India: The 70% Conundrum (Part I) – What Does The Haryana RERA Imply?

Last Updated: 12 June 2019
Article by Abhilash Pillai and Apoorv Jain

There is a requirement under the Real Estate (Regulation and Development) Act, 2016 (Act) to keep aside 70% of receivables from allottees in a separate, designated bank account (RERA Account). This has, from the outset, been viewed as a measure of great reform that would prevent siphoning of funds and ensure that money collected for the purpose of a particular project is, in fact, used for that project. However, the manner and method of utilisation and withdrawal of money lying in the RERA Account has always been a matter for considerable discussion and debate.

Illustratively, the Uttar Pradesh Real Estate Regulatory Authority has, in April 2019, directed banks not to adjust interest payments against the money that is required to be deposited in the RERA Account. This issue has recently come to the fore and become a matter of serious deliberation in Haryana.

Supertech Homebuyers Case

While taking cognisance of utilisation of sale proceeds/ receivables realised from the allottees of a project by a promoter, the Haryana Real Estate Regulatory Authority (H-RERA), in the case of Supertech Limited, came down heavily on withdrawals by the lenders (including banks/ financial institutions) for violating Section 4(2)(l)(D) of the Act, which provides for 70% of the sale proceeds/ receivables realised from the allottees of a real estate project to be deposited by the promoter in the RERA Account. The Act provides that such amount can only be withdrawn in proportion to completion of the project, in compliance with the procedure laid down in this regard.

H-RERA, while deciding on this matter, which pertained to the development of the Hill View Project, Gurugram, by Supertech Limited, took note of this provision, and observed that Supertech Limited had only maintained a single escrow account and deposited the entire sale proceeds/ receivables realised from the allottees in the said account. This, at the outset, was itself a breach of the Act, which mandates a separate account to be maintained in which 70% of receivables from the customers should be deposited.

Further, Supertech Limited also authorised its lender to withdraw amounts from such escrow account. H-RERA has held that even if the requirement of a separate account is overlooked, the lender was in violation of Section 4(2)(l)(D) of the Act, which mandates that any withdrawal from the 70% share of the sale proceeds cannot be made without fulfilling the conditions laid down in the Act. The said amount of 70% belongs to the allottees of such project till the promoter incurs and has paid for expenditure on land and construction costs.

The Developer is a Custodian of Allottees' Money

While it was never in doubt that the money lying in the RERA Account cannot be withdrawn at will, H-RERA has now gone a step ahead and clearly held that a promoter, as a mere 'custodian' of the deposited amount, does not even have the right to create a charge on the RERA Account. This is based on a mistaken assumption that creation of a charge would automatically enable the lender to withdraw money from the RERA Account, on which the lender has a charge. In the normal course that would be true, but exercise of any such right can only be in accordance with law.

In the instant case, H-RERA has proposed imposition of a penalty on the promoter for violation of Section 15(1) of the Act, in terms of which majority rights and obligations in respect of a real estate project cannot be transferred, unless the promoter has obtained prior consent from two thirds of the allottees and of the real estate authority. The lender was also directed to show cause as to why such punitive action should not be taken against it. The action of the promoter that has triggered this violation has not been explained in the order of H-RERA. However, based on the general theme of the order, the trigger appears to be the assignment of the account in which the entire receivables were deposited, and the right of the lender to withdraw from such account. This is noteworthy, as even in the instant scenario, the promoter continued to function as such, and retained its development rights and obligations, in respect of the project.

Criminal Liability – Policing Without Authority?

H-RERA has gone on to hold that withdrawal from the RERA Account is an act inviting criminal liability on the part of the promoter's and lender's directors, managers and officers. The police commissioner was also directed to register a criminal case for misappropriation of funds.

At the outset, it may be noted that the Act does not impose any criminal liability for not maintaining 70% of the sale proceeds in the RERA Account; penalty for breach of this requirement has been stipulated at up to 5% of the estimated project cost. Imprisonment is provided for only in instances where orders of the Real Estate Appellate Authority have not been complied with. Neither does the Act provide for the real estate authority to have powers to direct the police commissioner in the manner that it has. The basis of issuing directions to initiate criminal proceedings is, therefore, not very clear.

RERA Account – A No Lien Account

As a probable fallout of these proceedings, H-RERA has also issued directions on May 10, 2019, under which it is mandated that the RERA Account must always remain free from 'all encumbrances, lien, loan and control of any third party i.e., lender/ bank/ financial institution'.

The directions further state that 70% of the amount from the master customer collection account should be transferred to this RERA Account automatically at the end of each business day. The RERA Account should be exclusively used for the construction and development of the project and proportionate land cost. The directions issued by H-RERA also mandate that no amount from the RERA Account should be used for the repayment/ pre-payment of any project loan/facility.

The directions further state that the remaining 30% amount received from the customers/ allottees should be deposited in a separate account named as the Promoter's Free Project Account'. The amount lying in this can be utilised for making finance costs and the repayment/ pre-payment of loans, if any. The directions further state that the funds available in this 30% account may be used freely for business activities related to the same project provided the real estate authority has not issued any directions to the promoter for such account. In other words, the funds available in this 30% account cannot be used for other projects.

Revision of Order – Worth the Time and Effort

The order passed by H-RERA in the instant case strives to clear the dust on many aspects, but not necessarily with pleasant consequences for stakeholders. The order is also incomprehensible on some aspects, as discussed above.

It may be noted that the lenders to the project have already approached the Real Estate Appellate Tribunal, which has, in an order issued earlier in May, 2019, set aside the order of H-RERA on the ground that principles of natural justice were not followed while deciding on the matter, and has accordingly directed H-RERA to adjudicate afresh, after giving the lenders an opportunity to be heard.

The order of H-RERA appears worthy of a relook, not only to clear the air on various matters of law, but also from a business and economic perspective. This would certainly reinstate the confidence of lenders who finance such projects in their ability to leverage cash flows of the projects, not to mention providing a fillip to the developers who are already facing a liquidity crunch.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions