How compliances under the Real Estate (Regulation and Development) Act, 2016 have impacted the real estate sector in India
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The real estate sector has significantly contributed to India’s Gross Domestic Product in the past decade. However, this sector’s growth has been marred with its fair share of controversies, several of which have emanated from the severe lacunae that exist in the regulatory framework governing the real estate sector.
During the period leading up to the implementation of the Real Estate (Regulation and Development) Act, 2016 (“RERA”), an exigent need was felt to legislate and regulate the real estate sector by framing and implementing policies and a credible legal framework to ensure that homebuyers would not be exploited, that timely delivery of projects would take place, and that rampant malpractices undertaken by developers would be curbed. There was an urgent need to establish a centralized regulatory authority to ensure standardization in the real estate sector.
Before implementing the RERA, homebuyers could have only sought redressal under the Consumer Protection Act, of 1986, which is a grievance redressal forum for all consumers. However, given the sheer magnitude and the varied nature of issues being faced by homebuyers, it was seen as being inadequate, thereby paving the way for RERA to be promulgated and after that, implemented.
On March 10th, 2016, the Real Estate (Regulation and Development) Bill, 2016, was passed by the Rajya Sabha and on March 25th, 2016, by the Lok Sabha. Initially, on May 1st, 2016, only 59 sections out of 92 were notified. The remaining 32 sections became operative on May 1st, 2017.
The RERA is Central legislation. Nevertheless, its execution depends almost entirely on States and Union Territories (“UT”). Section 84 of RERA provides that within six months from the commencement of RERA, by notification, the States/Union Territories shall set up rules to carry out the provisions of RERA in an effective and unbiased manner.
Through RERA, the mandated state-level authorities (“State Authority” or “State Authorities”) were established to regulate the real estate business, which, inter alia, covered activities such as keeping a regular check on rampant project delays and enhancing the accountability of promoters and developers towards homebuyers.
In terms of section 20 (1) of RERA, each State and UT is required to set up their respective regulatory authorities within one year from the date that RERA comes into force. Previously, the State Governments had the power to appoint their respective regulatory authorities to examine and inspect the real estate sector. The establishment of State Authorities brought about uniformity and parity between the numerous real estate regulatory bodies that existed across the country.
Section 21 of RERA directs that State Authorities shall consist of a chairperson and a minimum of two whole-time members (as appointed by the appropriate State Government). Under section 35, RERA grants State Authorities with extensive powers by giving them the status of a civil court.
This section authorizes State Authorities to conduct inquiries or investigations either based on a complaint filed against the promoter/allottee/real estate agent or even by taking suo-moto cognizance. Other powers bestowed on the State Authorities include the power to call for information, summon the person and examine them on oath, and the power to order for production of relevant documents.
The division of powers between the Centre and State under RERA is precise and clear. Freedom has been given to the States and UTs to implement the provisions of RERA as per their requirements. In case of a conflict, the Central Act applies to resolve any disputes and assists in bridging the gap between the Centre and States.
As of January 11th, 2020, thirty States and UTs have notified rules under RERA. However, West Bengal has its legislation for the real estate sector that is separate from RERA, i.e., the West Bengal Housing Industry Regulation Act, 2017.
A brief overview of the key provisions is given as under:
RERA, through sections 3 to 10, imposes an obligation that all commercial and residential real estate projects (the total area to be constructed exceeds five hundred square meters or eight apartments) must be registered with the relevant State Authority under whose jurisdiction the project is to be developed before the development process is initiated.
Ongoing projects where completion certificates or occupancy certificates have not been issued must register themselves as well by the requirements under RERA. In terms of section 5 of RERA, this application must be addressed by the State Authority within thirty days of submission of the said application by the promoter of the project.
Once registration has been accepted, the promoter of the project will be provided with a registration number, login, and password. RERA has mandated that pertinent details relating to the real estate project including sanctioned plans, layouts, the location of the project with clear demarcation of the land area, carpet area, number and area of the garage, copy of sale agreements, approvals, etc., are to be published on the website of the appropriate State Authority for general public access.
In terms of section 11 of RERA, the promoter must upload the finer points of the project including the number and types of units sold out, information regarding which government approvals have already been obtained, which approvals are pending and the completion schedule, every three months.
On the individual State level, to instil transparency and ensure timely compliance with the various requirements under RERA, as well as to have a continuous overview of the ongoing projects of the registered promoter, State Authorities have come up with a quarterly compliance updation system.
Through this system, promoters are required to update on the State Authorities’ website as well as on their project website, information regarding the said project including a list of the number and types of apartments or plots of the project available for sale and offer, list of the number of covered parking and garages present and booked, the list of approvals taken and those which are yet to be obtained after procurement of the commencement certificate, an anticipated timeline of the construction of the project, any pending litigations linked to the project, etc.
Failure to do so may lead to the promoters attracting heavy penalties, and penal proceedings may also be initiated against said promoters by the respective State Authority.
This has resulted in greater transparency vis-a-vis real estate projects in a way that was not available to prospective homebuyers before.
To address the issue of promoters utilizing money obtained from homebuyers into projects other than what was promised, and to mitigate the risks relating to insolvency of the promoters, RERA provides for an escrow mechanism with regard to the money received by promoters of the project from the homebuyers.
Broadly, the developer must allocate 70 per cent of the money received from homebuyers into an escrow account, which will be maintained with a scheduled commercial bank. The promoter shall have access to only the remaining 30 per cent of the said amount, which will only be allowed to be utilized for the project for which the homebuyer has paid. This mechanism additionally serves as an assurance for the promoter as well, since this arrangement requires the homebuyer to make timely payments as agreed upon.
In terms of Section 4(2)(l)(D) of RERA, the promoter is allowed to withdraw the amounts from the separate account to cover the cost of the project, but only in proportion to the percentage of completion of the project. The amounts from the separate account can only be withdrawn after it is certified by an engineer, an architect, and a chartered accountant in practice about the proportion to the percentage of completion of the project.
As an additional check on this mechanism, the promoter shall get their accounts audited within six months after the end of every financial year by a chartered accountant in practice. The promoter shall produce a statement of accounts duly certified and signed by such a chartered accountant, who shall further verify during the audit that the amounts collected for a particular project have been utilized for that project and the withdrawal has complied with the proportion to the percentage of completion of the project as mandated by RERA.
Inordinate delays in the possession of homes have been a major cause of apprehension for homebuyers. Before the establishment of State Authorities, the builder-buyer battle appeared to be one-sided. With the implementation of RERA, the playing field between the two has been largely levelled, since the promoter has to adhere to the project completion and delivery dates mentioned in the sale agreement, and the buyers have to abide by the timely payment schedule to which they have agreed.
If a promoter fails to complete construction and is unable to give possession of the property to the allottee on time, he becomes liable to repay the entire amount given by the homebuyer, if they decide to withdraw from the sale agreement. If they wish to stay in the agreement, then the promoter will have to pay interest to the allottee for every month of the delay till possession is given.
Every State, to safeguard the interests of homebuyers, has introduced its own set of penal provisions vis-à-vis violation of this requirement by the promoter. For example, in States like Telangana, Maharashtra, Tamil Nadu, and Gujarat, if a promoter fails to complete the project on time or is unable to give possession of an apartment, plot or building to the allottee by the terms as encapsulated in the agreement for sale, he shall be liable to pay interest to the homebuyer for every month of delay till he can give possession to the allottee.
In states like Himachal Pradesh and Uttarakhand, if a project is unduly deferred beyond the timelines that have been set, the law states that any such delay will make the developer liable to repay the same interest to the allottee as the EMI that is being paid by the allottee to the bank.
Section 14 (3) of RERA states that if any structural defect or any other defect in workmanship, quality or provision of services or any other unfulfilled obligations of the promoter, that were required to be carried out as per the agreement for sale relating to such development, is brought to the notice of the promoter within 5 years from the date of handing of possession by the allottee, it shall be the duty of the promoter to rectify said defect without further charges.
The rectification of these defects needs to take place within 30 days of the issue being brought to their attention by the allottee. If the promoter fails to rectify the defects within this prescribed time, the allottee stands to receive appropriate compensation under RERA.
If any buyer, promoter, or real estate agent has any complaints concerning a development project, they can file a complaint with the respective State Authority. As stated in section 44 of RERA, an appeal against the decision of the State Authority can be filed within 60 days with the Appellate Tribunal, after which it may be moved before the High court and even the Supreme Court.
At the State Authority and the Appellate tribunal level, RERA has bound the respective authorities to address the grievances raised by a petitioner in a time-bound and efficient manner, ideally 60 days from receipt of the complaint.
It should be noted that the aforementioned compliances are by no means exhaustive. Other compliances include the standardization of agreements to sale, a fixed timeline for obtaining permits and approvals by promoters, mandating that the transaction is carried out through a RERA registered agent making available the approved plan to the buyer, non-acceptance by the promoter of advance more than 10% of the cost of apartment, plot or building, as the case may be, without first entering into a written and executed agreement to sale, etc. All these compliances under RERA have collectively contributed to furthering the protection of the interests of the ordinary homebuyer.
For a long, the perception has been that real estate transactions were lopsided and heavily in favour of the builders/developers and promoters. The sector as a whole was plagued with several issues such as non-completion of projects on time or at all, the announcement, advertisement and collection of funds for development projects without taking proper approvals, subsequent changes in building plans or specifications other than what was promised to the homebuyer, among others.
Along with attempting to address the aforesaid, the driving force behind RERA has been to boost real estate investments to ensure sustainable development of the real estate sector, bearing in mind the quantum growth of the Indian population. RERA aspires to create a more equitable and fairer real estate regime, chiefly in the primary market.
This legislative regime has increased the overall transparency in real estate transactions, which, along with mandatory timely completion of projects, has led to the interest of the ordinary homebuyer being better protected. The complete overhaul of the real estate regime through RERA has further unified the entire legal regime for the purchase of flats, plots, etc., and has homogenized a very vital sector of the Indian economy.
State Authorities are constantly working to boost domestic and foreign investment in the real estate sector, and have, with the help of local municipal authorities, successfully implemented a single-window clearance system for real estate projects, thereby fast-tracking development projects and fostering investor confidence in the sector.
As far as benefits to the builders/developers and promoters are concerned, the removal of systemic redundancies in the form of cutting down on needless, superfluous and repetitive compliances, while creating parity in regulations across the board, has allowed for compliances to be adhered to more easily and quickly.
Nevertheless, on the flip side, the enactment of RERA has added pressure on the promoters and developers by imposing strict timelines with even more stringent penalties that follow if they fail to comply with RERA.