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In sight view on Real Estate and Development Act

March 16, 2017[2017] 79 taxmann.com 162 (Article)
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Jaya Sharma-Singhania

CS, M/s. Jaya Sharma & Associates, Practicing Company Secretary Firm, Mumbai

Hetal Chitroda

CS, M/s Jaya Sharma & Associates (Mumbai)
image The Real Estate (Regulation and Development) Act, 2016 is an Act of the Parliament of India which seeks to protect home-buyers as well as help boost investments in the real estate industry. The bill was passed by the Rajya Sabha on 10 March 2016 and by the Lok Sabha on 15 March 2016. The Act came into force from 1 May 2016 with 69 of 92 sections notified. The Central and state governments are liable to notify the Rules under the Act within a statutory period of six months.

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.

While the real estate sector continues to grow the need for reforms and institutionalisation was being felt for long. This was propelled by increased litigations and consumer discontent with the practices prevalent across the industry. The need for regulations and uniform guidelines was also being felt by the industry which continued to be   perceived negatively by consumers because of unscrupulous activities of a few. Also a long standing demand by the industry and consumers was largely unmet i.e. delays in grant of project approvals and dispute resolution. There was no better time to introduce Real Estate (Regulations and Development) Act as the Indian Government is focusing on - housing for all, smart cities and infrastructure development, fulfilment of these goals will require enablers such as the Act. image

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.

Salient Features

1.   Real Estate Regulatory Authority:
  Under the Act, instead of a regular forum of consumers, the purchasers of real estate units from a developer would have a specialised forum called the "Real Estate Regulatory Authority" which will be set up within one year from the date of coming into force of the Act. In the interim, the appropriate Government (i.e., the Central or State Government) shall designate any other regulatory authority or any officer preferably the Secretary of the department dealing with Housing, as the Regulatory Authority. image
2.   Registration with the Regulatory Authority:
  The promoter has to register their project (residential as well as commercial) with the Regulatory Authority before booking, selling or offering apartments for sale in such projects. In case a project is to be promoted in phases, then each phase shall be considered as a standalone project, and the promoter shall obtain registration for each phase.
  Further, in case of ongoing projects on the date of commencement of the Act which have not received a completion certificate, the promoter of such project shall make an application to the Regulatory Authority for registration of their project within a period of three months of the commencement of the Act.
3.   The following types of projects shall not be required to be registered before the Regulatory Authority:
  Where the area of land proposed to be promoter does not exceed 500 square meters or the number of apartments to be constructed in the project does not exceed eight apartments. However, the appropriate Government (Central and State Government) may, if it considers appropriate, reduce the threshold limit below 500 square meters or eight apartments;
  Projects where the completion certificate has been received prior to the commencement of the Act;
  Projects for the purpose of renovation or repair or re-development which does not involve marketing, advertising, selling and new allotment of any apartment plot or building.
4.   Carpet Area :
  Under the Act, developers can sell units only on carpet area, which means the net usable floor area of an apartment. This excludes the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment.
5.   70% of realisation from purchasers / allottee in a separate bank account:
  The Act mandates that a promoter shall deposit 70% of the amount realised from the purchasers / allottee, from time to time, in a separate account to be maintained in a scheduled bank. This is intended to cover the cost of construction and the land cost and the amount deposited shall be used only for the concerned project.
  The promoter shall be entitled to withdraw the amounts from the separate account, to cover the cost of the project, in proportion to the percentage of completion of the project. However, such withdrawal can only be made after it is certified by an engineer, an architect and chartered accountant in practice that the withdrawal is in proportion to the percentage of completion of the project.
  The promoter is also required to get his accounts audited within six months after the end of every financial year by a practicing chartered accountant. Further, he is required to produce a statement of accounts duly certified and signed by such chartered accountant, and it shall be verified during the audit that (i) the amounts collected for a particular project have been utilised for the project; and (ii) the withdrawal has been in compliance with the proportion to the percentage of completion of the project.
6.   Advertisement or prospectus issued by the promoter:
  The advertisement or prospectus issued or published by the promoter should prominently mention the website address of the Regulatory Authority, where all details of the registered project have been entered and include the registration number obtained from the Regulatory Authority and other similar details.
  Where any person makes an advance or a deposit on the basis of the information contained in the notice, advertisement or prospectus and sustains any loss or damage because of any incorrect, false statement included in these, he shall be compensated by the promoter in the manner as provided under the Act. Also, if the person affected by such incorrect, false statement contained in the notice, advertisement or prospectus, intends to withdraw from the proposed project, his entire investment (along with interest at such rate as may be prescribed and compensation in the manner provided under the Act), will be returned to him.
7.   Limit on receipt of advance payment:
  A promoter shall not accept a sum more than 10% percent 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 of sale with such person and register the said agreement of sale, under any law for the time being in force.
8.   Restriction on addition and alteration in the plans:
  The promoter cannot make any addition or alteration in the approved and sanctioned plans, structural designs, specifications and amenities of the apartment, plot or building without the previous consent of the purchasers / allottee.
  The promoter also cannot make any other addition or alteration in the approved and sanctioned plans, structural designs and specifications of the building and common areas within the project without the previous written consent of at least two-thirds of the purchasers / allottee, other than the promoter, who have agreed to take apartments in such a building.
9.   Structural defect:
  In case any structural defect or any other defect in the workmanship, quality or provision of services or any other obligations of the promoters is brought to the notice of the promoter within a period of five years by the purchasers / allottee from the date of handing over possession, the promoter shall rectify such defect without any further charge, within thirty days. If the promoter fails to rectify such defect within such time, the aggrieved purchasers / allottee shall be entitled to receive appropriate compensation in the manner as provided in the Act. image
10.   Restriction on transfer and assignment:
  The promoter shall not transfer or assign his majority rights and liabilities in respect of a project to a third party without obtaining prior written consent from two-thirds of the purchasers / allottee, except the promoter, and without the prior written approval of the Regulatory Authority.
  The purchasers / allottee, irrespective of (i) the number of apartments or plots booked by him or booked in the name of his family; or (ii) in the case of other persons such as companies/firms/any association of individuals, by whatever name called, booked in its name or booked in the name of its associated entities/related enterprises, shall be considered as one purchasers / allottee only.
11.   Refund of amount in case of delay in handing over possession:
  In case the promoter is unable to hand over possession of the apartment, plot or building to the purchasers / allottee (i) in accordance with the terms of the agreement of sale; or (ii) due to discontinuance of his business as a promoter on account of suspension; or (iii) revocation of his registration or for any other reason, then the promoter shall be liable, on demand being made by the purchasers / allottee, to return the amount received by him from the purchasers / allottee with interest and compensation at the rate and manner as provided under the Act. This relief will be available without prejudice to any other remedy available to the purchasers / allottee.
  However, where a purchasers / allottee does not intend to withdraw from the project, he shall be paid interest by the promoter for every month of delay, till the handing over of the possession, at a prescribed rate.

Protection to buyers:

image The Act prohibits unaccounted money from being pumped into the sector and as now 70% of the money has to be deposited in bank accounts through cheques. A major benefit for consumers included in the Act is that builders will have to quote prices based on carpet area and not super built-up area, while carpet area has been clearly defined in the Act to include usable spaces like kitchen and toilets.

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.

  The first and foremost of these was to hold real estate developers in equity with consumers and make them accountable for delivery and quality of projects.
  Primarily RERAs will have an oversight on the real estate transactions and promote timely and satisfactory completion of projects, protect consumer interest and bring about transparency in all proceedings related to the sale, construction and handover of projects.
  The Act brings all stakeholders - consumer, real estate developer and intermediaries under the purview of the RERA. And various disputes pertaining to these parties will be handled by RERA. Also the Act defines liabilities of every stakeholder and punishment to be awarded in case of violations.
  RERA will also maintain a web portal which will host almost all the relevant information a consumer requires from a real estate developer including - details of land titles, project approvals, construction progress, names of intermediaries, contractors etc.

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.

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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:

1.   Due to huge difference in collectorate price (ready reckoner) and the market price of real estate property there is huge cash component (20-30%) involved in property transactions. As such huge chunk of money goes unaccounted thus making this sector as a best platform to park black money. Demonetization will certainly check this cash transactions and bring back transparency.
2.   As the cash component in property transactions will go down, this will result in a drop in land prices and land deals will likely see a substantial dip.
3.   One of the negative effect could be the immediate unemployment in unorganized sector (laborers and raw materials) due to sudden slow down.
4.   The debt-ridden unorganized developers will face cash crunch in short term and will be forced to cut down the prices to push up sales ,much to the delight of property buyers.

Long term impact:

1.   Due to increased deposits in banks the lending rates may decrease making homes more affordable especially in the affordable segment, much to the benefit of the government's Housing for all mission.
2.   This will boost home sales and generate job opportunities to allied dependent sectors as well.
3.   Real sector will be transformed into more efficient, organized, fair and transparent sector and will be put on the roadway leading toward sustainable growth.

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:

  If promoter does not register its project with the Regulatory Authority – the penalty may be up to 10% of the estimated cost of the project as determined by the Regulatory Authority;
  If promoter does not comply with the aforesaid order of the Regulatory Authority - imprisonment of up to three years and a further penalty of up to 10% of the estimated cost, or both; and
  In case the promoter provides any false information while making an application to the Regulatory Authority or contravenes any other provision of the Act – the penalty may be up to 5% of the estimated cost of the project or construction.

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:

image The aims of real estate due diligence are to thoroughly inspect the fundamentals of the property, seller, financing, and compliance obligations to reduce and mitigate financial uncertainties. The effort is not for the fainthearted. Prospective buyers must scrupulously examine zoning restrictions, potential liens, and possible encroachments on the property. Existing structures must be fully inspected to discern needed repairs and their costs. They must determine whether or not they will absorb legacy liabilities from prior owners' legal and regulatory violations. If the property is largely financed, they need to address their ongoing ability to make required payments to the lender.

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.

Bibliography

https://en.wikipedia.org/wiki/Real_Estate_(Regulation_and_Development)_Act,_2016

https://www.godrejproperties.com/buyersguide/realestateact

https://www.reit.com/investing/reit-basics/what-reit

https://blog.ipleaders.in/analysis-real-estate-regulation-development-act-2016/

http://indianexpress.com/article/business/economy/real-estate-regulation-and-development-act-2016-state-level-dilution-may-give-leeway-to-realtors-4407613/

https://ct.wolterskluwer.com/resource-center/articles/due-diligence-in-commercial-real-estate-transactions

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