Building Block For A Real Estate Regulator

Starting 1st May 2017, the much awaited Real Estate (Regulation & Development) Act (the 'Act') comes into effect. The ministry of Housing & Urban Poverty Alleviation recently notified 69 out of the total 92 sections of the Act and this set the ball rolling for States to formulate, within a maximum of 6 months, rules and regulations as statutorily mandated. Since land is a State subject under the Constitution, even after the Centre enacts legislation, State governments have to ratify them. States now have to set-up the Real Estate Regulatory Authority's ('RERA') and the Real Estate Appellate Tribunals and have only a maximum of 1 year from the coming into effect of the Act to do so.

The preamble to the Act details the intention behind the legislation which is primarily to protect the interests of consumers and bring in efficiency and transparency in the sale/purchase of real estate. The Act also attempts to establish an adjudicatory mechanism for the speedy redressal of disputes. RERA and the Appellate Tribunal are expected to decide complaints within an ambitious period of 60 days. But no legislation can protect the interest of only one class. The real estate sector contributes almost 6% to our GDP and is also one of the largest job creators. Mindful of this, the Act seeks to assist developers by giving regulators the powers to make recommendations to appropriate State governments to create a single window for clearances of approvals in a time bound manner. Recommendations can also be made for measures to increase financial assistance for the affordable housing segment.

Some key provisions of the Act include a requirement for developers to register projects with RERA now prior to any advertisement and sale. In fact, even the printed brochures have to be submitted to the regulator. Developers are also expected to have all sanction plans approved and regulatory clearances in place prior to the commencement of sale. Any subsequent changes have to be approved by a majority of the buyers and the regulator. The Act, again ambitiously, stipulates an electronic system, maintained on the website of RERA where developers are expected to update on a quarterly basis the status of their projects, submit regular audits and architectural reports of each project and also regularly update the status of ongoing approvals and clearances. Notably, non-registration of projects is now taken very seriously and RERA has the power to order up-to 3 years imprisonment of the promoters of a project for non compliance.

One of the most notable provisions under the Act requires developers to maintain a separate escrow account in relation to each project and deposit 70% of the collections with respect to each project in such account to ensure that funds collected are utilized only for the project for which they were collected. This provision will prevent against the circulation of money between different projects, which had become a common practice of builders. The Act also requires all real estate brokers and agents to be registered with the regulator.

While interests of consumers have been protected, developers find provisions of the Act as being exceptionally burdensome on a sector already ailing from a paucity of funds and multiple existing regulatory challenges. The builder lobby has been demanding 'industry' status for the real estate sector as that will ease the availability of bank loans. Real estate companies express that the blame for all delays does not lie at their door step. In a lot of cases the appropriate authority fails to grant approvals/sanctions within a stipulated time frame which causes delay. While the Act addresses some of this, it does not deal with concerns of developers regarding force-majeure (acts of god outside their control) which result in shortage of labour or issues that come up on account of their not being a central repository of land titles/deeds. Other concerns of the builders include that the sector is already overly regulated and the introduction of RERA, almost as a super regulator, will infact impede growth.

While some concerns of developers are legitimate, unfortunately, the real estate sector had become somewhat of an untamed horse galloping away in all directions and for the most part the cracks that were beginning to emerge on their books were of their own making. Once 100% Foreign Direct Investment was permitted in the sector, international money began to flood the market and for the most part builders/developers overstretched themselves, diverted funds and some begun to cross-invest in non-core activities. In the race to get ahead and announce the next 'Mega Project' one came across many instances where real estate companies embarked upon projects without even consolidating land. The real estate sector had also become the 'parking lot' for black money/ Benami transactions and all tricks were used to evade government dues and taxes by registering property below circle rates. Most of these issues are likely to get addressed under the new law.

Like with any new legislation, it takes time to iron out the creases.  In fact, the 22 sections that are still to be notified relate to functions/duties of promoters, rights/duties of allottees, recovery of interest on penalties and other offences and it appears that the law makers consciously delayed the notification of these provisions till such time that regulator, developers and buyers familiarize themselves with the new legislation. Eventually the benefit of any statute is contingent on its effective implementation. Despite a model set of rules, till date only a few States have notified rules as required from them. The onus is now on all States to formulate rules and establish the regulatory authorities in a timely manner. There shouldn't just be paper compliance, by designating an existing authority to take additional charge as the real estate regulator, as that would affect the timeliness as prescribed under the Act. It's also important that members selected as regulators have subject matter expertise to understand nuances of the sector.

In final analysis, the new legislation is a welcome enactment and one that will go a long way to assist upstanding developers. More importantly, it will ease the burden on innocent home buyers who put their life's saving into a real estate investment with the hope of getting a roof over their head and who's dreams have often come tumbling down!

Satvik Varma is a corporate commercial lawyer in New Delhi. A graduate of Harvard Law School, he's enrolled in India and New York.