Real estate (Regulation & Development) Bill - 2013

INTRODUCTION

The real estate sector plays a catalytic role in fulfilling the need and demand for housing and infrastructure in the country. While this sector has grown significantly in recent years, it has been largely unregulated, with absence of professionalism and standardisation and lack of adequate consumer protection. Though the Consumer Protection Act, 1986 is available as a forum to the buyers in the real estate market, the recourse is only curative and is not adequate to address all the concerns of buyers and promoters in that sector. The lack of standardisation has been a constraint to the healthy and orderly growth of industry. Therefore, the need for regulating the sector has been emphasised in various forums. So, it becomes necessary to have a Central legislation in the interests of effective consumer protection, uniformity and standardisation of business practices and transactions in the real estate sector. Hence, with the objective of 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 government of India has brought to introduce a law to regulate both residential and commercial real estate in India under a comprehensive law which shall be called  after notification by the government of India as “The  Real Estate (Regulation & Development) Act of 2015” (hereinafter referred to as “RERA”). Moreover, the new legislation 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.

BACKGROUND

Real estate involves the sale, purchase and development of land for residential, commercial and industrial purposes. Different aspects of real estate are regulated by different levels of government. Real estate projects are currently regulated by state governments under their respective state town and country planning or apartment ownership Acts. Typically, town and country planning Acts regulate land use and development. Apartment ownership Acts regulate individual ownership of apartments in buildings with multiple apartments. Approvals for construction of real estate projects are primarily given at the local and state level. Certain approvals are given by the central government. Consumer grievances may be redressed through forums established under the Consumer Protection Act, 1986. Unfair trade practices may be challenged under the Competition Act, 2002. Several court cases have addressed issues in the sector such as unfair buyers’ agreements and illegal construction. The Competition Commission of India has pointed out that the absence of a single regulator for the real estate sector is partly responsible for poor grievance redressal. In 2013, the Committee on Streamlining Approval Procedures in the Real Estate Sector recommended making the sector more transparent, with information on real estate projects made easily available. It also recommended strengthening the grievance redressal mechanism in case of non-compliance with building standards or contracts. In 2009, the Ministry of Housing and Urban Poverty Alleviation had published a Model Real Estate Regulation and Development Bill, to regulate and promote real estate and ensure consumer protection. The Model Bill provided a legislative framework which state governments could choose to adopt while enacting their own laws. Some states have enacted laws or are in the process of enacting laws to regulate the real estate sector, along the lines of the Model Bill. The Real Estate (Regulation and Development) Bill, seeks to regulate contracts between buyers and sellers in the real estate sector to ensure consumer protection, and standardization of business practices. It establishes regulatory authorities at the state level to register residential real estate projects. The Standing Committee examining the Bill submitted its report on February 13, 2014 and made following recommendations:

Commercial and industrial real estate: The current Bill seeks to regulate only residential real estate. The Bill should regulate commercial and industrial real estate as well.

Exclusion of certain projects: The exclusion of projects smaller than 1,000 square meters or 12 apartments from the purview of the RERA could lead to the exclusion of a large number of small housing projects. This limit should be lowered to 100 square meters and three apartments.

Registration of all real estate agents: All real estate agents should be required to register with a RERA and not just those facilitating the sale of a project covered by the Bill.

Single window system for project approvals: A new provision should be inserted to allow RERAs to give directions to state governments to establish a single window system for providing clearances for projects. A time limit should be specified for state and local authorities to issue completion certificates.

Definition of carpet area: The Bill defines carpet area as ‘net usable floor area’ of an apartment, excluding the area covered by its walls. The term ‘net usable floor area’ should be defined in the Bill.

Structural defects: The Bill specifies that a promoter must rectify any structural defect which is brought to his notice within two years of allotment. This term should be increased to five years.

MAJOR HIGHLIGHTS OF THE BILL.

While conceding most of the recommendations of the Standing Committee, the parliament passed this new landmark legislation with the following major highlights of this landmark legislation are detailed as under:

Establishment and constitution of a Real Estate Regulatory Authorities.

All states and union territories (UTs) must establish state level regulatory authorities, called Real Estate Regulatory Authorities (RERAs) within one year of the Act coming into force. However, two or more states or UTs may set up a common RERA or a state or UT may also establish more than one RERA, to perform following key functions: (a) Ensuring that residential projects are registered, and their details uploaded on the RERA website; (b) Ensuring that buyers, sellers, and agents comply with obligations under the Act; (c) advising the government on matters related to the development of real estate;

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.

Establishment and constitution of a Real Estate Appellate Tribunals

One or more tribunals, called Real Estate Appellate Tribunals, will be established in states and union territories to hear appeals against decisions of RERAs. One Tribunal may be established for two or more states.

Each 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.

Appellate tribunals will now have to adjudicate cases in 60 days as against 90 days proposed earlier and Regulatory Authorities to dispose of complaints in 60 days.

Appeals from the order of the tribunal shall lie in the High Court.

Establishment and constitution of a Real Estate Appellate Tribunals

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 will advise the central government on major questions of policy, and protection of consumer interests.

Mandatory Registration of Real Estate Projects and Agents.

The Bill requires that all residential projects, with some exceptions, be registered. Promoters cannot book or offer these projects for sale without registering them.

Registration is not required for projects that: (a) are less than 500 square meters, or (b) entail the construction of less than 8 apartments, or (c) entail renovation/repair/re-development without re-allotment or marketing of the project.

The state governments can establish a lower limit for the exemption. Where a project is developed in phases, each phase must be registered separately. In order to register, the promoter must provide details such as the layout plan of the project, and the carpet area of property for sale to the RERA.

If the applicant does not hear back from the RERA within 15 days of the application for registration, the project will be considered registered.

Registration may be revoked after giving 30 days notice to the promoter. In case of revocation, the RERA can recommend the completion of the project through the competent authority or association of buyers or in any other manner. Here, competent authority refers to the local authority responsible for land development.

Real estate agents must register with a RERA in order to facilitate the sale or purchase of property in real estate projects that have been registered. Registered agents must not facilitate the sale of unregistered projects or mislead buyers regarding services offered.

Duties of the Promoter and the Buyer

On registration, the promoter shall upload details of the project on the website of the RERA including the number and types of properties for sale, and quarterly updates on the status of the project. In addition, the promoter must make the site and layout plans of the project, and the schedule of completion of the project available to the buyer.

In case a buyer incurs a loss because of false advertising, and wishes to withdraw from the project, the promoter must return the amount collected, with interest.

70% of the amount collected for the project from buyers must be used only for construction of that project. The state government can change this amount to less than 70%. The promoter shall not accept more than 10% of the total cost of the property as an advance payment without entering into a written agreement.

The promoter shall: (a) obtain a completion certificate from the relevant authority, (b) form an association or society of buyers, and (c) provide essential services till the association of buyers takes over the maintenance of the project. If the promoter is unable to give possession of the property, he shall be liable to return the amount received by him for the property, with interest.

The allottee to obtain stage-wise time schedule of project and claim possession as per promoter declaration. He is also entitled to refund with interest and compensation for default by the promoter. On their part, allottees must make payments and fulfil responsibilities as per agreement.

The buyer must make required payments within the term specified in the agreement signed with the promoter. He will be liable to pay interest for any delay in payment. Buyers must participate towards the formation of an association/society/cooperative society.

Penalties/Punitive Measures in Case of Non- compliance

The Real Estate Regulatory Bill puts the onus on builders to provide all correct information and adhere to all rules strictly. In case of any non-compliance on the builder’s part, he is liable to face the following punitive actions:

In case the promoter fails to register the property, he may be penalized up to 10% of the estimated cost of the project.

Failure to register despite orders issued by the RERA will lead to imprisonment for up to three years, and/or an additional fine of 10% of the estimated cost of the project.

The promoter will have to pay up to 5% of the estimate cost of the project if he violates any other provisions of the Act.

Real estate agents will have to pay a fine of Rs 10,000 for violating any provisions of the Act, for each day the violation continues.

The Bill provides regulatory authorities the power to cancel project registration in case of persistent violations and decide on further course of action regarding completion of such projects.

Builders will now have to pay equal rate of interest in case of default or delays as home buyers. For structural defects, liability of builders has been increased to five years, which was earlier two years.

A new provision has been created for imprisonment up to three years in case of promoters and up to one year in case of real estate agents and buyers for violation of orders of Appellate Tribunals or monetary penalties or both.

For wrong disclosure of information or for not complying with the disclosures and requirements, payment of 5 per cent of project cost will be imposed on the builder.

The Bill provides regulatory authorities the power to cancel project registration in case of persistent violations and decide on further course of action regarding completion of such projects.

For all registered projects, the time frame for completion must be clearly mentioned and adhered to. The developer is expected to receive all approvals from local authorities before marketing the project. The buyer will also have the right to obtain stage-wise completion schedule.

Flowery ads with misleading data on project location, appearance and amenities will be discouraged, thanks to strict guidelines on advertisement.

Terms such as carpet area will be made uniform to ensure that there is no ambiguity in specifications. If there are quality issues after taking possession, the developer has the obligation to rectify them.

Apart from developers, real estate agents will also be regulated. They have to be registered and should maintain books of accounts, records and documents. Promoters and agents can be punished for making misleading statements.

Bar of Jurisdiction :

No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Authority or the adjudicating officer or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act.

However, for redressal of grievances, the bill, however, allows aggrieved buyers to approach consumer courts that are available at the district level instead of only the real estate regulatory authorities proposed to be set up under the bill, mostly in capital cities.

APPARENT INCONSISTENCIES

Jurisdiction of parliament to legislate on real estate:

The question whether the Parliament has jurisdiction to legislate on real estate being an estate subject is not tenable for the reason that it is, though, the primarily the responsibility of state governments to regulate real estate and that states must monitor real estate projects, the scope of this legislation is limited to contracts between buyers and promoters, and transfer of property. Both these items fall within the Concurrent List and as such the legislation seeks to regulate transactions between buyers and promoters of residential real estate projects to ensure: (a) consumer protection, and (b) standardization of business practices in the sector. It does so through establishment of real estate regulatory authorities at the state level. Currently, real estate projects are primarily regulated by state governments as land and land improvement are in the State List of Seventh Schedule of the Constitution. Under Entry 18 of the State List, states can make laws related to land, or rights in or over land; land improvement; and colonisation of land.

Inconsistencies with state laws regulating real estate

The Bill provides that states can continue to apply their laws regulating real estate, to the extent that these laws are not inconsistent with the Act. However, several states have enacted or are in the process of enacting laws that have provisions that are inconsistent with the Bill. These provisions will be superseded by the Bill. Some examples are listed below.

While the central Bill mandates establishing a statutory regulatory authority to register projects in a state, West Bengal has delegated this function to a government department.

While the central Bill mandates that 70% (or less, as determined by state governments) of the funds collected from buyers of a project be used only for construction of that project, certain state governments have allowed for greater flexibility in usage of funds. The Maharashtra Housing Regulation and Development Act, 2012 mandates that the entire amount collected from buyers be kept in a separate account and be used for purposes collected.

The draft Haryana Real Estate (Regulation and Development) Bill, 2013 mandates that 70% of the amount collected from buyers for a project be used for that particular real estate project.

States such as Punjab, West Bengal and Uttar Pradesh have stated that they would prefer to continue existing laws to regulate real estate.

70% OF AMOUNT COLLECTED FROM BUYERS TO BE USED ONLY FOR CONSTRUCTION

The cost of a real estate project includes the cost of land and the cost of construction (and the profit margin). The Bill mandates that 70% (or less, determined by states) of the amount collected from buyers for a particular project be deposited in a separate bank account and be used only for construction of the project. The provision seeks to address the practice of builders using money from an existing project for other projects, resulting in delays in completion. However, this provision could lead to an increase in the cost of the project. In some cases, the cost of land may be higher than 30% and the cost of construction less than 70% of the total cost of the project. Mandating that 70% of the amount collected from buyers for a project should be used only for construction of that project, could lead to part of the money collected remaining unutilized. At the same time, the developer may need to borrow funds to finance the cost of purchasing land. The interest cost on these funds would increase the project cost, which may have to be borne by the buyers. Similar legislation has addressed the issue differently. The Model Bill (2009) states that the entire amount collected from buyers be kept in a separate account and be used for purposes collected, allowing for greater flexibility in its usage.5 The Maharashtra Act (2012) does the same. 6 The draft Haryana Bill (2013) mandates that 70% be collected and that this amount be used for the real estate project.

CHALENGES AHEAD:

Several committees and government agencies have outlined major challenges in the real estate sector. However, it is unclear if a central law can address these issues, given that some of these items fall under the purview of the state government:

Lengthy approval process for project clearances: In 2012, the Committee on Streamlining Approval Procedures for Real Estate Projects recommended establishing a single window clearance system for approvals. It noted that up to 50 approvals are required for projects, across three levels of government, taking up to four years. The Bill allows RERAs to make recommendations to state governments regarding measures to improve the approval process. However, the Standing Committee has recommended that a new provision be inserted to allow RERAs to direct state governments to establish a single window system.

Lack of clear land titles: The Planning Commission has pointed out that unclear land titles and lack of transparency in real estate transactions are detrimental to the development of the real estate sector. In 2010,the centre published a Model Bill, the draft Land Titling Bill, to reform the land titling system.14 In 2012, the Standing Committee on Rural Development suggested that modernisation of land records, including land titles, would be useful for land based developmental and regulatory activities.

Prevalence of black money: In a 2012 paper on black money, the Finance Ministry pointed out that the real estate sector, which constitutes about 11% of the GDP of the country, is particularly vulnerable to black money through underreporting of transaction prices while paying taxes.

MAJOR LOOPHOLES:

Major Loopholes in the Real Estate Bill to watch out for

Inclusion of ongoing Projects: Certain provisions in the Real Estate Bill which need to be relooked at, like bringing ongoing projects under the ambit of the proposed law. This will create a lot of confusion and will this mean that work will stop in such projects till registration of such ongoing projects is given. They believe that the Bill should be prospective not retrospective as it will stall ongoing projects and all including consumer will suffer.

Inclusion of Commercial Real Estate: The Bill now also covers commercial real estate, however the two asset classes of residential and commercial real estate need to be looked at differently. According to developers, a commercial asset is often leased and about 80 per cent of the business of commercial sector is of leasing, wherein cash flow for developers only begins after the building has been constructed and clients have moved in. In such a scenario provisions such as maintaining 50 per cent receivables may not be suitably applicable to commercial real estate.

Promoters’ Deposit reduced from 70 to 50 per cent:  Promoters have to deposit 50 per cent instead of the earlier proposed 70 per cent of the amounts realised for the real estate project from the allottees in a separate account in a scheduled bank. A leeway of 20 per cent will effectively leave more in the hands of developers to continue their practice of diverting funds collected for a project towards other projects.

Shortage of Housing Supply: Once the Bill becomes a law, supply shortage is imminent in the residential sector as developers cannot market or launch a project before obtaining all necessary project-related permissions. This means they will have to arrange funds for obtaining approvals and registering projects, squeezing out cash from balance sheets.

Real Estate Regulatory Bill-2015 Provisions may lead to Corruption: The Bill offers deemed approval for projects after 15 days of submission of documents, after which regulator has the power to scrutinise the documents and cancel the approval. However experts feel that post review of documents after the specified 15 days’ time frame is not a good idea as this will open a huge window for corruption. This process should have been automatic. Apart from that, the definition of wilful defaulters is not quantified in the Bill, and the clause on revocation of registration could be dangerous for developers.

Incentives Demanded by Developer: The developers seem to be at the receiving end of the Bill and may have to bear the brunt of many provisions. To give them a fair deal, the government is working on a mechanism to grant sanctions in one month’s time through an expert panel appointed by it. Currently, developers need to take at least 50 approvals before they can launch a project. If the government creates single-window clearance, the prices of houses could come down by 15-20 per cent. Today when clearances are stretching beyond one year, approvals in even 100 days will be a big relief provided all approvals are done in a time bound manner.

CONCLUSION:

The new legislation will ensure greater accountability towards consumers, and significantly reduce frauds and delays as also the current high transaction costs. It attempts to balance the interests of consumers and promoters by imposing certain responsibilities on both. It seeks to establish symmetry of information between the promoter and purchaser, transparency of contractual conditions, set minimum standards of accountability and a fast track dispute resolution mechanism. The new legislation will induct professionalism and standardisation in the sector, thus paving the way for accelerated growth and investments in the long run. However, major things expected that didn’t shape up despite continuous demands from industry stakeholders for single-window clearance, the Bill does absolutely nothing to streamline the 50-plus approvals required for a housing project. The proposed new legislation continues to exempt the government and its agencies that have slow clearing processes, contributing to overall delays. Developers feel that urban local bodies and development authorities should be brought under the ambit of regulators, since the process of issuance of certificates is under their control.

BY: ANURAG TIWARI, ADVOCATE

anurag.adv@gmail.com

Note: The content of this article is intended to provide a general guide to the subject matter.