India: Real Estate (Regulation & Development) Act, 2016 |Issues: Addressed & Un-Answered

Background

The real estate sector plays a pivotal role in fulfilling the need and demand for housing and infrastructure in the country. However the earlier framework and regulatory regime was inadequate to address all the concerns of buyers and developers in the real estate sector. The lack of an exhaustive legal framework paved the way for enactment of the Real Estate (Regulation and Development) Act, 2016 ("Act").

  1. Structure of the Act

On 1 May 2017, the Central Government notified various provisions of the Act thereby bringing into force all the 92 provisions of the Act. The Act covers provisions with respect to all the possible stages of interaction between the developer and the prospective allottee, ranging from the stage of registration of a project till the registration of the property.

  1. Registration of the Real Estate Project

The Act restrains the developer from inter alia advertising and selling any real estate project without having the same registered with Real Estate Regulatory Authority ("RERA") of the concerned state. The Act mandates such registration for all projects where the area of land proposed to be developed exceeds 500 square metres and/ or where the number of apartments exceeds 8. In cases of ongoing projects, the registration is mandatory where the developer has not received completion certificate or where the project requires only renovation / redevelopment.1

The Act requires the developer to mandatorily inter alia, disclose at the time of registration of the project, details relating to its enterprise, details of the projects developed by the promoter in the last 5 (five) years, copy of the approvals, plans, commencement certificate etc2.

Thus a developer can now proceed (advertise, book and sell) with the project only when the necessary approvals, sanctioned plans, layout plans and specifications are in place and are submitted at the time of registration. RERA has the power to refuse registration if the aforesaid mandatory documents are not in place, post which refusal the developer shall not be in a position to even advertise the project much less accept any booking.

The Act also mandates submission of a declaration by the developer, supported by an affidavit, inter alia, stating that he has legal title over the land proposed to be developed, that the land is free from all encumbrances and the time period within which he undertakes to complete the project.

Such deadline, in our view, is to be committed upon a detailed and realistic analysis of the process of construction as the Act prescribes penal consequences for its breach.

The Act additionally mandates that the developer shall deposit 70% of the amount realised for the project from the allottees in a separate account to be maintained in a scheduled bank to cover the cost of construction and land, which amount is permitted to be withdrawn by the developer post certification by an engineer, architect and chartered accountant that the withdrawal is in proportion to the percentage of completion of the project. The Act further mandates audit of books of accounts of the developer.

The developers therefore will have to ensure that the amounts received in respect of a particular project are only utilised for the purposes of the said project alone and that the same is not diverted for construction of any other project or for purchasing any other land/ property.

The registration of the project is to expire on the date of proposed completion of project. In cases other than that of force majeure,3 the strict regime of the Act only permits extension of registration period by not more than 1 year, and that too in cases where there is no default on the part of the promoter. The Act provides for revocation of registration, if RERA is of the opinion that the developer has committed any default under the Act or is involved in any kind of unfair practice or irregularities4. Post revocation of registration, the developer is debarred inter alia from carrying out further construction of the project.

  1. Advertisement of the Real Estate Project

The Act envisages consequences including return of investment made by the allottee along with interest and compensation if the said allottee sustains any loss or damage due to any incorrect, false and misleading statement made in the advertisement or prospectus released by the developer. Additionally, making of false and misleading statements is also a ground for revocation of registration of a project5.

Accordingly, the developers will have to be factually accurate regarding the commitments being made in relation to the proposed construction, right from the stage when the project is being advertised for sale and should ensure that no false statements are made to allure investment. The Act prescribes penal consequences in the event there is any variation and alteration in the committed specifications.

  1. Execution of Agreement to Sale

The Act prescribes a ceiling of 10% on the advance payment to be accepted by the developer at the time of receiving the application for booking. It requires the developer to execute a written agreement for sale and register the same, in the event it has to accept any amount over and above the aforesaid ceiling. The Act provides that the form of agreement for sale ("ATS") shall be prescribed by way of Rules framed under the Act.

However, the Act fails to clarify as to whether a fresh ATS will have to be executed, as per the prescribed format, in cases where ATSs have already been executed prior to the coming into effect of the Act or an addendum will be required to be executed.6The aforesaid requirement will also impact the practise of executing un-registered ATSs under the earlier regime.

  1. Construction of the Real Estate Project

The Act requires the developer to construct the project strictly in accordance with the sanctioned plans, layouts and specifications, without any alteration. The Act, however, permits carrying out of minor alterations at the request of the allottees, which have been defined to exclude structural changes including an addition to the area or change in height, etc. Further, if the developer intends to carry out any other alteration in the sanctioned plans/ layout plans and specifications, it needs to obtain previous written consent of at least 2/3rd  of the allottees. In case of structural defects, defects in quality or provision of services, etc., the Act provides that the developer shall pay compensation to the allottee. The period of intimation of such defects by the allottee to the developer has been prescribed as 5 years from the date of handing over of possession.7

The developers therefore will have to ensure that the area offered for sale is not varied without obtaining previous written consent of at least 2/3rd of allottees. Also the Act defines the term "carpet area"8 as net usable floor area of the apartment excluding the area covered by external walls. This will impact the practise of varying the super area of the apartment, which the allottee did not have any source to verify earlier. However the carpet area, as now defined is easily verifiable by the allottee and any variation in the same without the consent of 2/3rd of allottees is not permissible.

  1. Handing over of possession and execution of conveyance deed9

The promoter is required to execute a registered conveyance deed in favour of the allottees and hand over physical possession of the property within 3 months from the date of issue of occupancy certificate, unless otherwise prescribed under relevant local law. The other relevant documents are required to be handed over to the allottee within 30 days of obtaining the completion certificate, unless otherwise prescribed under relevant local law.

The allottee has a right to receive the necessary documents and plans relating to construction, which will serve as a source to verify whether the construction is at variance.

  1. Defaults by Developer

The Act contemplates that in the event the developer fails to complete the project as per the terms of the ATS and/ or delays the handing over of possession, the allottee will have the option to either withdraw from the project or await possession. In the former case, the developer is required to return the entire investment with interest and compensation. In the latter case, the promoter is required to pay interest for every month of delay till possession is handed over.

Therefore any deviation from the ATS and / or any delay in handing over possession gives the allottee either a statutory right to claim refund along with interest and compensation or claim interest for such delay.

  1. Dispute Redressal Mechanism under the Act & Penalties

The Act provides for a three tier dispute resolution / grievance redressal mechanism by way of a Complaint before RERA, Appeal before Real Estate Appellate Tribunal against the Order passed by RERA and a Second Appeal before High Court against the decision of Appellate Tribunal. The Act prescribes penalty for violation of its provisions which may extend up to 10% of the project cost. Also there is imprisonment prescribed in the event the developer violates Section 3 of the Act relating to registration of project.

  1. Unanswered Issues

It is apparent from the aforesaid that if the Act is strictly implemented, the same shall ensure a healthy regulation of the otherwise un-regulated real estate market. However there are certain issues, which have not been appropriated addressed in the Act and have been left to the discretion of the State Governments to be addressed in the proposed Rules. It is pertinent to state that while Rules framed by States of Gujarat, Rajasthan, Maharashtra, Madhya Pradesh, Odisha and Andhra Pradesh and Union Territory of Delhi have been notified and are in force, there are few States, including Uttar Pradesh and Haryana, which are yet to finalise and notify the Rules.

  1. Impact of On-Going Projects: The Act provides that all real estate projects where the completion certificate has not been received, will be covered under the Act and will require registration with RERA. Act does not address the fate of on-going projects where the developer has although applied for issuance of completion certificate, however the same is awaited. There is a possibility that given this vagueness, the provision may be interpreted to include an exception for projects in respect of which the developers have applied for issuance of completion certificate.

States of Odisha, Rajasthan and Madhya Pradesh and Union Territory of Delhi have adopted the mandate prescribed by the Act and provided that all projects where the "Completion Certificate" has not been issued by the competent authority, will be covered by the Act and will have to apply for and obtain registration under Section 3 thereof. However the applicability of the Act has been diluted by way of Rules framed by the States of Uttar Pradesh and Andhra Pradesh, where the projects in respect of which the Application seeking issuance of "Completion Certificate" has been made by the developer, are excluded from the purview of the Act. The Rules framed by State of Gujarat and Maharashtra are silent in so far as the issue inclusion / exclusion of the on-going projects is concerned. However it is arguable that in the absence of any provision to the contrary in the Rules, the mandate of the Act should apply, thereby bringing all projects where "Completion Certificate" has not been issued within the purview of the Act.

  1. Execution of ATS: While the Act provides that the form of ATS shall be prescribed by the State Government, there is lack of clarity as to whether a fresh ATS will have to be executed in cases where ATS has already been executed as per the earlier prevalent format, prior to the date of coming into force of the Act. The issue also attains relevance as the Act now mandates compulsory registration of the ATS.
  1. Registration of ATS: The Act further does not clarify as to whether the ATSs which have already been executed prior to the date of coming into force of the Act will also require registration.
  1. Certification before disbursement: The Act prescribes that 70% of the amount collected by the developers from the allottees will have to be deposited in a separate bank account and the said amount will be disbursed post certification by the engineer, architect and chartered accountant. The Act, however, fails to prescribe as to whether these engineers, architects and chartered accountants are required to be independent professionals or they can also be the ones who are on the rolls of the developers. There is a possibility of the process being abused in the event the said professionals are not independent.

V.Conclusion

Section 91 of the Act gives power to the Central Government to pass appropriate orders in the event any difficulty arises in giving effect to the provisions of this Act. It appears that the aforesaid issues may require interference by the Central Government so as to ensure that the otherwise strict mandate of the legislation is not lost.

Footnotes

1 Section 3 of the Act.

2 Section 4(2) of the Act.

3 Section 6 of the Act.

4 Section 7 of the Act.

5 Section 12 of the Act.

6 Section 13 of the Act.

7 Section 14 of the Act.

8 Section 2(k) of the Act.

9 Section 17 of the Act.

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 legalalerts@khaitanco.com

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