A New Regulation Towards Development

In Depth

A New Regulation Towards Development

Ankit Chaturvedi | June 2016

Even if it does not provide a single-window clearance system, the new regulations in place in the real estate will hopefully bring safety and transparency in the market for consumers of residential and commercial projects.

The Real Estate (Regulation and Development) Act, 2016 (“Act”) seeks to protect home-buyers as well as help boost investments in the real estate industry. The Act came into force from 1st May 2016 with 69 of 92 sections notified and expressly repeals the Maharashtra Housing (Regulation and Development) Act, 2012 and will have over-riding effect on conflicting state laws.

The Act has been passed with an intention to bring safety and transparency in the market for consumers of residential and commercial projects by introducing a robust regulatory mechanism. The Act seeks to address distortions in the real estate market due to the asymmetrical relationship between real estate developers and consumers.

SIGNIFICANT HIGHLIGHTS OF THE NEW REGULATIONS REGULATING BODY

All states and union territories (UTs) must establish state level regulatory authorities, called Real Estate Regulatory Authority (“RERA”) within one year of the Act coming into force to regulate transactions related to both residential and commercial projects and ensure their timely completion and handover. Two or more states or UTs may set up a common RERA. A state or UT may also establish more than one RERA.
Each RERA will consist of a chairperson and at least two full time members with experience in sectors such as real estate, urban development, law and commerce.
One or more tribunals, called Real Estate Appellate Tribunals (“Appellate Tribunal”), will be established in states and union territories to hear appeals against decisions of RERAs. One Appellate Tribunal may be established for two or more states. Each Appellate Tribunal will consist of a chairperson and two members, one with a judicial background and one with a technical background.
If a RERA observes that an issue impacts competition, it may refer the case to the Competition Commission.
A Central Advisory Council, consisting of representatives from union ministries, state governments, RERAs and representatives of the real estate industry, consumers, and labourers will be established. The Council shall play advisory role to the Central Government on major questions of policy, and protection of consumer interests.
Before the establishment of the RERA the appropriate Government may designate any Regulatory Authority or officer, preferably, Secretary, of the department dealing with Housing to act as RERA, and after the establishment of RERA the case shall be transferred to the RERA and RERA shall adjudicate upon the cases from the stage such cases are transferred.

REGISTRATION OF REAL ESTATE PROJECT AND REGISTRATION OF REAL ESTATE AGENTS

The Act requires mandatory registration of real estate projects with the RERA where the total area of land proposed to be developed exceeds 500 square meters or where more than eight apartments are proposed to be developed inclusive of all phases (where phase-wise development is proposed), in order to provide greater transparency in project-marketing and execution. However the appropriate Government may reduce the threshold of 500 sq metres and eight apartments.
The Act provides that the RERA within one year of coming of its establishment shall operationalise a website to enable online registration.
The Act also requires every phase of a project to be registered separately as a stand alone project. Projects cannot be advertised, booked or sold in any form prior to registration and obtaining the necessary construction approvals.
For on-going projects which have not received completion certificate on the date of commencement of the Act, will have to seek registration within 3 months. Application for registration must be either approved or rejected within a period of 30 days from the date of application by the RERA. It is noteworthy that if application for registration is not rejected within the stipulated time of 30 days then the application shall be deemed accepted.
On successful registration, the promoter of the project will be provided with a registration number, a login id and password for the applicants to fill up essential details on the website of the RERA.
For failure to register a penalty of up to 10 percent of the project cost or three years’ imprisonment may be imposed. Real estate agents who facilitate selling or purchase of properties must take prior registration from RERA. Such agents will be issued a single registration number for each State or Union Territory, which must be quoted by the agent in every sale facilitated by them.

STANDARDISATION AND PROTECTION TO BUYERS

A major benefit for consumers included in the Act is that the builders will have to quote prices based on the ‘carpet area’ and not on the ‘super built-up area’, and the Act defines key terms such as ‘apartment’, ‘carpet area’ and ‘interest’ which will help in homogenising sector practices and prevent abuse of consumers due to biased classifications such as ‘super built-up area’, etc.
The Act provides that a specified form of agreement for sale between promoters and consumers may be prescribed, which will prevent inclusion of biased provisions in it. Consumers have also been granted the right to seek relief for unilateral termination of such agreements by promoters without cause.
The Act prohibits real estate agents from facilitating any sale or purchase of plots/apartments in projects without obtaining registration with the RERA. The agents are required to facilitate access of project information to consumers at the time of booking and refrain from making false statements, misleading representations and indulging in unfair trade practices.
Publicly accessible disclosures of the project and promoter details, along with a self-declared timeline within which the promoter is required to complete the project, are compulsory. Quarterly project related disclosures are also required. The disclosures are to be made available online which would benefit the consumers.
The promoter may seek to extend the registration by an application. RERA subject to the facts and circumstances may extend the registration for a period of not more than one year. The registration may also be extended due to force majeure which shall mean a case of war, flood, drought, fire, cyclone, earthquake or any other calamity caused by nature.

DUTIES AND FUNCTIONS OF THE PROMOTERS

Promoters must park 70% of all project receivables in a separate account in a scheduled bank. Drawdown from such account is permitted for land and construction costs only, in line with the percentage of project completion (as certified by an architect, an engineer and a chartered accountant). Further, a promoter can accept only up to 10% of the apartment cost prior to entering into a written agreement for sale with the consumer as advance payment or application fee as the case may be.
In terms of warranties the promoter is required to declare that it has legal title to the project land or authenticate the validity of title, if such land is owned by some another person. The promoter is also required to obtain insurance as notified by the appropriate Government for title and buildings along with construction insurance.
The promoter is prohibited from creating any encumbrances or charges on any apartment after executing an agreement for the same. In the event such charge or encumbrance is created, it will not affect the right and interest of the concerned consumer.
The promoter is not permitted to alter plans, structural designs and specifications of the land, apartment or building without prior consent of two-third of the allottees other than the promoter, who have agreed to take apartments in such building.
The promoter is responsible structural defect or any other defect in workmanship, quality or provision of services or any other obligations of the promoter as per the agreement for sale relating to such development is brought to the notice of the promoter within a period of five years by the allottee from the date of handing over possession, it shall be the duty of the promoter to rectify such defects without further charge, within thirty days, and inthe event of promoter’s failure to rectify such defects within such time, the aggrieved allottees shall be entitled to receive appropriate compensation in the manner as provided under Section 14 (3) of this Act.
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-third allottees, except the promoter, and without the prior written approval of the Authority according to Section 15(1) of the act.

RIGHTS AND DUTIES OF THE ALLOTTEES

The allottee is entitled to obtain the information about sanctioned plans, layout plans with specification, approved by the competent authority and such other information. The allottee is entitled to know stage wise time schedule of completion of the project, including the provisions of amenities and services asagreed between promoter and allottee.
The allottee shall be entitile to claim the possession as per the declaration given by the promoter.
The allottee may claim refund along with interest if the promoter does not comply or is unable to give possession as per the agreed terms or due to discontinuance of his business for any reason.
The obligation of the allottee to make timely payment and pay interest in case of delay may be reduced as per the mutual agreement between the promoter and the allottee.
Every allottee shall form an association or society or cooperative society of the allottee or a federation.
Allottee are obligated to take the possession of the apartment, plot or building within a period of two months of the occupancy certificate issued for the said apartment, plot or building.

LEGAL RECOURSE AND PENALTIES

The Act provides for time bound resolution of complaints and disputes by the RERAs and Appellate Tribunals. The consumer shall be entitled to claim the refund of amount paid along with interest at such rate as may be prescribed and compensation in the manner as provided under this Act, from the promoter, if the promoter fails to comply or is unable to give possession of the apartment, plot or building, as the case may be, in accordance with the terms of agreement for sale or due to discontinuance of his business as a developer on account of suspension or revocation of his registration under Section 19(4).
Part VII of the Act imposes monetary penalties on the promoter of up to 5% of the ‘estimated cost of the project’ (as determined by the RERA) for disclosure related defaults, and up to 10% for other defaults, along with a maximum imprisonment of 3 years.
Consumers are liable to a fine of up to 10% of the apartment cost or imprisonment up to 1 year for non-compliance with orders of the Appellate Tribunal.
Real estate agents will have to pay a fine of ` 10,000 for violating any provisions of the Act, for each day the violation continues

BRIEF ANALYSIS OF THE REGULATION

The Act contains several provisions to address the shortcomings in the real estate market, principally by way of establishing a disclosure framework and setting strict liabilities for promoter irregularities. It provides a robust mechanism for protection of consumers’ interest from the real estate developers enriching the principle of caveat emptor.

The most notable point of the Act is that with the ambit of “promoters”, defined under sub-section zk of section 2 of the Act, are included not only private person, as defined in sub-section zg of Section 2, but also development authority or any other public body.

The Act also sufficiently provides deterrence to the developers from making false allurements and promises. The Act constrains the developers to provide whatever they promise and also make them liable towards any defects in the construction within five years of handing over the possession. However, parking 70% of sale proceeds in a separate account may increase promoters’ reliance on institutional capital such as private equity or bank finance which shall prove to be expensive for the promoter and impact the utilisation of project receivables. This may further result into an escalation in project costs, the burden of which will eventually pass on to the consumers.

The Act has answered many of the problems faced by the consumer save for providing a single-window clearance system for various permits and licenses required before initiation of any real estate project, which could have saved time for the developers. Further, the Act does not assign liability for project delays attributable to state agencies. However the Act gives the benefits of any delay on behalf of RERA to the developer.

About Author

Ankit Chaturvedi

The author is an Advocate based in New Delhi. He has LLB from Government Law College, Mumbai and Masters in Intellectual Property Law.