Issues in Real Estate Sector and Real Estate Act

The Real Estate sector in India is one of the largest contributors to the GDP of India (around 6% of Indian GDP) and also one of the top job creators. This sector has seen growing pace with liberalization of the economy since 1991 and after the Government’s policy to allow 100% Foreign Direct Investment (FDI) in this sector since 2005. The constantly changing economic demands and growth, participation of new and more players and the inflow of huge investments in the economy and in this sector, have boosted the demand for real estate space, in commercial, residential, retail and hospitality sectors.

Even though the Real Estate sector is growing with growing economy of India, it is also facing several challenges and problems at the same time. Due to lack of proper rules and regulations and absence of strict adherence to law and regulations in force, Consumers, sellers and even governments are suffering and facing several issues.

Issues faced by Consumers:

Real estate projects in India take a long time to complete due to a complicated and corrupt regulatory mechanism and various legal issues (land issues, sanctions of project approvals etc.). Because of this, there is delay in delivery of possession to consumers. Consequently, the consumers have to bear the cost of Rent in one hand and cost of EMI in other hand at the same time. Moreover, they also sometimes, come under the influence of several fraudulent advertisements to purchase the products. In case of default in performance of their part, they also have to pay huge interest cost to builders.

Issues faced by Sellers:

Though the number of participants in Real Estate sector is increasing, they are also suffering various challenges to maintain their survival, growth and profitability. Some of the such challenges are, lack of land titles; delay in projects sanctions and procedural difficulties; lack of adequate source of finance; shortage of capital and labour; rising construction cost; high stamp duty and taxes; wide fluctuation in real estate prices, increasing inventory of unsold units etc.

Issues faced by Government:

Though the Real Estate sector is one of the main revenue generator, job creator and GDP contributor of the Country, the Government is facing several challenges to regulate this sector. The Government is lacking ability to maintain demand-supply balance. Due to the control and dominance of some private players, many government led schemes are also failing. It is facing problems to protect the interest of consumers. Real Estate sector has always been a very favourite place for black money holders to park their black money. Due to Black money players, corrupt practices, different practices to determine pricing and tax amount etc., the Government is facing revenue leakage, adverse effect in GDP etc. the ultimate effect of which has to be borne by honest consumers and sellers.

The Real Estate (Regulation and Development) Act, 2016 ("The Real Estate Act" or "RERA"):

In order to encounter such issues, to curb black money; to protect the consumer interest; to bring transparency; to prevent revenue leakage and to boost investment in real estate industry, the Parliament of India passed an Act called "The Real Estate (Regulation and Development) Act, 2016" which received the assent of the President on 25th March, 2016 and came into force from 1st May 2016 (with 69 of 92 Sections notified vide Ministry Of Housing And Urban Poverty Alleviation’s Notification dated 26th April, 2016).

As per Section 84 of the Real Estate Act, the respective State Governments shall make rules for carrying out the provisions of this Act within 6 months of the Act being enforced.  

Ministry of Housing & Urban Poverty Alleviation had notified the final rules for the five Union Territories  without Legislature viz., Andaman & Nicobar Islands, Dadra & Nagar Haveli, Daman & Diu, Lakshadweep and Chandigarh vide Real Estate (Regulation and Development) (General) Rules, 2016 on 31st October, 2016.

In line with this, Gujarat, Uttar Pradesh, Madhya Pradesh and Orissa have finalized their rules, while Rajasthan, Karnataka, West Bengal, Maharashtra & Tamil Nadu have framed their draft rules but these rules are still subject to public comments and necessary approvals. And other states are yet to finalize respective rules.

Salient Features of the Real Estate Act:

(1) Registration of Real Estate Projects by Promoters before sale and advertisement whether new or on-going projects with the Real Estate Regulatory Authority established under this Act is mandatory [Section 3].

(2) The Promoter shall deposit 70% of the amounts realized for the real estate project from the buyers, from time to time, in a separate account (escrow account) to be maintained in a scheduled bank to cover the cost of construction and the land cost and shall be used only for that purpose [Section 4].

(3) Promoter shall also declare size of the apartment based on carpet area even if it was earlier sold on any other basis such as super built-up area etc. [Section 4].

(4) Registration of Real Estate Agents who facilitate the sale or purchase of or act on behalf of any person to facilitate the sale or purchase of any plot, apartment or building, as the case may be, in a real estate project or part of it, being the part of the real estate project registered under section 3 of the Act, being sold by the promoter in any planning area, is mandatory [Section 9].

(5) The promoter shall, upon receiving his Login ID and password from the Real Estate Regulatory Authority create his web page on the website of the Authority and enter all details of the proposed for public viewing, including -

(a) details of the registration granted;
(b) quarterly up-to-date the list of number and types of apartments or plots, as the case may be, booked;
(c) quarterly up-to-date the list of number of garages booked;
(d) quarterly up-to-date the list of approvals taken and the approvals which are pending subsequent to commencement certificate;
(e) quarterly up-to-date status of the project; and
(f) such other information and documents as may be specified [Section 11].

(6) The promoter at the time of the booking and issue of allotment letter shall be responsible to make available to the Buyers, the following information, namely:—

(a) sanctioned plans, layout plans, along with specifications, approved by the competent authority, by display at the site or such other place as may be specified by the regulations made by the Authority;

(b) the stage wise time schedule of completion of the project, including the provisions for civic infrastructure like water, sanitation and electricity [Section 11].

(7) The promoter may cancel the allotment only in terms of the agreement for sale only and the buyer may approach the Authority for relief, if he is aggrieved by such cancellation and such cancellation is not in accordance with the terms of the agreement for sale [Section 11].

(8) A promoter shall not accept a sum more than 10% of the cost of the apartment, plot, or building as the case may be, as an advance payment or an application fee, from a person without first entering into a written agreement for sale with such person and register the said agreement for sale, under any law for the time being in force [Section 13].

(9) 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 2/3rd buyers, except the promoter, and without the prior written approval of the Authority [Section 15].

(10) If a promoter is unable to give possession of the property or possession is delayed, then the money received for the property along with interest has to be returned to the buyer or Interest has to be paid till handing over the possession [Section 18].

(11) It is mandatory for all the States and Union Territories to establish state level regulatory authorities called Real Estate regulatory authorities (RERAs) within a year of the act coming in to force to exercise the powers conferred on it and to perform the functions assigned to it under this Act. It is provided that two or more states can establish a common RERA and each state/UT can also establish more than one RERA [Section 20].

(12) It is mandatory for all the States and Union Territories to establish an Appellate Tribunal within a year of the Act coming to be known as the (name of the State/Union Territory) Real Estate Appellate Tribunal which will be required to adjudicate cases in 60 days [Section 43 & 44].

(13) If a promoter fails to register the property, he has to pay up to 10% of the estimated cost of the project as a penalty [Section 59].

(14) If a promoter fails to register the property despite orders issued by RERA will attract imprisonment up to 3 years and/or an additional fine of 10% of the estimated cost of the project [Section 59].

(15) If any buyer, who fails to comply with, or contravenes any of the orders, decisions or directions of RERA he shall be liable to a penalty for the period during which such default continues, which may cumulatively extend up to 5% of the plot, apartment or building cost, as the case may be, as determined by the relevant Authority [Section 67].

As it can be seen from the above, the Real Estate Act has become very stringent as far as the proper regulation and transparency of the Real Estate Sector is concerned. For the Government’s commitments to curb black money, develop smart cities, protect consumers’ interest and provide housings for all; the Real Estate Act has come as a boon but it is yet to see as the time will tell whether or not the Real Estate Act will become successful in achieving its objectives as expected by everyone.

Disclaimer: This write up is based on the understanding and interpretation of author and for knowledge purpose only and the same is not intended to be a professional advice. All valuable comments and feedback are welcome.