflict of interest of the politicians who have a major stake personally in the real estate sector. Hence, political reluctance might be a major roadblock.
The laws relating to rights over land, land improvement and colonization of land are under the state list. Therefore, laws in the states of Haryana and Maharashtra differ from the Central Act and there might be conflict between the two laws.[37] Though the Maharashtra Housing (Regulation and Development) Act, 2012 has been repealed[38] specifically under the Act, the one for the state of Haryana has not been which will be continuous source of confusion in the state though the Central Act will supersede the state Act.
Conclusion
The Act is a positive change in terms of increasing transparency in the real-estate sector, increasing accountability of the promoters and developers and establishing efficient forums for grievance redress. This will consequently lead to lower litigation due to stringent rules and regulations in the highly corrupt sector. Time bound approvals and transparency will also lead to greater flow of investment both domestic and foreign leading to reduction in cost of borrowing in the real-estate sector.[39] Though it is a win-win situation for both the developers and the buyers and will help the sector grow in the long-run, the discrepancies in the Act needs to be urgently addressed. Further, the Act cannot be implemented effectively till the political reluctance in implementing the Act is removed which is a major roadblock. Hence, the Act needs legislative amendments by consulting the stakeholders involved as there is a huge scope of improvement coupled with removing any conflict of interest that the political class might have in the implementation of the Act.
[1] Notification dated April 26, 2016, available at http://mhupa.gov.in/writereaddata/Real_Estate_RegulationDevelopment_2016.pdf. (last accessed on May 18, 2016).
[2] Real estate Act comes into force on Sunday, THE HINDU:BUSINESS LINE, April 30, 2016, available at http://www.thehindubusinessline.com/news/real-estate/real-estate-act-comes-into-force-on-sunday/article8541172.ece.
[3] The Real Estate (Regulation and Development) Act, 2016, section 20, March 26, 2016.
[4] The Real Estate (Regulation and Development) Act, 2016, section 21, March 26, 2016.
[5] The Real Estate (Regulation and Development) Act, 2016, section 31, March 26, 2016.
[6] The Real Estate (Regulation and Development) Act, 2016, section 32 & 34, March 26, 2016.
[7] The Estate Regulator Bill: 10 things you should know about it, THE ECONOMIC TIMES, March 10, 2016, available at http://economictimes.indiatimes.com/wealth/real-estate/real-estate-regulator-bill-10-things-you-should-know-about-it/articleshow/51344872.cms.
[8] The Real Estate (Regulation and Development) Act, 2016, section 44(2), March 26, 2016.
[9] The Real Estate (Regulation and Development) Act, 2016, section 44(5), March 26, 2016.
[10] The Real Estate (Regulation and Development) Act, 2016, section 53(4), March 26, 2016.
[11] The Real Estate (Regulation and Development) Act, 2016, section 3(2), March 26, 2016.
[12] The Real Estate (Regulation and Development) Act, 2016, section 4(l) (D), March 26, 2016.
[13] The Real Estate (Regulation and Development) Act, 2016, Proviso, section 4(l) (D), March 26, 2016.
[14] Supra at 7.
[15] The Real Estate (Regulation and Development) Act, 2016, section 2(k), March 26, 2016.
[16] The Real Estate (Regulation and Development) Act, 2016, section 4(h), March 26, 2016; Sudip Mullick and Amit Wadhwani, Salient Features of the Real Estate (Regulation and Development) Bill, 2016, MONDAQ, available on http://www.mondaq.com/india/x/475724/real+estate/Salient+Features+Of+The+Real+Estate+Regulation+And+Development+Bill+2016.
[17] The Real Estate (Regulation and Development) Act, 2016, section 13(1), March 26, 2016.
[18] The Real Estate (Regulation and Development) Act, 2016, section 14(2)(i), March 26, 2016.
[19] The Real Estate (Regulation and Development) Act, 2016, section 14(2)(ii), March 26, 2016.
[20] The Real Estate (Regulation and Development) Act, 2016, section 18, March 26, 2016.
[21] The Real Estate (Regulation and Development) Act, 2016, section 14(3), March 26, 2016.
[22] The Real Estate (Regulation and Development) Act, 2016, section 59, March 26, 2016.
[23] The Real Estate (Regulation and Development) Act, 2016, section 3(1), March 26, 2016.
[24] The Real Estate (Regulation and Development) Act, 2016, section 3(2), March 26, 2016.
[25] The Real Estate (Regulation and Development) Act, 2016, section 4, March 26, 2016.
[26] The Real Estate (Regulation and Development) Act, 2016, section 60, March 26, 2016.
[27] The Real Estate (Regulation and Development) Act, 2016, section 61, March 26, 2016.
[28] Id.
[29] Vineet Sahay, The Real Estate (Regulation and Development) Bill- The first step towards real estate reform, June 23, 2013, available at http://www.legalservicesindia.com/article/article/the-real-estate-(regulation-and-development)-Bill-the-first-step-towards-real-estate-reform-1536-1.html.
[30] Supra at 20.
[31] Wait for one more year before you can seek shelter under Real Estate Act, THE INDIAN EXPRESS, April 29, 2016, available at http://indianexpress.com/article/india/india-news-india/wait-for-one-more-year-before-you-can-seek-shelter-under-real-estate-act-2775423/.
[32] The Real Estate (Regulation and Development) Act, 2016, section 20(1), March 26, 2016.
[33] The Real Estate (Regulation and Development) Act, 2016, section 43(1), March 26, 2016.
[34] The Real Estate (Regulation and Development) Act, 2016, section 84, March 26, 2016.
[35] Devangshu Datta, Will the new Real Estate Act be a game changer?, BUSINESS STANDARD, BUSINESS STANDARD, May 10, 2016, available at http://www.business-standard.com/article/markets/will-the-new-real-estate-act-be-a-game-changer-116051000541_1.html.
[36] Ashwini Kumar Sharma, What does Real Estate Act change for you?, LIVE MINT, May 6, 2016, available at http://www.livemint.com/Money/Kxt8ReSnyYfZiAnkCF8ToJ/What-does-real-estate-Act-change-for-you.html.
[37] Tejaswinee Roychowdhury, Critical analysis of the Real Estate Act, May 11, 2016, available at http://www.letscomply.com/knowledge-hub/2016/05/critical-analysis-real-estate-act/.
[38] The Real Estate (Regulation and Development) Act, 2016, section 92, March 26, 2016.
[39] Bhushan Shah and Labdhi Shah, Update: Real Estate (Regulation and Development) Bill, 2016, March 19, 2016, IndiaCorpLaw, available at http://indiacorplaw.blogspot.in/search/label/Real%20Estate. (last accessed on May 18, 2016).
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