Rapid urbanization, increasing earnings and reduction in home loan interest rates have been key attributes for the upsurge in housing demand over the last decade. To overcome the hassles of purchasing land and constructing houses themselves, homebuyers prefer to purchase/book residential apartments from reputed & experienced developers. Further, under construction units are available at a better value as opposed to ready to move in units. Homebuyers bet their life savings on a developer on the grounds of its credibility and good faith.

Invariably, these developers charge an earnest money/lump sum payment at the time of booking of the apartment, followed by one or two more such payments before one gets to lay hands on the Builder-Buyer agreement (This agreement forms the most crucial part of the contract between the parties detailing their respective rights & obligations, payment milestones and delivery timelines, etc.). Lack of adequate legal knowhow force homebuyers to execute the agreement as it is, lest they should witness forfeiture of the earnest money paid and/or cancellation of allotted unit. This is then followed by construction milestone linked payments as & when claimed by the builder. Homebuyers make all conscious efforts to fulfil their obligations under the agreement, in the quest for getting the house as per agreed specifications and timelines. 

Unfortunately, unethical business practices and malicious intentions of some of the developers have triggered unrest in the sector in the recent past, making homebuyers wait endlessly to get possession of their residential units booked. Majority of these builders have cited ‘force-majeure’ as key reasons for delay in construction/hand over, stating myriad excuses like downturn in the economy & real estate sector, scarce availability of building material, non-availability of labour due to alternate government schemes, lack of water supply, delay in grant of approvals & clearances by the authorities, etc. However, based on petitions filed by a group of homebuyers with various consumer forums, upon careful examination, such claims have been found to be frivolous in nature, without any practical substance. In a few cases, these builders have even been found to have diverted funds collected from homebuyers to different projects/business lines, thereby hardly leaving any capital for completion of construction. These forums have directed such builders to either complete the project and hand over possession within defined timelines along-with applicable interest, or to refund the deposited amounts along-with higher interest. This somehow has provided some solace to such homebuyers/petitioners.

But in view of the large number of such stranded home seekers, introduction of a legal framework and a regulatory body in the sector was considered imperative to streamline any business activity. 

In view of the foregoing scenario, it was high time to regulate the Real Estate Sector, by bringing in the much needed reforms. Towards this end, the Government has taken a stupendous initiative of introducing The Real Estate (Regulation and Development) Act, 2016 (RERA) which will act as a regulator of real estate sector. This act was passed by the Parliament in May 2016 and came into force w.e.f. 1st May, 2017, to be applicable across all States (except Jammu & Kashmir) and Union Territories (UTs) of India, covering all the residential and commercial projects. It empowers and administers the activities of all the stakeholders of real estate sector so as to bring greater transparency, citizen centricity, accountability and financial discipline. By following citizen-centric approach, RERA is aimed to protect the interest of consumers, promote fair play in real estate transactions and to ensure timely execution of projects. All the States of the country have been asked to prepare and notify their respective rules in tandem with the Act, so that it can be effectively implemented and facilitate the speedy disputes redressal of the registered real estate projects. Currently, of the 28 States, 11 States are yet to notify the final RERA rules for its implementation and of the 17 States, permanent regulator has been set up in 4 States only, i.e. Maharashtra (leads in RERA implementation), Gujarat, Madhya Pradesh, and Punjab, while the balance has an interim regulator.

The following key highlights may be useful to understand how a purchaser of a property (commercial or residential) can be benefitted with this Act, while overcoming the stumbling blocks encountered prior to the establishment of RERA:

 

RERA Coverage

 

Impact for Homebuyers

1.

All the Commercial and residential projects, including plotted development where the total area to be developed exceed more than 500 sq. mts. or more than 8 apartments

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All medium to large sized real estate projects shall be covered under the ambit of the RERA Act, thereby ensuing comprehensive participation by developers

2.

Existing projects where the completion certificate (CC) or occupancy certificate (OC) has not been issued

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All existing under construction projects which are yet to hand over possession shall be covered

3.

Each phase is to be treated as standalone real estate project requiring fresh registration

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Multiple units of a larger project will attract equal treatment, thereby enabling comprehensive coverage


 

Stipulation

 

Impact for  Homebuyers

1.

Mandatory registration of new and existing projects with RERA before launch

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All prospective real estate projects shall be governed under this Act, thereby ensuring properly laid out regulations in favour of the buyers. Registration will also ensure full availability of project related information on a common platform for easy access by any stakeholder. It will strengthen monitoring and supervision of projects, thereby ensuring timely delivery to homebuyers

2.

No false statements or commitments in advertisement

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Will bring more confidence in consumers to rely on the project specifications provided under a regulated regime, without any ambiguity or any false representations

3.

Registration of Agents / Brokers with RERA

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Developers are always not the interface with the consumers, hence the registration of Agents/ Brokers, will make them at par accountable and responsible towards their actions

4.

Sharing information project plan, layout, government approvals, land title status, sub-contractors

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Will ensure greater disclosures and transparency to the buyers; no hidden information; constant monitoring mechanism enabled

5.

Disclosure of carpet area (as per the prescribed definition)

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No more manipulation on account of sales on the basis of built up area. By specifying carpet area, consumers will have a clear idea of the exact space to be delivered to them

6.

Cannot accept more than ten percent of the cost of the plot, apartment, or building as an advance payment or an application fee, without making a written agreement for sale and registering it

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Consumers will not fall prey to the developers’ unethical intentions by paying 20–30% before the execution of the agreement 

7.

70% of the funds collected from allottees needs to be deposited in the project escrow account. Withdrawals to cover construction and land cost and will be in proportion to the percentage completion method.  Withdrawal to be certified by an engineer, architect, and a CA

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An extremely important step to maintain financial discipline.  Funds collected from buyers of a particular project, shall be necessarily utilized for the development of that project, thereby eliminating any misappropriation by builders. The necessary certifications for the withdrawal of funds from authorised professionals, will validate the authenticity of its utilization

8.

Standard prescribed format of the Sale Agreement to maintain uniformity

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Uniformity will address all issues of ambiguity among the consumers. The prescribed format will be on a fair deal principle for both the parties, and cannot be amended by the developer suo moto 

9.

Specified Project completion time period

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Supervision and monitoring under the Act will ensure the adherence of the timelines of all the construction activities

10.

Audit of the Project accounts

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Will bring financial discipline and help eliminate black money transactions

11.

RERA to freeze project bank accounts of the developers upon non-compliance

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Will prohibit the developers to carry out any action or activity which contravenes the Act

12.

Compensatory interest

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Will break the developer driven approach of the agreement; consumers henceforth would be eligible for interest payment for delayed possession at the same rate of interest, what would be applicable in case they delayed payments to the builder

With the above, it is evident that RERA will bring a great relief to the homebuyers by protecting their interests and rights.  The supervision and monitoring of the project till delivery of possession, will increase the confidence of the consumers in the stakeholders. With the implementation of this Act, a uniform regulatory environment will prevail with the essence of financial discipline, greater transparency, accountability, compliance and increased customer confidence.

Impact of RERA on lenders

With the implementation of RERA, financial discipline will be helpful in streamlining the construction activities and timely project completion will avoid any cost overrun and at the same time ensure timely debt servicing to lenders. Despite this, lenders feel there are certain pitfalls which needs to be addressed.  Some of the apprehensions/challenges for the Lenders are briefed as under:-

  • Apart from the RERA Act applicability being on the new projects, it covers the existing projects as well.  This will dilute lenders’ existing rights of the security created in their favour as instead of having a 100% access on the receivables of the existing projects now the lenders will have access to only 30% in accordance with RERA Act.
  • Prior to the introduction of RERA Act, it has been a clear position under law that the lenders were entitled to enforce security and recover their outstanding dues, without reference to the purchasers who had also acquired rights in the unit being built on the land.
  • RERA brings a great concern for lenders in case of enforcement of security to recover their outstanding dues since they have no clarity as to whether enforcement of mortgage/ security would be construed to 'transfer' of his majority rights and liabilities in respect of the project as transfer of majority rights and liabilities requires not only the prior approval of RERA but also the prior approval of the 2/3rd allottees of the project. In the event of any default or breach of the Act committed by the developer/promoter, the Authority directs the bank to freeze the account holding 70% of the project collection and appoint another promoter for the completion of the project. Such cases put the lenders in a difficult situation as they cannot enforce its security interest and/or take over the development rights of the project

With the above complexities of the Act, Lenders might make a representation before the regulator to apprise them of their concerns and apprehensions.

At the initial stage of RERA implementation, some teething problems will be experienced as substantial time consuming groundwork will be required to carry out at the time of registration of the eligible Projects,   which may lead to the initial backlog and increase the project launch time. But to have the far-reaching effective outcome and to bring evolution in the real estate industry, the initial hiccups will have to be condoned. 

The most positive aspect of this Act is that it provides a unified legal regime for the purchase of commercial or residential properties.  As the non–violation of the stipulated guidelines/policies of the Act will attract monetary penalties and other stringent actions against the defaulter; it is anticipated that this Act will prove to be a catalyst for the real estate industry.

Team Panorama
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