Sudip Mullick, Partner, Khaitan & Co is in charge of the Real Estate and Hospitality practice of the Firm and also specialises in construction disputes. Mr Mullick has been with the Firm for about 2 decades and he is also a member of the Executive Committee of the Firm.
The Real Estate (Regulation and Development) Act, 2016 ("Act") has been enacted recently. Of the 92 sections in the Act, 59 have been notified on 26 April 2016 and came into force on 1 May 2016. The principal aim of the Act is to protect the interest of the allottees (purchaser of units in real estate projects). The Act applies to both residential and commercial real estate projects provided that such a project is constructed on land admeasuring atleast more than 500 square meters or the number of unit in such project are 8 or more. The Act is also applicable to ongoing projects in respect of which completion certificate has not been obtained.
While the Act has created expectation in the real estate industry that it would act as a catalyst in disciplining the promoters and bring much needed professionalism in the industry, there is also some amount of trepidation due to uncertainty regarding the application of the Act with respect to existing projects which would depend heavily upon regulations to be framed by the State Government and practices which develop gradually.
REGISTRATION OF PROJECTS
The Act requires the promoter of a real estate project (ongoing and new) to register the project with an authority called the Real Estate Regulatory Authority ("RERA") before marketing, advertising, booking, selling units in the project. The project can be registered only when the necessary approvals and commencement certificate are in place. If the project is to be constructed in a phased manner, then the promoter will have to register each phase of the project as a standalone project. The purpose of registration is to provide information to prospective allottee/s regarding the project and to allow them to make an informed decision as well as to regulate that the product promised by the promoter is delivered as promised. While registering the project, the promoter has to also declare brief details of all his projects launched in the last 5 years.
Some of the concerns of the industry with respect to ongoing projects is delay in such projects and consequences thereof. For example, if there is already a delay in ongoing project, would the promoter and allottees be governed by the existing agreement between themselves or would they be governed by the provisions of the Act and rules as framed? and would the compensation be determined by the adjudicating officer appointed under the Act? The question that screams for an answer is whether promoters would be required to deposit 70 per cent of the amount already received (as in most ongoing projects substantial amount would have been received and utilized by the promoter) or only such amounts which may be required for completion of balance construction. For ongoing and new projects, the prime concern of the promoter is that the authorities that would grant construction approvals have not been brought under the ambit of the Act.
Firstly, lender/investor would be concerned as to whether the mechanism as envisaged in the transaction documents of lending/ investment for receipt/repayment of principal and interest and/or protection of their investments would continue to hold good in view of provision relating to deposit of 70 per cent of money received from allottee in a separate account. Secondly, the lender / investors would also be concerned about the risks and liabilities of enforcing and/or resorting the step-in rights and the consequence thereof in view of the fact that a promoter in case of divesting their majority stake would require prior consent of RERA as well as 2/3rd of the allottees?
OPPORTUNITIES FOR LENDERS/ INVESTORS
As a result of this Act, one of the opportunities that lenders and investors would foresee would be that in view of the provision that money will be allowed to be withdrawn on proportionate completion of project it may lead to need for additional requirement of finance by the promoters.
OPPORTUNITIES FOR CONSTRUCTION COMPANIES
It appears that construction companies engaged in civil construction may have a greater role to play in various ongoing and future projects. Since, 70 per cent of the money received from allottees would be deposited with a scheduled bank, civil contractors will have great comfort in participating in the real estate project because of high degree of security of usage of the money and receipt of their payment. If such a model becomes successful, civil contractors should in their agreement with the promoter procure mechanisms akin to those that are usually procured by lender/investors to secure payment for themselves. There will also be enormous prospects for involvement of civil contractors in ongoing projects as well as new ones where lenders/ investors seek to exercise their step-in right as such lenders/investors will have little or no expertise relating to understanding time schedule for completion of construction and they would heavily depend upon recommendation of project consultants for advise or expediting project and if required, step-in for actual construction in order to deliver on time which will also impact lenders/investors right to receive money from the separate account.
OPPORTUNITIES FOR INSURANCE COMPANIES
The Act provides that the promoter shall obtain insurance in respect of title of the land, building and construction of the project, the benefit of which will ultimately be passed on to the allottees at the time of entering into the agreement for sale. This will provide insurance companies in India with opportunities to create new products on title insurance.
GROUND REALITIES TO BE CONSIDERED WHILE FRAMING RULES UNDER RERA ACT
The respective State Governments are required to frame rules ("Rules") under the Act within 6 months from its commencement for carrying out the provision of the Act. Where an ongoing project is already delayed or is reasonably expected to be delayed (in the opinion of the promoter), in order to avoid any knee jerk reaction, mass failure or unnecessary non-productive litigation between promoters and allottees, it would benefit all stakeholders involved with the project if the rule framed by the State Government under the Act enact provisions for completion of delayed projects within a reasonable period of time. For the period of delay that has already happened before a project's registration, the allottee should be bound by the agreement between the promoters and allottee (whether registered or not), however, for any delay beyond the completion period proposed by the Promoter at the time of registration, the consequences would be as determined by the adjudicating authority (as defined) under the Act. The Act is silent on the consequences of failure of promoters to receive construction approval within a given period of time from the concerned authority. The Rules framed under the Act or the industry practices should evolve and address this issue since delays relating to approvals are a practical reality in India. The Act provides for stringent consequences in the event of lapse or revocation of registration of a project. In this regard, the State Government, while framing the Rules, should take a liberal view by applying the principal of condonation of delay and only in the event of repeated default by the promoter, should stringent punishment apply.
Thus, the Rules regarding grant of an appropriate extension of time for delay in completion of the project or delay in issuing construction approvals by the appropriate authority can be an impediment to the industry, especially in view of present constraint of granting additional time of only 1 year for extension of registration or completion of project. As is common knowledge, approvals are and may be withheld for extraneous considerations and for lack of willingness to take the responsibility of decision.
In case of ongoing projects, the Rules on mandatory deposit of 70 per cent should be carefully drafted so to enable RERA to assess the money received and to be received for a project and ensure that such amount of money as would be required for completion of the project be deposited in a separate account and not necessarily seek or require the promoter to deposit 70 per cent of the amount already received. Further, since the promoter is mandatorily required to obtain title insurance of the land, building and construction and ultimately pass it on to the allottees, the Rules to be framed by the State Government should provide some relaxation to the promoter from their continuing liability to compensate the allottee for any defects in title. The Rules to be framed by the State Government under the Act should be considered with an open and liberal mind so that they are flexible enough to address the challenges concerning the ongoing projects.
The Act which has now created various opportunities for its stakeholders including certainty of quality of product as promised and timely delivery of product or compensation in lieu thereof, should not be squandered due to acts, omissions and inflexibility of stakeholders including the State Government in framing Rules and implementation of the Act by being practical or taking into consideration ground realities.
The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at firstname.lastname@example.org