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Need of the real estate (Regulation and Development) Act, 2016:
The real estate sector in India has witnessed several changes since the Indian economic growth picked up pace in early 2000's. Further, migration into urban centers, increase in disposable incomes and foreign investments drove demand for all forms of real estate in the country. Another emerging trend that has been witnessed is that the average age of home buyers has seen a reduction and use of mortgage for purchase of property has been on a rise. In commercial real estate several foreign investors have been acquiring significant stakes in Indian office complexes including SEZs.
The Act paves way for empowering all stakeholders engaged in the business and consumption of real estate, be it – consumers, real estate developers, brokers/ intermediaries amongst others. One important point to note here is that the Act doesn't cover the rental arrangements and agreements in any form. However all commercial and residential real estate including plots, apartments, shops, offices and other such properties are all covered under the Act. While consumer interest seems to have been finally addressed by the adoption of the Act it can't be ignored that the Government has codified best practices for the first time in this sector and these will go a long way in defining growth from here on.
The Act largely seeks to protect the interest of the purchasers / allottee by promoting transparency, accountability and efficiency in the construction and execution of real estate projects by promoters. It also holds the promoters accountable for not registering their projects with the Real Estate Regulatory Authority or for providing insufficient information regarding their project. In addition to the promoter and purchasers / allottee, the Bill also brings real estate brokers who facilitate the sale and purchase of units in a project within its ambit.
the Act intends to increase transparency and accountability in the real estate sector, by providing mechanisms to facilitate and regulate the sale and purchase of commercial and residential units/projects and timely completion of projects by the promoters.
Protection to buyers:
Need for setting up Real Estate Regulatory Authority (RERAs):
Real estate sector is supposedly one of the largest contributor to Indian economy and amongst the largest employers too. However real estate transactions in the country have largely been a tiresome and ambiguous affair for consumers. Real estate developers have been found to violate prudential norms of conducting business which has further resulted in litigations and disputes. In worst cases consumers have been handed over poor quality units which at times can also be a hazard. The need for clean-up of this system was being felt for long.
RERA thereby becomes one body which can be approached during disputes arising out of Real Estate Transactions and contracts, and this body will have power to impose penalties and punishment as set out under the Act
Hurdles in implementation of the Act:
Despite being a well-drafted piece of legislation due to various stages of negotiations that the Act has undergone in the past 9 years, there are many lacunae that it suffers from which has been discussed below:
The requirement of depositing 70% of project money in an escrow account is a likely source of confusion. The onus of informing about the transactions in on the builder which can be manipulated. Further, the requirement of certification by an engineer, an architect and a chartered accountant before withdrawing any amount is futile since they are all paid by builders and are likely to make reports in favor of the builders. Hence, there is an obvious conflict of interest. Further delays and disputes in withdrawal of amounts might lead to litigations jeopardizing the projects. Hence, the Act fails to address the problem of black money investment in real estate business. Further, the cost of land and construction of the project might be higher than 70% of total cost of the project. This may lead to borrowing of funds to raise the cost of the project with interest cost which will ultimately increase the cost of the project and burden the consumers.
It will be difficult for builders to sell units based on carpet area for buildings which are under construction and where some units have already been sold under super built up area. Therefore, an exemption to this effect may be inserted under section 4(h) of the Act to resolve the conflict. Further the word 'net usable floor area' must be defined in the Act for greater clarity.
There is a provision on monetarily penalizing the promoter for delay in completion of projects. However, in case such a delay is caused due to delayed governmental approvals then the promoter should not be penalized. Hence, such an exemption should be added under the relevant provision.
The time limit for the adjudication process by RERA and REAT might not work as expected. There were time limits for adjudication of real estate disputes on the consumer courts as well, however, no complaint was disposed off within the time frame of 90 days. Hence, the time limits under the Act are also unlikely to work.
The purchasers / allottee can receive benefits under the Act only after one year which is the time frame for the respective governments to establish RERA and REAT. There is also a time limit of six months for different states to make rules for carrying out provisions of the Act. Looking at the political will and stability of governments in different states, the adherence to the timelines might be patchy with some governments establishing efficient bodies while some may not.
Many departments and processes will have to streamlined along with up-gradation of land records and bringing parity between circle rate and market rate. Since, most of documents in real estate sector are hand-written, it will be a herculean task to capture all that on an online database which will also demand a lot of time. Moreover, understanding the ownership pattern would be critical for ensuring transparency under the Act.
The Act may not be implemented efficiently due to dilly-dallying tactics in implementation of the provisions of the Act. This may be due to conflict of interest of the politicians who have a major stake personally in the real estate sector. Hence, political reluctance might be a major roadblock.
The laws relating to rights over land, land improvement and colonization of land are under the state list. Therefore, laws in the states of Haryana and Maharashtra differ from the Central Act and there might be conflict between the two laws. Though the Maharashtra Housing (Regulation and Development) Act, 2012 has been repealed specifically under the Act, the one for the state of Haryana has not been which will be continuous source of confusion in the state though the Central Act will supersede the state Act.
The measures taken to secure consumer interest and empower him:
The consumer is entitled to receive information about the sanctioned plan, layout plan as approved by the competent authority, stage wise time schedule of the project completion and the services promised by the real estate developer like drinking water facility, electricity, sanitation etc. After receiving the physical possession of the unit, the consumer has a right to obtain the necessary documents and plans including that of the common areas.
The consumers can claim possession of the unit and the association of consumers can collectively claim possession of the common areas as declared by the real estate developer.
If the real estate developer fails to meet the timeline or does not deliver what was promised, the consumer has a right to claim refund of amount paid along with prescribed interest and compensation for the same Also consumers will have to be updated about project progress, sales and construction status by the real estate developer.
Impact of Demonetization on Real Estate:
Realty sector has the largest share of India's black money. This move, to eradicate black money, would cause an upheaval in the real estate market. The primary sector or fresh inventory sale would be least affect by this move because most of its transactions are taken over by the finances provided by financial institutions and banks. The resale market is where the real hit would be. However, people would now look out for better real estate investment where there is more transparency in payment structure.
The sale of higher-end premium property and the resale inventory would be the ones at that would be greatly impacted by this master stroke played by Modi. The secondary or resale market will, however, certainly be impacted, given the fact that this segment does see the involvement of cash component. Luxury property where more transactions are done by cash would also see a drop of 25%-30%. These areas will be adversely affected as people investing here do not make use of banking channels for the payment.
The liquidity squeeze is only temporary and with the changing times, it would only lead to clear and transparent transactions. Price of property will be seeing a downfall in the near future because of this demonetization.
According to many real estate experts, this move will not see much impact on the primary realty market. However, the secondary market would be highly affected by this sudden move. Most reputed developers in the primary sector undertake cashless transactions and thus would be least affected. The CBRE Chairman, Anshuman finds that this 'bold move' would have a very positive impact in the long run. According to him, this move would increase the confidence of investors in real estate market as there could be more transparency in every transaction.
Short term impact:
Long term impact:
Offences and Penalty Under the Act:
Stringent penal provisions have been prescribed under the Act against the promoter in case of any contravention or non-compliance of the provisions of the Act or the orders, decisions or directions of the Regulatory Authority or the Appellate Tribunal which are the following:
These penal provisions have also been prescribed for any contravention or violation committed by the real estate agent or the allottee.
If any purchasers / allottee fails to comply with, or contravenes any of the orders, decisions or directions of the Regularity Authority, there may be a penalty for the period during which such default continues, which may cumulatively extend up to 5% of the cost of the plot, apartment or building, as the case may be, as determined by the Regulatory Authority. Further, if any purchasers / allottee fails to comply with, or contravenes any of the orders or directions of the Appellate Tribunal, this may entail imprisonment up to one year or with fine for every day during which such default continues, which may cumulatively extend up to 10% of the cost of the plot, apartment or building, as the case may be, or with both.
Due Diligence in Commercial Real Estate Transactions:
Many sophisticated commercial real estate investors consider it a best practice to commence detailed due diligence before the purchase contract is signed. The alternative is to carefully lay out in the contract for sale the items of due diligence that the buyer must undertake and the time this will take. This also serves to compel the seller to deliver required documents on an expeditious basis. Certain findings may adversely affect the acquirer's anticipated financial return, giving buyers a stronger hand in the transaction negotiations to ensure a fair and accurate property valuation, given the risks that have been unearthed.