Real estate is a trusted avenue of investment for all. Every person at some point of time, needs to buy a piece of land for his/her need of habitat. Land is limited while the population is growing at a geometric pace. Thus, the demand and value of land asset always remains high.
Recent Wealth reports released by Kotak and KPMG in 2016, indicate that HNIs have built a substantial portion of their wealth through investments in real estate and thus, they continue to favor and invest in this sector.
Then why is it that real estate markets fluctuate, are the economic factors responsible for that or there are other reasons too?
Economic factors play an important role in real estate market fluctuations. However, it is the lack of faith among the participants induced by fraudulent practices of some which is primarily responsible for the unusual behavior of real estate market.
Government came out with the Real Estate (Regulation and Development) Act in March 2016, to tackle the problem of distrust and to setup an effective consumer grievance redressal authority in all the States.
Real Estate (Regulation and Development) Act, 2016
This Act applies to residential as well as commercial real estate projects. The provisions of this Act cover within its ambit three main parties- the Promoters (Builders), the Allottees (Buyers) and the Real Estate Agents.
This Act has been formulated for the benefit of Buyers and security of their hard-earned money. The Builders/ Developers as well as real estate agents shall be liable for conduct of any illegal, unfair or fraudulent act on their part. Heavy penalty has been prescribed for breach of terms of the agreement including default in timely completion of construction and delay in delivery of possession, between the Buyer and the Builder along with payment of equal interest rates on such penalty amount.
Seventy- percent of the amount received for the project is to be kept in a separate bank account, to prevent diversion of funds from one project to another by the promoter/builder, resulting in timely completion of the project. In addition, the provision of paying interest for any delay in complying with deadlines provided in the agreement or on website or advertisement, notice or circulars, will encourage the Builders and allottees to fulfil their obligations and duties on time. Timely completion of work along with efficient utilisation of funds will boost the investor confidence in real estate sector leading to increase in the investment flow.
For Builders also this Act is a good news because with increased investment in real estate sector, they stand to profit. Increase in real sector investment essentially means that the huge real estate inventory will be absorbed and the Builders will be able to realise their cash which is stuck in the form of these unrealized inventories and further invest it into other profitable projects.
Under the Act, a specialised forum called the “Real Estate Regulatory Authority” will be set up within one year from the date of this Act coming into force. 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.
This Act is a welcome step for safe and secure real estate investments.
Important provisions of the Act:
- 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.
- The Real estate agents also have to get registered with RERA.
- 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.
- Certain projects need not be registered under this Act- (a) when area of land does not exceed 500 square meters or the number of apartments to be constructed in the project does not exceed eight apartments, or (b) projects with completion certificate, or (c) projects for the purpose of renovation or repair or re-development which does not involve marketing, advertising, selling and new allotment of such project.
- Registration procedure involves disclosure of numerous information including but not limited to professional details of the promoter, history of projects launched by the promoter, copy of approval and commencement certificate, copies of sanctioned plan, layout plan and project specifications, draft of allotment letter, agreement for sale and conveyance deed, details of contractors, engineers, architects, real estate agent and other persons affiliated with the project and an affidavit by promoter.
- Developers can sell units only in terms of the carpet area. Carpet area 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.
- Seventy percent of the project amount kept separately, is intended to cover the cost of construction and the land cost and the amount deposited shall be used only for the concerned project. Withdrawals from the account can be made after the grant of certification by an engineer, a chartered accountant in practice and an architect.
- Registration under this Act maybe revoked if the Promoter (a) defaults in doing anything required under the Act or the rules or regulations made thereunder; or(ii) violates any terms of the approvals granted for the project; or (iii) the promoter is involved in any kind of unfair practice or irregularities.
- On revocation of Promoter’s registration, his/her name will be published on the Regulator’s website under the list of defaulters, the bank account of project will be freezed and the information of such de-registration will be communicated to other State regulatory authorities.
- In case of any misleading advertisement or publication made by the Developer in print or online media, the Buyer shall have the right to withdraw from the project and receive the investment amount along with interest rate applicable.
- The Promoter shall provide the Buyer/Allottee with information as regards the sanctioned plans and layout plans along with specifications approved by the competent authority and stage wise time schedule of completion of the project.
- A Developer cannot accept more than 10% of the amount of cost of apartment/plot/building as the case maybe, before entering into a registered agreement of sale.
- 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.
- For a period of 5 years, the promoter shall rectify any structural defect or other defect in the workmanship, quality or provision of services or any other obligations of the promoters brought to his notice. If rectification is not done, the Buyer shall receive appropriate compensation for the same.
- In case the promoter is unable to hand over possession of the apartment, plot or building to the allottee, 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. 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 at the prescribed rate by the promoter for every month of delay, till the handing over of the possession.
- Overriding effect of the provisions of this Act-In case of conflict between provisions of this Act and any other law, the provisions of this Act shall be applicable.
Once the Act becomes operative in practice, the following enumerated benefits are projected to arise:
1. Establishment of an independent Tribunal specifically for resolution of real estate disputes.
2. Increase in FDI inflow
3. Timely delivery of project units
4. Immunization against fraudulent, misleading and unfair practices
5. Ease in availability of finance- Financial intermediaries will not hesitate to grant loans as the Act mandates a list of compliances making the transaction very secure.
6. Transparency – The Act provides that all the details of the project including duration and grant of approvals, are to be published on the website and other publications.
7. Project planning – Due to heavy compliance requirements, project planning has to be undertaken by Developers, for smooth functioning of the construction work.
Concerns raised for ongoing projects:
- How 70% of proceeds will be transferred to meet land and construction cost?
For ongoing projects, how to calculate 70% of proceeds after a certain percentage of the total amount has already been spent for construction, is a relevant question. No provision spells out calculation procedure in such scenario.
- Procedure for alteration in plans.
The provision stating that consent of two- third buyers is essential for making alteration in plans, does not put light on who will constitute the two-third buyers. Will the buyers who have left the project midway be considered for calculation of two-third?
- Which plan will be filed- original, sanctioned plan or latest version?
The number of plans for any project maybe multiple as before the commencement of this Act, there was no rule for alteration of plans. While registration process, the Promoter has to file the project plan under this Act. However, which plan is to be filed – sanctioned plan, original plan, or latest version of plan is not clearly put forward in the provision.
- How to calculate timeline for ongoing projects?
The time line is one of the major issues of ongoing projects. If the timeline is calculated from the date of commencement of the construction- Builders will suffer and if the date of project registration under this Act is considered- possession to Buyers maybe delayed by a large margin, defeating the purpose of the Act.
The supplementary rules of this Act are pending government approval and modifications. Once these rules are enforced, the Act will become operational effectively. The real estate industry is eagerly awaiting the announcement of these rules with the expectation that the Government will address the aforesaid concerns and bring an end to the confusions surrounding this beneficial legislation.