Real estate sector in India has contributed to 9% of the Indian GDP and is the second largest employer after agriculture in India.
The Real estate industry in India is going through a grim phase. The slowdown in the economy has made the condition of the real estate sector unpleasant and this coupled with the unorganized nature of this sector has ensured that real estate prices have plunged to the lowest levels since the last decade.
Almost every housing developer is currently sitting on multiple half cooked projects and most of the projects are delayed well beyond their projected completion dates.
The industry is also plagued with the problem of low cash flows severely impacting its operations. Real Estate Developers have an arbitrary working culture with their own conditions and it is the buyers who had to pay the price despite not getting timely possession of their units.
Sadly, if the buyers fail to pay the installment amount within the stipulated time then he will be charged interest at the rate of 12-18%. On the other hand, if the developer fails to deliver the project the interest will pay at the rate 0-6%.
Real Estate sector in India lacked a legal infrastructure to work upon. As a result, it leads to frequent disputes among the parties and in turn contributed significantly to the numbers of pending litigations already burdening the Judiciary of India.
In the backdrop of all these issues, India needed a strong cure of legal statute to regulate the sector and to regain the lost trust of the buyers. This came in the form of recently enacted Real Estate (Regulations and Development) Act, 2016. RERA, as it is commonly abbreviated, is a landmark realty law to protect small home buyers from relentless developers and to provide an infrastructure for the Industry to work upon. Very interestingly, at present, it is the only law in India which specifically deals with the issue.
However, India is not the first country to enact this law. Earlier US, UK, and other developed countries have also enacted similar legislations. Does it mean all the real estate laws across the world are same? The answer is a resounding no. Different countries have a different structure of governance and accordingly, the process of enactment and application of law varied from country to country. All the countries have applied the law considering their socioeconomic environment and specific character of the real estate industry operating that country. However, the basic underlying idea followed is the same everywhere.
At the outset, RERA will significantly impact the real estate developers, land owners (in the case of Joint Development Agreements) and strategic investors such as private funds. However, the buyers will be the one who will enjoy the fruits of this legislation.
RERA, brought into force with effect from 1 May 2017, seeks to disrupt the environment in which the real estate sector works. It lays down specific responsibilities on real estate developers to regulate the Industry and regain the lost trust of the buyers. For example one such responsibility laid down is that the real estate developer cannot market or offer for sale a 'real estate project' before registering the project with RERA and has to create a web page on the website of the RERA Authority furnishing all the necessary details such as registration details, details of proposed project along with proposed completion period, etc. Moreover, in order to ensure strict adherence to the legislation, the law lays down severe penalty provisions which can be invoked against the defaulting developers.
Additionally, RERA requires all builders to register their project with RERA authority and get the same approved before they start advertising the same. Failure to do so will invite imprisonment up to 3 years or fine of up to 10% of the total project, which itself can shoot up to lakhs and crores of Rupees.
The law is expected to stabilize prices in the Industry. This will lead to enhanced activity in the sector, leading to more housing units supplied to the markets. In such cases, it surely can be seen as a boon for the buyers in the Indian Economy. Moreover, this will also provide material support to the backbone of the Real Estate Sector in the country.
Earlier there were many fly-by-night players who made fool of the buyers and many real estate developers collected money from buyers and channelized them to start a second real estate project, instead of completing the first project. Due to lack of proper mechanism, in such cases, the consumer had to make rounds of consumer or civil courts to get back their hard earned money. Now under the new law, after the establishment of RERA Authority, the consumer can go to the real estate regulator for grievance redressal. In true sense, it will prove to be landmark legislation from consumer protection point of view.
In order to get more clarity on the subject, let's have a look at some of the duties laid down under the Chapter III of act applicable to developers:
- Duty to obtain the completion certificate or the occupancy certificate.
- Duty to publish all the information related to the ongoing/ approved projects on the website of the Authority.
- Duty to obtain the lease certificate, if applicable.
- Duty for providing and maintaining the essential services such as common area maintenance.
- Duty to provide physical possession to the allottee.
- Not to accept some more than 10% of the cost of apartment, plot or building as an advance payment from a person without entering into a legal agreement.
- Duty to develop the project only in accordance with the sanctioned plan, layout plan, and specifications as approved by the competent authorities. However, minor alterations are allowed as may be required by the allottee or as may be necessary due to structural reasons.
- Not to transfer the majority of his rights and liabilities in respect of a real estate project to a third party without obtaining prior written consent from two-third of allottees and without the prior written approval of Authority.
- In case the developer fails to complete or is unable to give possession of a project, he shall be liable to return the amount received by him in respect of that project with interest, if demand by the allottees.
From the responsibilities have been cast upon the shoulder of Developers. Therefore, it can be concluded that the new law has been brought in to bring more transparency, enable buyer's protection and easy recourses availability to buyers in case of default on part of the developer.
Talking about the political allegations, Opposition termed the new Real Estate Bill a pro-builder and anti-buyer bill. However, many experts claimed that the new bill will actually help the buyers and curb the fly by night developers.
One of the most important provisions, which will significantly affect the developers is the requirement that the 'Promoter will have to deposit 50% of the amounts collected from buyers in a separate bank account within 15 days.” Such funds can be used only in a phased manner in proportion to the percentage of completion of the project (to be certified by an engineer, architect, and a chartered accountant) for meeting the cost of construction and land cost. Therefore, a developer would be restricted to use the funds received for one project for development for other. It will ensure project completion in a timely manner.
The new law will also impact the economy as it will help curb the collection and use of black money in the real estate market. The bill has provisions which will help in tracking down the sources of black money which are currently costing the govt. billions of rupees in lost taxable income.
The new law also provides for the creation of appellate tribunal to resolve disputes the buyers and developers. This will also serve as a deterrent for mischievous developers who have the intention to cheat innocent buyers.
In order to facilitate the growth and promotion of a healthy, transparent, efficient and competitive real estate sector, the authority shall make recommendations to the appropriate competent authority of government regarding :
- Protection of interest of the allottees, promoter, and real estate agent;
- Creation of single window system for timely approval of projects;
- Creation of a transparent and robust grievance redressal mechanism against developers;
- Measures to encourage investment in real estate sector;
The law focuses more on the creation of an apex body which can be empowered with necessary powers to control the real estate sector in India. A few important functions of such body, as given under Chapter V of the Act, are as follows:
- To register and regulate real estate projects and real estate agents registered under this act;
- To publish and maintain website records, for public viewing, for all real estate projects;
- To fix the standard fees to be levied on the allottees;
- To ensure compliance with the obligations cast upon the promoters, the allottees and the real estate agents under this Act and the rules and regulations made thereunder;
- To ensure compliance with the regulations or order or directions made in exercise of powers given under this Act;
- To call for any information as it may deem necessary including books of accounts.
Moreover, to punish the violation of rules by bad players in the market penal provisions have also been laid down. Some of the penalties which can be imposed by the real estate regulator are summarized as follows:
- Projects can be de-registered and penalties might be imposed on the developer in such cases.
- Developers may have to pay fine up to 10% of the total estimated project cost or in case he continues with such violations, he shall be punishable with imprisonment for a term which may extend up to 3 years.
- Additionally, any submission of wrong information by the developer will attract a fine equal to 5% of total estimated project cost.
- Where any such offense has been committed by a company, every person who was in charge of such company at the time when the offense was committed, shall be deemed to be guilty of the offense and shall be liable to proceed against and punished accordingly.
Lastly, the new law seeks to disrupt the entire ecosystem in which the complete real estate industry works and will help to weed out players who tend to violate the rules and try to cheat the innocent buyers. Moreover, taking a broad view in the mind, it can also be said that not only developers but other players in the segment such as Land Owners (who enter into JDA), PE Investors and real estate agents will be affected.
Thus, after the enactment of the new landmark law, the backdrop in which a real estate transaction is undertaken would have to be carefully scrutinized and analyzed from the perspective of tax, regulatory, accounting and, obviously RERA.