India: The Real Estate (Regulation And Development) Act, 2016

Last Updated: 4 April 2016
Article by   Trilegal

The Real Estate (Regulation and Development) Act, 2016 has received Presidential assent. The Act is seen as a significant move towards ensuring consumer protection and standardising business practices and transactions in the real estate sector.

The Real Estate (Regulation and Development) Act, 2016 (Act), passed by the Indian parliament in its current session, has received the assent of the President of India on 25 March 2016. Different provisions of the Act may be brought into force on different dates as may be specified by the Indian government.

First introduced in 2013, the Act has been passed with the intent to bring transparency and safety in the market for consumers of residential and commercial projects by introducing a sectoral regulatory mechanism. The Act seeks to address distortions in the real estate market due to the asymmetrical relationship between real estate developers and consumers. Preventing structural abuse of dominance in a sector that has been rated as the second lowest in terms of consumer satisfaction, is also a key objective of this legislation.

Key Highlights

The Act contains several provisions to address the lacunae in the real estate market, principally by way of establishing a disclosure framework and setting strict liabilities for promoter irregularities.

Regulator: The Act mandates setting-up of real estate regulatory authorities (RERAs) and real estate appellate tribunals in all states and union territories (except Jammu & Kashmir) within 1 year of its notification.

Registration: The Act requires mandatory registration of real estate projects with the RERA where the total area of land proposed to be developed exceeds 500 square meters or where more than eight apartments are proposed to be developed inclusive of all phases (where phase-wise development is proposed). The Act also requires every phase of a project to be registered separately as a standalone project. Projects cannot be advertised, booked or sold in any form prior to registration and obtaining the necessary construction approvals. The RERA is required to either grant or reject registration applications within 30 days.

Disclosures: Publicly accessible disclosures of the project and promoter details, along with a self-declared timeline within which the promoter is required to complete the project, are compulsory. Quarterly project related disclosures are also required. The disclosures are to be made available online.

Standardisation: The Act defines key terms such as 'apartment', 'carpet area' and '(rate of) interest', which will help in homogenising sector practices and prevent abuse of consumers due to biased classifications such as 'super built-up area' etc.

Ring-fencing of project receivables: Promoters must park 70% of all project receivables in a separate account. Drawdown from such account is permitted for land and construction costs only, in line with the percentage of project completion (as certified by an architect, an engineer and a chartered accountant). Further, a promoter can accept only up to 10% of the apartment cost prior to entering into a written agreement for sale with the consumer.

Warranties: The promoter is required to declare that it has legal title to the project land or authenticate validity of title, if such land is owned by another person. The promoter is also required to obtain insurance for title and buildings along with construction insurance.

Bar on encumbrance: The promoter is prohibited from creating any charge or encumbrance on any apartment after executing an agreement for the same. In the event such charge or encumbrance is created, it will not affect the right and interest of the concerned consumer.

Project sanctity: The promoter is not permitted to alter plans, structural designs and specifications of the land, apartment or building without prior consent of two-third of the allottees. The promoter is also not permitted to transfer or assign majority of its rights and liabilities in a project without such consent, along with the RERA's prior written approval.

Model agreement: The Act provides that a specified form of agreement for sale between promoters and consumers may be prescribed, which will prevent inclusion of biased provisions in it. Consumers have also been granted the right to seek relief for unilateral termination of such agreements by promoters without cause.

Defects liability: The promoter is responsible for structural defects or other deficiencies for a period of 5 years from the date of delivery of possession.

Agents: The Act prohibits real estate agents from facilitating any sale or purchase of plots/apartments in projects without obtaining registration with the RERA. The agents are required to facilitate access of project information to consumers at the time of booking and refrain from making false statements, misleading representations and indulging in unfair trade practices.

Legal recourse: The Act provides for time bound resolution of complaints and disputes by the RERAs and the real estate appellate tribunals. The Act also provides for refund of amounts paid by consumers (along with interest and compensation) for promoter's failure to give possession of the apartment in accordance with the agreement for sale, or any breach of such agreement.

Existing projects: Existing projects which have not received completion certificate as on the date of commencement of this regulation will be required to obtain registration with the RERA within 3 months of such commencement.

Penalties: The Act imposes monetary penalties on the promoter of up to 5% of the 'estimated cost of the project' (as determined by the RERA) for disclosure related defaults, and up to 10% for other defaults, along with a maximum imprisonment of 3 years. Consumers are liable to a fine of up to 10% of the apartment cost or imprisonment up to 1 year for non-compliance with orders of the real estate appellate tribunal.

Interplay with state laws: The Act expressly repeals the Maharashtra Housing (Regulation and Development) Act, 2012 and will have over-riding effect on conflicting state laws.

Shortcomings of the Act

Though the passage of the Act is a significant move, it falls short of holistically regulating the real estate sector and addressing some of the fundamental issues associated with it. A few shortcomings are highlighted below:

Capital efficiency: The requirement to deposit 70% of sale proceeds in a separate account will impact the utilisation of project receivables and increase promoter reliance on institutional capital such as private equity or bank finance (which can be expensive). This is could lead to an escalation in project costs, which may then be passed on to the consumers.

Approvals process: Under the Act, all necessary approvals are required to be obtained prior to project launch, instead of certain specific approvals as previously required. This may delay project initiation and restrict supply of new properties.

There is no single-window clearance approval process which could further add to the delays in project launch. Also, the Act does not assign liability for project delays attributable to state agencies.

Systemic issues: The Act neither establishes a conclusive title system for land, nor addresses the issue of availability of housing stock across all income categories or the practice of using black money in real estate transactions.

The Act is a standard-setting instrument for the real estate sector and performs the critical task of identifying and allocating risks associated with construction and development projects. The current approach of the Act is to uniformly regulate different types and sizes of projects and its implementation will require significant capacity building at the state-level. The Act disrupts existing sector practices to raise efficiency of the real estate market and is likely to benefit all stakeholders by imposing financial and operational discipline, accountability and diligence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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