A few additional advantages in favour of Real Estate Buyers added by cabinet on the recommendation

A few additional  advantages in favour of Real Estate Buyers added by cabinet on the recommendation of select committee of Rajya Sabha

The Real Estate is one of the globally recognized sectors in India and second largest employer after agriculture and the same is expected to grow at 30% over the next decade.

It is assumed that he real estate market will touch US $ 180 billion by 2020. The market size of this sector is expected to increase at a compounded annual growth rate (CAGR) of 11.2%. According to data released by department of industrial police & promotion, the construction development sector of India received Foreign Direct Investment (FDI) equity inflow to the tune of US $ 21.50 billion in the last 15 years.

All these are the figures which witness and tell us the story of real estate growth in India which surprisingly, till date, is governed without any regulated support. Mere contracts between the Builders and the Buyers which however are regulated by Indian Contract Act, 1872, define the rights and obligation of the parties which happens to be one sided contract, highly in favour of the Builders and detrimental to the interest of the investors.

The Real Estate (Regulation of Development) Bill, 2013(“Bill” ) is an attempt to regulate this vast industry to protect the interest of buyers, promote fair play in real estate transactions and to ensure timely execution of projects.

The Bill provides uniform regulatory environment to ensure speedy adjudication of disputes and orderly growth of the real estate sector. It will boost domestic and foreign investment in the Real Estate sector and help achieve the objective of Government of India to provide ‘Housing for All’ by enhanced private participation.

The Bill ensures mandatory disclosure by promoters to the customers through registration of real estate projects as well as real estate agents with the Real Estate Regulatory Authority. The Bill aims at restoring confidence of consumers in the real estate sector; by institutionalizing transparency and accountability in real estate and housing transactions which will further enable the sector to access capital and financial markets. The Bill will promote orderly growth through consequent efficient project execution, professionalism and standardization.

Cabinet, on the base of recommendation of select committee of members of Rajya Sabha, have made a few changes in the bill to further protect the interest of investors, some of the important changes are enumerated below with critical analysis:

1. Bill applicable both for commercial and residential real estate projects.

The Original Bill was applicable for residential project only. Indian real estate sector growth is mix of residential and commercial projects.  The real estate market in India is growing with a lightning speed and this growth is solely due to commercial property developments and upcoming commercial real estate projects in our country. A large number of individual investors have made investment in commercial properties either for start of their own business or earn rental income from the property. The government by bringing commercial projects within the ambit of Real estate Bill as made an attempt to safeguard the investors in the commercial properties and widening the scope of the Bill and the same is a welcome move.

1. Project size. 500 sq.mtr or eight flat instead of 1000 sq.mtr earlier.

Reducing the project size will bring the small size projects of 500 sq.mtrs or eight flats project within the ambit of the Real Estate Bill. There are mushrooming of small size projects and sizable investors have made investment in these project. Earlier project size of the 1000 sq.mtrs were covered in the bill but now the size has been reduced to 500 sq.mtr project to bring more and more project under this bill.

1. Sale proceeds to be kept in escrow account to meet out construction cost:

Most of thereal estate project are delayed due to financial crunch which happened due to practice of the Builders that they will collect the money for say A project and will divert the funds for say B project.Since both the projects are in the same companyand there is no regulation that they cannot use the fund collect for one project and used for other project except loan documents of the bank or financial institution ( applicable in case the project is funded by the Bank/ Financial Institution). Most of the financial problem is due to such financial diversion from one project to other project. To mark a full stop on such practice, it was proposed that out of amount collected as sale consideration from sale of the project, some of it should be kept in a escrow account which should be used for the purpose of construction. In the original bill, the builders were required to keep 70% of the sale in an escrow account to meet out the project development cost which was reduced to 50%. But, now the original provision of 70% has been restored in the Bill, which has to be passed by the Rajya Sabha. This will protect the interest of buyer, as the 70%, which is substantial amount, collected shall be earmarked for the construction purpose; rest of 30% can be used for general corporate purpose.

The provision no doubt is in favour of the buyers, but will create a hardship on the builders and a substantial amount of sale proceeds shall remain blocked in the escrow account and will not be available for expansion.

Liability of structure defect for 5 years instead of 2 years earlier.

Defect liability period has been increased to 5 years from 2 year. The standard of material used in the construction will be improved otherwise, the developer shall have to bear the expenses to repair in the structure besides the damages it may be required to pay to the customer. The provision is again to protect the interest of investors.

Rate of interest at same rate at which builders charge

Builders were charging interest of delay payment of installments calculated interest ranging from 18% to 24% that too compounding but when it comes to penalty which is payable on late possession to the buyers, they would offer interest ranging from 2% - 3%. Recently, in some judgment passed by the National Commission of Consumer forum, a strong view has been taken and it was ordered that the builder shall pay interest of late possession or in case of refund with interest ranging from 12% - 15%. Now with a view to give it a legal cover, the amendment has been made to the effect that the builders shall pay same amount of interest which they charge from the customer on delayed payment. This is a welcome move in the interest of investors.

But it should be noted that default of the builders on account of their own act is definitely liable to be punished by making the payment of interest on same rate they charge from their customers, but when such delay is due to outside force, like delay in giving the permissions/ approvals from the competent authority, they should not be held liable.

 Formation of resident welfare association

Under the current Laws, some of the state have promulgated apartment ownership act but some has yet to take a step towards this direction. Even after completion and handing over the possession, builders keep the maintenance of the building in their own hand and charge a heft amount of maintenance charges which they are compelled to pay.

But the amendment has been made to the effect that the resident welfare associations need to be formed within 3 month of allotment of majority units. Generally allotment of unit is made on receipt of 10% -20% payments and balance is received as per construction linked installment plan. The moot question which needs to be answered is that how an allottee that has not paid full amount and conveyance deed is yet to be executed in his favour can be treated as resident. The formation of such an association should have been linked to the execution of sale deed and handing over the possession instead of the allotment in the present bill.

District consumer court an additional dispute resolution mechanism

Earlier it was decided to have provision to the effect that in case of any grievance by the builder, the recourse would be that a legal case can be filed before the Real Estate Regulatory Authority. Now the doors of the consumer courts have been opened besides taking the shelter of Real Estate Regulator Authority. There are more than 600 consumer courts in India deciding the matter relating to consumer and consumer grievance including the customer of real estate project. This will be an additional advantage.

In my view there will be conflicting authorities, one Real Estate Regulatory Authority will decide the matters according to the provisions of Bill and on the other hand, consumer forum have to assume power from the Consumer Protection Act.

Carpet area clearly defined to include kitchen and toilets

Builders are selling the real estate product based on super area and some time the ratio of super area to carpet area is touching 60:40; meaning thereby in case you are buying a flat of 2000 sq.ft .super area, you are getting carpet area of 1200 sq.ft. only. First time in any written legislation the definition of carpet area is provided.

We all are waiting the day when the Bill shall be passed and be given a shape of legislation governing the real estate industry. We hope to see it through in coming session of parliament.

Sushil Aggarwal

SA & Associates

Advocates and Solicitors

Skaggarwal68@yahoo.com