India: Real Estate Regulatory And Development Act: Crying Out Sellers Beware!

Last Updated: 13 November 2017
Article by Bhavani Navaneedhan

Introduction

The Real Estate (Regulation and Development) Act ("RERA") came into effect on May 1, 2016 with the aim of curbing unethical practices of developers and intermediaries in the real estate market. Real–estate sector has been unorganized and clogged with the unscrupulous practices adopted by promoters and intermediaries against buyers. Until now, there was no codified law regulating the practices of promoters and real estate agents. Buyers had to approach the consumer and civil courts for grievance redressal and as a result, were trapped in lengthy legal battles to get possession of their homes. RERA seeks to screen through the activities of the promoters and middlemen, impose strict accountability standards and provide speedy justice to buyers.

This bulletin discusses some of the salient features of RERA and aims to critically analyze its provisions for highlighting the shortcomings that may impact its effective implementation.

1. Salient Features

RERA adopts preventive as well as curative measures to streamline the real estate sector. It contains 92 sections, broadly encompassing registration norms, affirmative duties and constraints on promoters, and penalties for their violations that aim to provide a comprehensive governance structure and ensure the welfare of buyers. Some of the key provisions of RERA are discussed in the following paragraphs.

1.1 Mandatory Registration for promoters

In order to provide accurate information about the real estate projects and bring in transparency coupled with accountability on promoters, S. 3 of RERA mandates promoters to register new or ongoing projects with the Real Estate Regulatory Authority1 ("Authority") where the developable land exceeds 500 sq. mtrs., or where more than 800 apartments are to be constructed. While applying for registration, the promoters have to declare business details, information about earlier projects, sanctioned construction plans, pending litigation pertaining to the land, and proof of clear title.2 Further, in alignment with the objectives, S. 5 makes the process of disclosing relevant information compulsory, and the promoters are obligated to provide updated information at the time of registration on the Authority's website. The registration can be revoked and the promoters can be meted out penalty extending up to 5% of the project cost, if they make false or misleading disclosures, or violate the parameters and standards of the project.3

Prior to RERA, promoters did have a similar obligation under contractual and consumer laws. However, there was a greater scope for misrepresentation, as there was no centralized government repository of promoter disclosures as now provided for in RERA. Thus, buyers had to rely on piecemeal and false information provided by the promoters and real estate agents, resulting in a commonplace trend of fraudulent dealing and unfettered tampering of project details to enhance realtor profits. In such situation, RERA's mandatory registration and disclosure provisions shall deter promoters from falsifying project information, make them comply with disclosures, and facilitate buyers to directly access information on the Authority's website for informed decision-making. Moreover, to block all escape routes adopted by the promoters, RERA imposes fine that can extend up to 10% of the project cost for unregistered projects.4 This shall go a long mile in making the sector organized and better governed.

1.2 Checks on real estate agents

In a similar vein, S. 9 makes it compulsory for all real estate agents, both individual as well as firms, to get themselves registered with their respective state Authority. However, unlike promoter registration, RERA does not lay out the details that an agent has to disclose for registration. The general practice followed by agents is to provide their business details, address proof of directors, PAN, and details of registration in other states. Further, a registered agent is required to maintain accurate accounts and assist buyers in obtaining information and documents needed to finalize sale. They are prohibited from providing false information in any manner and cannot sell unregistered properties.5 Any agent who contravenes the above provisions is liable to pay penalty upto 5% percent of the sale price of the property sold.

This move will help to identify and flush out bogus agents in the market. Real estate agents play a pivotal role in the promotion and finalization of real estate transactions. Prior to RERA, they had the propensity to connive with the promoters for their personal gain, and actively deceive buyers. Thus, there was a need for regulating their activities and impose checks and balances. RERA provisions as stated above shall help identifying unfair practices of agents. At the same time, it shall act as a deterrent on the agents to act collusively with promoters for defrauding buyers and ensure bond fide of real estate deals.

1.3 Two-Tier Redressal Mechanism

RERA provides for a detailed mechanism of redressing affected parties' grievances. S. 31 empowers the Authority to conduct hearings and pass orders on complaints filed by aggrieved persons. Any individual, business entity, co-operative society, government body and association of allottees can file a complaint with the Authority. Upon receiving a complaint, the Authority must conduct an inquiry to determine defendant's contravention and pass suitable orders against the promoters, and/or agents found to be non-compliant thereof. If they violate the orders, they have to remit penalty amount which may extend up to 5% of the project or sale price. The powers of the Authority are commensurate with that of a civil court regarding discovery, summons, and examination of witnesses.6 Further, S. 43 provides for the establishment of Real Estate Appellate Tribunal ("Tribunal") to hear appeals from the orders of the Authority, which must be disposed off within 60 days of filing. The appellant must file the appeal within 60 days of receiving a copy of the Authority's decision. However, it is pertinent to note that, a promoter desirous of an appeal has to deposit 30% of the penalty imposed as a necessary pre-condition. The same 60 day timeline applies to a person aggrieved by Tribunal's order and preferring appeal to the High Court.

The entire process described above indicates the intent of the legislature to have an expeditious as well as effective system in place for the timely disposal of buyer complaints.

1.4 Check on Promoters

The pro-buyer approach of RERA is further reflected by the onerous obligations7 imposed on promoters, some of which are described below:

  • furnish all the details regarding sanctioned plans and stage-wise time schedule for completion of the project while issuing allotment letter
  • prohibition on taking loans against properties after the execution of sale deed; in case any charge is created, the promoter is completely liable for repaying the loan and has to bear the cost of all legal proceedings instituted by the lender
  • execute written agreement for sale and duly register it, failing which, only 10% of the apartment's cost as advance payment can be accepted
  • make necessary correction to any structural or other defects highlighted by the allottee within 5 years from the date of handing over possession, such correction should be made within thirty days
  • prohibition on transferring majority rights and liabilities in the real estate project to a third party without obtaining prior written consent from 2/3rd allottees and the Authority, provided that said transfer must not affect the sale and the transferor must complete the remainder obligations
  • if there is a failure to handover possession within agreed time, return the amount received from allottees along with interest and compensation, or pay interest for every delayed month till possession is handed over
  • maintain separate account in a scheduled bank to deposit 70% of the money received from allottees and use the money only for construction purposes

The abovementioned obligations are in the nature of checks requiring promoters to confirm with sale terms as well as ensure greater accountability for deviations.

Furthermore, to prevent promoters from taking advantage of buyer's difficulty in understanding real estate jargon, RERA clearly demarcates between "carpet area"8 and "common area".9 The former is the net usable floor area of an apartment excluding outer walls, balconies and terrace but includes the area covered by the internal partition walls of the apartment like kitchen and bedroom. The latter includes areas of common usage like lifts, staircases, common entrances and exits of building and other portions necessary for the maintenance, safety and common use. Until now, promoters used to market the built-up area, rather than the carpet area, which is less than the built-up area. The clear definition will align customers' expectations, with the actual measurements of the flat and in turn help them to take informed decisions.

2. Unfinished Law

Though RERA seems to be a well drafted piece of legislation, it still suffers from shortcomings. Firstly, the streamlined process under RERA does not address the issue of rising prices and black money, plaguing the real estate market. As such, it does not prescribe any standards to be followed by the promoters while fixing prices of apartment units, except the requirement based on carpet area. Promoters will continue fixing arbitrary prices on the basis of raw materials used, amenities provided, strategic location and other variable factors as they deem fit and in complete disregard of the guideline value prescribed by government.10 The difference in prices inevitably enables generation of unaccounted money, and RERA does not address this issue. Secondly, the Authority and the Tribunal have to be established and maintained by the appropriate government within 1 year from the date of RERA's enforcement, which means that the effective functioning of the forum lies in the hands of state bureaucrats, who are allegedly involved in promoting illegal real estate deals for their personal benefits. Out of the 28 states and 7 union territories, only 15 states and all union territories have established the regulatory machinery as on July 31, 2017, which is past the one year deadline. Moreover, a fair lot of promoters are yet to adhere to the registration norms and some states have diluted the scope and application of RERA while framing their rules. This poses a serious hurdle as infrastructure in conjunction with efficient operation, needs to be developed at state level for the fruitful working of the system. Thirdly, the registration process and the strict obligations imposed on promoters have resulted in promoters being cautious and fixing longer timelines for projects. This can result in delayed initiation and completion of projects, the brunt of which will ultimately be transferred to the buyer. Fourthly, the process of regulation under RERA applies only to registered projects. This means that the buyers are in parallel approaching the consumer and civil courts for grievances involving old and unregistered projects. The continuation of such approach will defeat the underlying purpose of creating a separate forum for real estate disputes, as buyers still need to withstand long court battles to get justice.

Conclusion

Undoubtedly, this is a revolutionary move intended to set certain ethical standards in the totally unfettered real estate market. However, the success of the regulatory mechanism is totally dependent on the expeditious creation of necessary infrastructure and the cooperation extended by realtors and authorities to properly execute RERA's provisions. Additionally, it is also equally important to educate the masses and make them aware of their rights and duties. Sooner than later, a need for amending RERA may emerge as the provisions do not ensure elimination of the problems marring real estate sector at its very roots. At present, the implementation of RERA is still at a nascent stage and its reformation of the real estate sector is yet to be witnessed.

Footnotes

1 S. 20 require the state and central government to set up the Authority within 1 year from the date of RERA's enforcement. If the respective government deems it necessary, they can establish more than 1 Authority within the state or territory 

2 See Section 4 of RERA 

3 See Section 60 of RERA  

4 See Section 59 of RERA 

5 S. 10 prescribes the duties of real estate agents 

6 S. 38 of RERA  

7 Ss. 11 to 18 of RERA provide the obligations of promoters 

8 S. 2(k) of RERA 

9 S. 2(n) of RERA  

10 Guideline value is the value of the land determined by government based on the facilities and infrastructure growth in that locality

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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