December 2018

 

The Real Estate (Regulation and Development) Act, 2016 (RERA), intends to protect the interests of home buyers and enhance transparency in the real estate sector. We examine how it will affect various stakeholders – from home buyers and builders, to brokers – and the provisions and penalties prescribed under the act

The Government of India enacted the Real Estate (Regulation and Development) Act 2016 on 26th March 2016 and all its provisions came into effect, from May 1, 2017.

Developers have been given until the end of July 2017, to register their projects under RERA. Likewise, real estate agents, who also fall under its ambit, are still in the process of registering themselves. Several states still need to notify the rules under the Act and most importantly for buyers, developers/promoters need to register their projects under RERA.

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What is the RERA (Real Estate Regulatory Act)?

The Real Estate (Regulation and Development) Act, 2016 (RERA) is an Act passed by the Indian Parliament. The RERA seeks to protect the interests of home buyers and also boost investments in the real estate sector. The Rajya Sabha passed the RERA bill on March 10, 2016, followed by the Lok Sabha on March 15, 2016 and it came into force from May 1, 2016. 59 of its 92 sections were notified on May 1, 2016 and the remaining provisions came into force from May 1, 2017. Under the Act, the central and state governments, are required to notify their own rules under the Act, six months, on the basis of the model rules framed under the central Act.

Why RERA?

For long, home buyers have complained that real estate transactions were lopsided and heavily in favour of the developers. RERA and the government’s model code, aim to create a more equitable and fair transaction between the seller and the buyer of properties, especially in the primary market. RERA, it is hoped, will make real estate purchase simpler, by bringing in better accountability and transparency, provided that states do not dilute the provisions and the spirit of the central act.

The RERA will give the Indian real estate industry its first regulator. The Real Estate Act makes it mandatory for each state and union territory, to form its own regulator and frame the rules that will govern the functioning of the regulator.

How will RERA impact home buyers

Some of the important compliances are:

• Informing allottees about any minor addition or alteration.
• Consent of 2/3rd allottees about any other addition or alteration.
• No launch or advertisement before registration with RERA
• Consent of 2/3rd allottees for transferring majority rights to 3rd party.
• Sharing information project plan, layout, government approvals, land title status, sub-contractors.
• Increased assertion on the timely completion of projects and delivery to the consumer.
• An increase in the quality of construction due to a defect liability period of five years.
• Formation of RWA within specified time or 3 months after majority of units have been sold.

The most positive aspect of this Act is that it provides a unified legal regime for the purchase of flats; apartments, etc., and seeks to standardise the practice across the country. Below are certain key highlights of the Act:

Establishment of the regulatory authority: The absence of a proper regulator (like the Securities Exchange Board of India for the capital markets) in the real estate sector, was long felt. The Act establishes Real Estate Regulatory Authority in each state and union territory. Its functions include protection of the interests of the stakeholders, accumulating data at a designated repository and creating a robust grievance redressal system. To prevent time lags, the authority has been mandated to dispose applications within a maximum period of 60 days; and the same may be extended only if a reason is recorded for the delay. Further, the Real Estate Appellate Authority (REAT) shall be the appropriate forum for appeals.

Compulsory registration: According to the central act, every real estate project (where the total area to be developed exceeds 500 sq mtrs or more than 8 apartments is proposed to be developed in any phase), must be registered with its respective state’s RERA. Existing projects where the completion certificate (CC) or occupancy certificate (OC) has not been issued, are also required to comply with the registration requirements under the Act. While applying for registration, promoters are required to provide detailed information on the project e.g. land status, details of the promoter, approvals, schedule of completion, etc. Only when registration is completed and other approvals (construction related) are in place, can the project be marketed.

Reserve account: One of the primary reasons for delay of projects was that funds collected from one project, would invariably be diverted to fund new, different projects. To prevent such a diversion, promoters are now required to park 70% of all project receivables into a separate reserve account. The proceeds of such account can only be used towards land and construction expenses and will be required to be certified by a professional.

Continual disclosures by promoters: After the implementation of the Act, home buyers will be able to monitor the progress of the project on the RERA website since promoters will be required to make periodic submissions to the regulator regarding the progress of the project.

Title representation: Promoters are now required to make a positive warranty on his right title and interest on the land, which can be used later against him by the home buyer, should any title defect be discovered. Additionally, they are required to obtain insurance against the title and construction of the projects, proceeds of which shall go to the allottee upon execution of the agreement of sale.

Standardisation of sale agreement: The Act prescribes a standard model sale agreement to be entered into between promoters and homebuyers. Typically, promoters insert punitive clauses against home buyers which penalised them for any default while similar defaults by the promoter attracted negligible or no penalty. Such penal clauses could well be a thing of the past and home buyers can look forward to more balanced agreements in the future.

Penalty: To ensure that violation of the Act is not taken lightly, stiff monetary penalty (up to 10% of the project cost) and imprisonment has been prescribed against violators.

RERA definition of carpet area

The area of a property is often calculated in three different ways – carpet area, built-up area and super built-up area. Hence, when it comes to buying a property, this can leads to a lot of disconnect, between what you pay and what you actually get.

Gautam Chatterjee, Maharashtra RERA chairman, explains that “It is now mandatory for the developers of all ongoing projects, to disclose the size of their apartments, on the basis on carpet area (i.e., the area within four walls). This includes usable spaces, like kitchen and toilets. This imparts clarity, which was not the case earlier.”

According to the RERA, carpet area is defined as ‘the net usable floor area of an apartment, excluding 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’.

Rahul Shah, CEO of Sumer Group, points out that “As per the RERA guidelines, a builder must disclose the exact carpet area, so that a customer knows what he is paying for. However, the act does not make it mandatory for the builders, to sell a flat on the basis of carpet area.”

Impact of RERA on real estate industry

• Initial backlog.
• Increased project cost.
• Tight liquidity.
• Rise in cost of capital.
• Consolidation.
• Increase in project launch time.

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.

With the advent of RERA, specialised forums such as the State Real Estate Regulatory Authority and the Real Estate Appellate Tribunal, will be established for the resolution of disputes pertaining to home buying and the aggrieved party will have no recourse to other consumer forums and civil courts, on such matters. While the RERA sets the groundwork for fast-tracking dispute resolution, the litmus test for its success, will depend on the timely setting up of these new dispute resolution bodies and how these disputes are resolved expeditiously with a degree of finality.

RERA in states

As on July 31, 2017, 23 states and union territories (UTs) have either established their permanent or interim regulatory authorities.

Under the RERA, every state and UT must have its own regulator. Developers will not be able to market their ongoing or upcoming projects, till they register either with the permanent or interim regulator in states. For ongoing projects, where completion or occupancy certificate has not been given, the deadline for registration ended on July 31, 2017.

Only four states – Gujarat, Maharashtra, Madhya Pradesh and Punjab – have established their permanent Real Estate Regulatory Authority, while 19 states/UTs have established interim authorities, an official with the Housing and Urban Affairs Ministry said.

Only 23 States/UTs have notified the rules under the Act, while six states have drafted the rules but have not yet notified. A total of nine states/UTs have appointed interim Appellate Tribunals under the Real Estate Act, while only seven states have started the online registration under the Act.

Maharashtra RERA

The Maharashtra Real Estate Regulatory Authority (MahaRERA) came into existence on May 1, 2017. Builders and real estate agents have been given a 90-day window, to register their new and ongoing projects, with the real estate authority, which ends on July 31, 2017.

Maharashtra becomes the first state to initiate conciliation mechanism

Aggrieved home buyers in Maharashtra, may be able to look forward to an early and amicable resolution of their disputes with their developers, with Maharashtra becoming the first state in India to initiate the conciliation mechanism under Section 32 (g) of the RERA, by way of Alternative Dispute Resolution (ADR). The conciliation process will go online from February 1, 2018 and hearings before the conciliation benches are expected to commence from the first week of March 2018.

Any aggrieved allottee or promoter (as defined under RERA) can invoke the conciliation mechanism set up by MahaRERA. For this purpose, a dedicated website has been created and one can have access to it even via the MahaRERA website.

Which projects come under RERA

Commercial and residential projects including plotted development. Projects measuring more than 500 sq mts or 8 units. Projects without Completion Certificate, before commencement of the Act. The project is only for the purpose of renovation / repair / re-development which does not involve re-allotment and marketing, advertising, selling or new allotment of any apartments, plot or building in the real estate project, will not come under RERA. Each phase is to be treated as standalone real estate project requiring fresh registration.

How can a builder be RERA compliant

• Project registration.
• Advertisement.
• Withdrawal – POC method.
• Website updation/ Disclosures.
• Carpet area.
• Alteration in project – approval of 2/3 allottees.
• Project accounts – Audit.
• 70% of the funds collected from allottees needs to be deposited in the project account. Withdrawals to cover construction and land cost.
• Withdrawals to be in proportion to the percentage completion method.
• Withdrawal to be certified by an engineer, architect, and CA.
• Provision for RERA to freeze project bank accounts upon non-compliance.
• Interest on delay will be same for customer and promoter.

What information does a builder need to provide under RERA

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

How to register projects under RERA

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

How will RERA impact insurance cost for construction and land title

• Land and approval costs to be meted out of internal accruals as prelaunch concept may end. It may lead to a shift in equity financing from debt financing prevailing currently. 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. 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.
• The project launch time may increase since a lot of time will be involved in finalizing finer details before launching a project.
• Details such as complete drawings, utilities layout, etc., needs to be finalized before project starts.

How will RERA impact real estate agents

Under the Real Estate (Regulation and Development) Act (RERA), real estate agents will need to register themselves, to be able to facilitate a transaction. The broker segment in India, is estimated to be a USD 4 billion industry, with an estimated 5,00,000 to 9,00,000 brokers. However, it has traditionally been unorganised and unregulated. “It will bring a lot of accountability in the industry and the ones who believe in professional and transparent business, will reap all the benefits. Now, the agents will have a much larger and responsible role to perform, as they will have to disclose all the appropriate information to the customer and even help them chose a RERA-compliant developer,” says Sam Chopra, founder and chairman of RE/MAX India. With RERA in force, brokers cannot promise any amenities or services that are not mentioned in the documents. Moreover, they will have to provide all information and documents to the home buyers, at the time of booking. Consequently, RERA is likely to filter out the inexperienced, unprofessional, fly-by-night operators, as brokers not following the guidelines will face hefty penalty or jail or both.

How can brokers become RERA compliant

Section 3:

Promoter cannot advertise, book, sell or offer for sale, without registration with RERA.

Section 9:

• No agent can sell any project without obtaining RERA registration.
• Agents’ RERA number needs to be documented in every sale facilitated by him.
• Registration needs to be renewed.
• Registration can be revoked or blocked if any breach is made to conditions of registration for a specified time.

Section 10:

• No agent can sell a project not registered.
• Maintain books and records.
• Not be involved in unfair trade practices.
• Make an incorrect statement – oral, written, visual.
• Represent that services are of a particular standard.
• Represent that the promoter or himself has approval or affiliation which such promoter or himself does not have.
• Permit publication of advertisement in the newspaper or otherwise of services not intended to be offered.

When and how should you file a complaint under RERA?

Digbijoy Bhowmik, head of policy, RICS, explains, “Complaints can be filed under Section 31 of the Real Estate (Regulation and Development) Act, 2016, either with the Real Estate Regulatory Authority or the adjudicating officer. Such complaints may be against promoters, allottees and/or real estate agents. Most state government rules, made appurtenant to the RERA, have laid out the procedure and form, in which such applications can be made. In the case of Chandigarh UT or Uttar Pradesh, for instance, these are placed as Form ‘M’ or Form ‘N’ (common with most other states and union territories).”

A complaint under the RERA, is required to be in the form prescribed under the respective states’ rules. The complaint can be filed with respect to a project registered under RERA, within the prescribed time limit, for violation or contravention of provisions of the act or the rules or regulations framed under RERA.

“For cases pending before the NCDRC or other consumer fora, the complainants/ allottees can withdraw the case and approach the authority under the RERA. Other offences (except complaints under Section 12, 14, 18 and 19) can be filed before the RERA authority,” explains Ajay Monga, partner at SNG & Partners law firm.

Applicable penalties under RERA

Benefits of RERA

Can RERA overturn ‘forced consent’ agreements procured by builders for changing project plans? Section 14 of the RERA prohibits developers from making any amendments to the sanctioned plan of the project, without the prior consent of the home buyers. As per Section 14, any alteration in the plans and specifications of an individual apartment, is permitted only with the prior written consent of the concerned home buyer. On the other hand, alterations in the layout of the entire project and the common areas of the building, cannot be effected unless the developer obtains the prior written consent of two-thirds of all the home buyers (or allottees) in the project.

The Bombay High Court, in the case of Madhuvihar Cooperative Housing Society and others vs Jayantilal Investments and others, 2010 (6) Bom CR 517, had the opportunity to interpret Section 7 of the Maharashtra Ownership of Flats Act (MOFA), 1963, which is similar to Section 14 of the RERA. It held that the consent of a home buyer must be an ‘informed consent’, i.e., one which is freely given after the flat purchaser is placed on notice by complete and full disclosure of the project or scheme that the builder plans to implement. Further, the consent must be specific and relatable to a particular project or scheme of the developer which is intended. The bench further added that blanket or general consents, obtained in advance by developers, particularly during signing of agreements, were legally invalid.

As Section 7 of the MOFA is analogous to Section 14 of the RERA, the ruling of the Madhuvihar Cooperative Housing Society case will hold good for all cases that come before the Real Estate Regulatory Authority and the Real Estate Appellate Tribunal.

Market situation after one year of RERA

• There have been fewer project launches and the focus has been on execution.
• Developers have tried to adhere to compliances, to avoid litigation.
• Relaxed delivery timelines for existing projects has granted developers an escape window.
• The market is yet to witness any landmark judgement that could set a precedent.

28 states and union territories notify RERA

As of October 24, 2018, 28 states and union territories (UTs) have notified the Real Estate (Regulation and Development) Act (RERA) in the country, Housing and Urban Affairs Ministry spokesperson, Rajeev Jain said. According to the ministry, 20 states and UTs had established real estate appellate tribunals under the legislation, of which, seven were ‘regular’ tribunals, while there were 13 ‘interim’ real estate appellate tribunals. “As many as 22 states have fully-functional web portals under the legislation,” Jain added. He said that 27 states and UTs had established the real estate regulatory authority and out of these, there were 13 ‘regular’ regulatory authorities, while 14 were ‘interim’ authorities. Six north-eastern states – Arunachal Pradesh, Meghalaya, Manipur, Mizoram, Nagaland and Sikkim – have not notified the Act or are yet to notify the RERA and its rules, due to land and other issues, while West Bengal, on the other hand, has notified its own real estate law – the Housing and Industrial Regulation Act, 2017 (HIRA), instead of the RERA.

Northeastern states agree to implement RERA

Nearly two years after the Real Estate Regulation Act (RERA) was enacted by the Parliament, six north-eastern states have finally agreed to implement the law, paving way for protecting the interest of home buyers in these states. Arunachal Pradesh, Meghalaya, Manipur, Mizoram, Nagaland and Sikkim had failed to notify the RERA, due to land and other issues. The development comes, after a team of the Union Housing and Urban Affairs (HUA) Ministry visited the north-eastern states on, October 26, 2018 and held a workshop with their representatives and discussed the issues coming in the way of notifying the Act.

Also read: Stamp duty and tax on gift deed of property

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