07
JUL
2016

The Real Estate (Regulation And Development) Act, 2016

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THE REAL ESTATE
(REGULATION AND DEVELOPMENT)
ACT, 2016 

Introduction

After a lot of opposition, deliberation and several amendments, the Rajya Sabha has, on 10 March 2016, approved the Real Estate (Regulation and Development) Bill, 2016 (Bill/Act) which substantially amends the original Real Estate (Regulation and Development) Bill, 2013.

  • The Bill largely seeks to protect the interest of the allottees/purchasers by promoting transparency, accountability and efficiency in the construction and execution of real estate projects by promoters.
  • It also holds the promoters accountable for not registering their projects with the Real Estate Regulatory Authority (Regulatory Authority) or for providing insufficient information regarding their project. In addition to the promoter and allottees, the Bill also brings real estate brokers who facilitate the sale and purchase of units in a project within its ambit.

 

Background:

(On 5th June 2013)The Real Estate (Regulation and Development) Bill was first introduced in 2013 under the UPA government.

  • The bill aimed at regulating only residential real estate and not commercial real estate.
  • The bill mandated that builders utilize 50% of funds accrued from allotment, in construction.
  • These were the two primary reasons why the bill was sent to a Parliamentary Standing Committee for recommendations and amendments.    

 

(On10th dec2015) Amendments to the bill

  • A key amendment to the bill now mandates builders to use 70% of funds accrued from allotment for construction.
  • The amendments also include bringing commercial real estate under the bill.
  • The previous bill had a penal code for violations which is removed in the amendment.
  • The Congress led opposition seeks to raise this issue when the bill comes up for hearing in the Parliament.

 

(On 10th dec2015) Union Cabinet approves Real Estate Bill:

The Union Cabinet approved the Real Estate bill today that will bring in reforms and accountability into the real estate sector.

  • The government said the proposed legislation is expected to promote regulated and orderly growth of the real estate sector through efficiency, professionalism and standardization.
  • The bill will now be up for consideration and passing by Parliament.

 

(On 10th march 2016) Rajya Sabha passes the Real Estate Bill: 

Rajya Sabha passed the Real Estate Bill, directed towards guarding home buyers from real estate developers who do not deliver on time and monitoring India’s real estate sector.

  • The Congress had given its support to the Bill, which was passed by a voice vote.
  • The bill would check unaccounted funds in this sector as 70% of the funds will now be deposited through cheques.

 

Highlights of the act

  • The act regulates transactions between buyers and promoters of residential real estate projects.  It establishes state level regulatory authorities called Real Estate Regulatory Authorities (RERAs).
  • Residential real estate projects, with some exceptions, need to be registered with RERAs.  Promoters cannot book or offer these projects for sale without registering them.  Real estate agents dealing in these projects also need to register with RERAs.
  • On registration, the promoter must upload details of the project on the website of the RERA.  These include the site and layout plan, and schedule for completion of the real estate project.
  • 70% of the amount collected from buyers for a project must be maintained in a separate bank account and must only be used for construction of that project.  The state government can alter this amount to less than 70%.
  • The act establishes state level tribunals called Real Estate Appellate Tribunals. Decisions of RERAs can be appealed in these tribunals.

     

    1. fiscal discipline :

    • Withdrawals to cover construction and land cost.
    • Provision for RERA to freeze project bank account upon non-compliance.
    • 70% of the funds collected from allottees needs to be parked in the project account.
    • In proportion to the % completion method.
    • Provision for stronger financial penalties for RERA non-compliances
    • Interest on delay will be same for customer and promote
    • Promoter to compensate buyer for any false or incorrect statement with full refund of property cost with interest
    • Project Accounts to be Audited / FY. Copy to be submitted to RERA
    •Withdrawal to be certified by Engineer, Architect, and CA

    2. Transparency:

    • No arbitrary cancellation of units by promoter
    • Number, type and carpet area of apartments
    • Consent from affected allottees for any major addition or alteration
    • Project completion time frame
    • No launch or advertisement before registration with RERA
    • Quarterly updating of RERA website with details such as unsold inventory and pending approvals
    • No false statements or commitments in advertisement
    • Informing allottees for any minor addition or alteration
    • of Consent 2/3rd  allottees for any other addition or alteration allottees for any other addition or alteration

    3. Accoutability:

    • Quarterly update of project progress along with pending approvals on RERA website
    • Offence by an officer committed with the consent or connivance of any director, manager, secretary or other officer of the company, will also be guilty
    • Every officer of a company, who was in charge or responsible will be liable for the conduct of the company and deemed to be guilty

    4.Customer Centricity:

    • Consent of 2/3rd allottees for any other addition or alteration
    • Increased assertion on the timely completion of projects and delivery to the consumer.
    • Unbiased interest on delays
    • Formation of RWA within specified time or 3 months after majority of units have been sold
    • Sharing information project plan, layout, government approvals, land title status, sub contractors
    • No false statements or commitments in advertisement
    • Consent from affected allottees for any major addition or alteration
    • Informing allottees for any minor addition or alteration
    • An increase in the quality of construction due to a defect liability period of five years

    5.Compliance:

    • Dispute resolution within 6 months at RERA and RERA appellate tribunals
    • Annual audit of project accounts by a CA
    • Maximum 1 year extension in case of delay due to no fault of developer
    • Timely updating of RERA website
    • Registration of agents/brokers with RERA
    • Authenticated copy of all approvals, commencement certificate, sanctioned plan, layout plan, specification,  plan of development work, proposed facilities, Performa allotment letter, agreement for sale and conveyance  deed to be given when applying for project registration with RERA
    • Project completion time period
    • Construction and land title insurance
    • Separate registration of different phases of a single projects
    • Mandatory registration of new and existing projects with RERA before launch
    • Conveyance deed for common area in favor of RWA
    • Developers to share details of projects launched in last 5 years with status and reason for delay with RERA

 

Possible impact:

Initial backlog:

  • Initially, a lot of work is to be done to get the existing and new project registered. Details such as status of each project executed in last 5 years, promoter details, detailed execution plans etc. needs to be prepared.

 

Tight liquidity:

  • Land and approval costs to be meted out of internal accruals as pre-launch concept may end. it may lead to a shift in equity financing from debt financing prevailing currently

 

Increased project cost:

  • Registration with RERA and insurance cost for construction and land title

 

Rise in cost of capital:

  • The cost of capital may go up as developers may now have to fund the land and approval cost through equity. With frequent delay in obtaining approvals, debt funding may not be an ideal route for developers.

 

Consolidation:

  • With entry in the sector made difficult, the sector may witness consolidation Strong financial and execution capability is required to launch a project. The development model/agreement may gain prominence.

 

Increased in project launch time:

  • The project launch time may increase since a lot of time will involve in finalizing finer details before launching a project. Details such as complete drawings, utilities layout, etc. needs to be finalized before project starts.

 

Salient Featuresin 

The salient features of the Bill are the following:

1. Real Estate Regulatory Authority

a) Under the Bill, instead of a regular forum of consumers, the purchasers of real estate units from a developer would have a specialized forum called the “Real Estate Regulatory Authority” which will be set up within one year from the date of coming into Force of the Act. In the interim, the appropriate Government (i.e., the Central or State Government) shall designate any other regulatory authority or any officer preferably the Secretary of the department dealing with Housing, as the Regulatory Authority.

2. Registration with the Regulatory AuthorityReal Estate Regulatory Authority

a) The promoter has to register their project (residential as well as commercial) with the Regulatory Authority before booking, selling or offering apartments for sale in such projects. In case a project is to be promoted in phases, then each phase shall be considered as a standalone project, and the promoter shall obtain registration for each phase.

b) Further, in case of ongoing projects on the date of commencement of the Act which have not received a completion certificate, the promoter of such project shall make an application to the Regulatory Authority for registration of their project within a period of three months of the commencement of the Act.

c) The following types of projects shall not be required to be registered before the Regulatory Authority:

i) Where the area of land proposed to be promoter does not exceed 500 square meters or the number of apartments to be constructed in the project does not exceed eight apartments. However, the appropriate Government (Central and State Government) may, if it considers appropriate, reduce the threshold limit below 500 square meters or eight apartments;

ii) Projects where the completion certificate has been received prior to the commencement of the Act;

iii) Projects for the purpose of renovation or repair or re-development which does not involve marketing, advertising, selling and new allotment of any apartment plot or building.

d) The application for registration must disclose the following information:

i) Details of the promoter (such as its registered address, type of enterprise such proprietorship, societies, partnership, companies, competent authority);

ii) A brief detail of the projects launched by the promoter, in the past five years, whether already completed or being developed, as the case may be, including the current status of the projects, any delay in its completion, details of cases pending, details of type of land and payments pending;

iii) An authenticated copy of the approval and commencement certificate received from the competent authority and where the project is proposed to be developed in phases, an authenticated copy of the approval and commencement certificate of each of such phases;

iv) The sanctioned plan, layout plan and specifications the project, plan of development works to be executed in the proposed project and the proposed facilities to be provided thereof and the location details of the project;

v) Performa of the allotment letter, agreement for sale and conveyance deed proposed to be signed with the allottees;

vi) Number, type and carpet area of the apartments and the number and areas of garages for sale in the project;

vii) The names and addresses of the promoter’s real estate agents, if any, and contractors, architects, structural engineers affiliated with the project; and

viii) A declaration by the promoter supported by an affidavit stating that:

a) he has a legal title to the land, free from all encumbrances, and in case there is an encumbrance, then details of such encumbrances on the land including any right, title, interest or name of any party in or over such land along with the details;

b) the time period within which he undertakes to complete the project or the phase; and

c) 70% of the amounts realized for the real estate project from the allottees, from time to time, shall be deposited in a separate account to be maintained in a scheduled bank to cover the cost of construction and the land cost and shall be used only for that purpose.

3. Carpet Area

Under the Bill, developers can sell units only on carpet area, which means the net usable floor area of an apartment. This excludes the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment.

4.  70% of realization from allottees in a separate bank account

a) The promoter has to register their project (residential as well as commercial) with the Regulatory Authority before booking, selling or offering apartments for sale in such projects. In case a project is to be promoted in phases, then each phase shall be considered as a standalone project, and the promoter shall obtain registration for each phase.

b) The promoter shall be entitled to withdraw the amounts from the separate account, to cover the cost of the project, in proportion to the percentage of completion of the project. However, such withdrawal can only be made after it is certified by an engineer, an architect and chartered accountant in practice that the withdrawal is in proportion to the percentage of completion of the project.

c) The promoter is also required to get his accounts audited within six months after the end of every financial year by a practicing chartered accountant. , Further, he is required to produce a statement of accounts duly certified and signed by such chartered accountant, and it shall be verified during the audit that (i) the amounts collected for a particular project have been utilized for the project; and (ii) the withdrawal has been in compliance with the proportion to the percentage of completion of the project.

5. Acceptance or refusal of registration

a) Upon receipt of an application by the promoter, the Regulator Authority shall within a period of 30 days, grant or reject the registration.

b) Upon granting a registration, the promoter will be provided with a registration number, including a login Id and password for accessing the website of the Regulatory Authority and to create his web page and to fill in the details of the proposed project.

c) If the Regulatory Authority fails to grant or reject the application of the promoter within the period of 30 days, then the project shall be deemed to have been registered.

d)The registration, if granted, will be valid until the period of completion of the project as committed by the promoter to the Regulatory Authority. This period shall be extended by the Regulatory Authority for a period not exceeding one year in aggregate, only due to force majeure and on payment of such fee as may be specified by regulations made by the Regulatory Authority.

6. Revocation or lapse of registration

a) The Regulatory Authority may revoke the registration granted o receipt of a complaint or suo moto or on the recommendation of the competent authority in case (i) the promoter makes a default in doing anything required under the Act or the rules or regulations made there under; (ii) the promoter violates any terms of the approvals granted for the project; and (iii) the promoter is involved in any kind of unfair practice of irregularities.

b) In the event the registration is revoked by the Regulatory Authority or it lapses, the Regulatory Authority shall:

i) debar the promoter from accessing the website in relation to the project, specify his name in the list of defaulters on its website and also inform other Regulatory Authorities in other States and Union territories about such cancellation;

ii) Facilitate the remaining development works to be carried out by competent authority or the association of allottees or in any other manner as may be determined by the Regulatory Authority. However, the association of allottees shall have a first right of refusal for carrying out the remaining development works; or

iii) direct the scheduled bank holding the project bank account, to freeze the account and thereafter take such further necessary actions, including consequent de-freezing Of the account, for facilitating the remaining development works in the manner mentioned above.

7. Website of the Regulatory Authority

a) The promoter shall, upon receiving his login Id and password, create his web page on the website of the Regulatory Authority and enter all details of the proposed project including:

i) details of the registration granted by the Regulatory Authority;

ii) Quarterly up-to-date list of the number and types of apartments or plots or garages, as the case may be, booked.

iii) Quarterly up-to-date status of the project along with the list of approvals obtained and approvals pending subsequent to commencement certificate; and

iv) Such other information and documents as may be specified by the regulations made by the Regulatory Authority.

8. Advertisement or prospectus issued by the promoter

a) The advertisement or prospectus issued or published by the promoter should prominently mention the website address of the Regulatory Authority, where all details of the registered project have been entered and include the registration number obtained from the Regulatory Authority and other similar details.

b) Where any person makes an advance or a deposit on the basis of the information contained in the notice, advertisement or prospectus and sustains any loss or damage because of any incorrect, false statement included in these, he shall be compensated by the promoter in the manner as provided under the Act. Also, if the person affected by such incorrect, false statement contained in the notice, advertisement or prospectus, intends to withdraw from the proposed project, his entire investment (along with interest at such rate as may be prescribed and compensation in the manner provided under the Act), will be returned to him.

ii) Quarterly up-to-date list of the number and types of apartments or plots or garages, as the case may be, booked.

iii) Quarterly up-to-date status of the project along with the list of approvals obtained and approvals pending subsequent to commencement certificate; and

iv) Such other information and documents as may be specified by the regulations made by the Regulatory Authority

9. Limit on receipt of advance payment

A promoter shall not accept a sum more than 10% percent of the cost of the apartment, plot, or building, as the case may be, as an advance payment or an application fee, from a person without first entering into a written agreement of sale with such person and register the said agreement of sale, under any law for the time being in force.

10. Restriction on addition and alteration in the plans

a) The promoter cannot make any addition or alteration in the approved and sanctioned plans, structural designs, specifications and amenities of the apartment, plot or building without the previous consent of the allottee.

b) The promoter also cannot make any other addition or alteration in the approved and sanctioned plans, structural designs and specifications of the building and common areas within the project without the previous written consent of at least two-thirds of the allottees, other than the promoter, who have agreed to take apartments in such a building.

11. Structural defect

In case any structural defect or any other defect in the workmanship, quality or provision of services or any other obligations of the promoters is brought to the notice of the promoter within a period of five years by the allottee from the date of handing over possession, the promoter shall rectify such defect without any further charge, within thirty days. If the promoter fails to rectify such defect within such time, the aggrieved allottee shall be entitled to receive appropriate compensation in the manner as provided in the Act.

12.  Restriction on transfer and assignment

The promoter shall not transfer or assign his majority rights and liabilities in respect of a project to a third party without obtaining prior written consent from two-thirds of the allottees, except the promoter, and without the prior written approval of the Regulatory Authority.
Please note that the allottee, irrespective of (i) the number of apartments or plots booked by him or booked in the name of his family; or (ii) in the case of other persons such as companies/firms/any association of individuals, by whatever name called, booked in its name or booked in the name of its associated entities/related enterprises, shall be considered as one allottee only.

13. Refund of amount in case of delay in handing over possession

In case the promoter is unable to hand over possession of the apartment, plot or building to the allottee (i) in accordance with the terms of the agreement of sale; or (ii) due to discontinuance of his business as a promoter on account of suspension; or (iii) revocation of his registration or for any other reason, then the promoter shall be liable, on demand being made by the allottee, to return the amount received by him from the allottee with interest and compensation at the rate and manner as provided under the Act. This relief will be available without prejudice to any other remedy available to the allottee.
However, where an allottee does not intend to withdraw from the project, he shall be paid interest by the promoter for every month of delay, till the handing over of the possession, at a prescribed rate.

14. Other relevant provisions

a) The same rate of interest will be payable by the allottee and the promoter in the event of their respective defaults.

b) In the absence of any local laws, an association or society or cooperative society, as the case may be, of the allottees, shall be formed within a period of three months of the majority of allottees who have booked their plot or apartment or building, as the case may be, in the project.

c) After the promoter executes an agreement for sale for any apartment, plot or building, no mortgage or charge can be created by the promoter on such apartment, plot or building. If any such mortgage or charge is created, then notwithstanding anything contained in any other law for the time being in force, it shall not affect the right and interest of the allottee who has taken or agreed to take such apartment, plot or building.

d) The promoter may cancel the allotment only in terms of the agreement for sale. However, the allottee may approach the Regulatory Authority for relief, if he is aggrieved by such cancellation and such cancellation is not in accordance with the terms of the agreement for sale, is unilateral and without any sufficient cause.

e) The promoter shall obtain insurance as may be notified by the appropriate Government, including but not limited to the title of the land and building and construction of the project. The promoter shall also be liable to pay the premium and charges in respect of the insurance.

f) The promoter shall execute a registered conveyance deed in favour of the (i) allottee in respect of the apartment, plot or building; and (ii) association of allottees of competent authority in respect of the undivided proportionate title in the common areas, and hand over possession of the same within the period as specified under the local laws. In the absence of any local law, such conveyance deed shall be carried out by the promoter within three months from date of issue of the occupancy certificate.

g) The promoter shall compensate the allottees in case of any loss caused to him due to defective title of the land in the manner as provided under the Act, and such claim for compensation shall not be barred by limitation provided under any law for the time being in force.

h) Every allottee shall take physical possession of the apartment, plot or building as the case may be, within a period of two months of the occupancy certificate issued for the said apartment, plot or buildings.

i) The Regulatory Authority shall make a recommendation to the appropriate Government on (i) creation of a single window system for ensuring time-bound project approvals and clearances for timely completion of the project; and (ii) creation of a transparent and robust grievance redressal mechanism against acts of omission and commission of competent authorities and their officials.

15. Real Estate Appellate Tribunal

a) In addition to the establishment of the Regulatory Authority, the Bill also proposes to establish a Real Estate Appellate Tribunal (Appellate Tribunal) within one year from the date of Commencement of the Act.

b) Any person aggrieved by any direction or decision made by the Regulatory Authority or by an adjudicating officer, may make an appeal before the Appellate Tribunal within a period of 60 days from the date of receipt of a copy of the order or direction.

c) The Appellate Tribunal shall deal with the appeal as expeditiously as possible and endeavor shall be made to dispose of the appeal within a period of sixty days from the date of receipt of appeal.

d)The Appellate Tribunal shall have same powers as a civil court and shall be deemed to be a civil court. An appeal against the order of the Appellate Tribunal may be filed before the jurisdictional High Court within a period of sixty days from the date of communication of the decision or order of the Appellate Tribunal.

16. Adjudicating officer

For adjudging the compensation to be paid by the promoter in accordance with the provisions of the Act, the Regulatory Authority shall appoint (in consultation with the appropriate Government) one or more judicial officers as deemed necessary, who is or has been a District Judge, to be an adjudicating officer for holding an inquiry in this regard. However, such an appointment will be made after giving any person concerned a reasonable opportunity of being heard.

17. Offences and Penalty

a) Stringent penal provisions have been prescribed under the Act against the promoter in case of any contravention or non-compliance of the provisions of the Act or the orders, decisions or directions of the Regulatory Authority or the Appellate Tribunal which are the following:

i) If promoter does not register its project with the Regulatory Authority – the penalty may be up to 10% of the estimated cost of the project as determined by the Regulatory Authority;

ii) If promoter does not comply with the aforesaid order of the Regulatory Authority – imprisonment of up to three years and a further penalty of up to 10% of the estimated cost, or both; and

iii) In case the promoter provides any false information while making an application to the Regulatory Authority or contravenes any other provision of the Act – the penalty may be up to 5% of the estimated cost of the project or construction.

These penal provisions have also been prescribed for any contravention or violation committed by the real estate agent or the allottee.

b) If any allottee fails to comply with, or contravenes any of the orders, decisions or directions of the Regularity Authority, there may be a penalty for the period during which such default continues, which may cumulatively extend up to 5% of the cost of the plot, apartment or building, as the case may be, as determined by the Regulatory Authority. Further, if any allottee fails to comply with, or contravenes any of the orders or directions of the Appellate

Tribunal, this may entail imprisonment up to one year or with fine for every day during which such default continues, which may cumulatively extend up to 10% of the cost of the plot, apartment or building, as the case may be, or with both.

18. Overriding effect

The provisions of this Act shall have an overriding effect in case there is any inconsistency between the provisions contained in this Act and in any other law (including a state law) for the time being in force.
The Maharashtra Housing (Regulation and Development) Act 2012 has been repealed by the Central Government.

Key Issues and Analysis

  • One may question Parliament’s jurisdiction to make laws related to real estate as “land” is in the State List of the Constitution.  However, it may be argued that the primary aim of this act is to regulate contracts and transfer of property, both of which are in the Concurrent List.
  • Some states have enacted laws to regulate real estate projects.  The act differs from these state laws on several grounds.  It will override the provisions of these state laws in case of any inconsistencies.
  • The act mandates that 70% of the amount collected from buyers of a project be used only for construction of that project.  In certain cases, the cost of construction could be less than 70% and the cost of land more than 30% of the total amount collected.  This implies that part of the funds collected could remain unutilized, necessitating some financing from other sources.  This could raise the project cost.
  • The Standing Committee examining the act has made several recommendations.  These include: (a) the  act should also regulate commercial real estate, (b) smaller projects should also be covered, and (c) all real estate agents must be required to register.70%.
  • The Standing Committee examining the act has made several recommendations.  These include: (a) the  act should also regulate commercial real estate, (b) smaller projects should also be covered, and (c) all real estate agents must be required to register.

 

Conclusion

The Act sets out a detailed procedure for Promoters to follow when undertaking real estate projects in India. Whilst the structural provisions set out in the Act involving the establishment of RERA, the online information filing system and the creation of a Tribunal will inevitably take some time to put in place, the Act provides the basis for a transparent and formalized regulatory system. These measures are likely to create greater opportunities for and attract increased investment in Indian real estate from international private equity, as developers may need to look at funding sources other than from purchasers, the risks involved in property development are lowered, with project timelines being shortened, mandatory insurance meaning that risk is more considered, and online publication of Promoter’s details meaning that the risk of investing with errant Promoters’ is reduced.

The increased transparency of the Act alongside the focus on consumers is likely to have a homogenizing effect, helping to improve the competitiveness of the Indian real estate sector and its attractiveness to international investment.

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