RERA will consolidate the Market

RERA will consolidate the Market
May 2017 , by , in Legal Opinion & Counsel

The need for a legislation to regulate real-estate sector was felt badly which ultimately led to passing of “Real Estate (Regulation and Development) Act, 2016” (“RERA”). Though it took eight years for this to happen, it is expected to be the biggest reform in the sector.

Till now, the real-estate customers were forced to sign unfair and one sided contracts giving the developers unbridled and unreasonable power. RERA shall set in motion the process of making necessary operational rules and creation of institutional infrastructure for protecting the interests of consumers and promoting the growth of real estate sector.    The Key features of the Act are:

Curbing Builder Malpractices

  • One of the most important clauses of RERA stipulates compulsory registration of all the residential real estate projects with plot size more than 500 sq. meters, with the regulator. For this, the developer will need to disclose names of promoters, project layout, plan of development works, land status, status of statutory approvals, draft of builder buyer agreements, and names and addresses of real estate agents, contractors, architects and structural engineers, to the authority. All this information has to be made available on the regulator’s website. Plus, these details have to be regularly updated by the developer. A clear picture of the number of units sold and construction status also has to be disclosed.
  • RERA not only requires mandatory registration but every phase of a project is to be registered separately as a standalone project. Builders have been barred from advertising booking or selling unless they have obtained all approvals from the concerned authorities. The Real Estate Regulatory Authority established under the act is required to either grant or reject registration applications within 30 days.
  • RERA prohibits real estate agents from facilitating any sale or purchase of plots/apartments in projects without obtaining registration with the RERA. The agents are required to facilitate access of project information to consumers at the time of booking and refrain from making false statements, misleading representations and indulging in unfair trade practices.
  • Existing projects which have not received completion certificate as on the date of commencement of this regulation will be required to obtain registration with the RERA within three months of such commencement.

Safeguarding interest of the Buyers

  • As per RERA promoters are required to keep 70% of all project receivables in a separate escrow account. Amount from such account can only be drawn for land and construction costs only, in line with the percentage of project completion (as certified by an architect, an engineer and a chartered accountant). This will help reduce the general practice of the builders to utilize all funds for separate upcoming projects.
  • Further the Act in order to safeguard customer interest has inculcated that promoter can accept only up to 10% of the apartment cost prior to entering into a written agreement for sale with the consumer.
  • The promoter of the project is required to declare that it has legal title to the project land along with supporting document to support his declaration.
  • The promoter is not permitted to alter plans, structural designs and specifications of the land, apartment or building without prior consent of two-third of the allottees. The promoter is also not permitted to transfer or assign majority of its rights and liabilities in a project without such consent, along with the RERA’s prior written approval.
  • The promoter is also required to obtain insurance for title and buildings along with construction insurance.
  • The new act prohibits promoters from creating any charge or encumbrance on any apartment after executing an agreement for the same. In the event such charge or encumbrance is created, it will not affect the right and interest of the concerned consumer.
  • The promoter shall be responsible for structural defects or other deficiencies for a period of 5 years from the date of delivery of possession.
  • To put a curb to the dominant one-sided clauses of the builder-buyer agreements, RERA provides that a specified format of agreement for sale between promoters and consumers should be prescribed, which will prevent inclusion of biased provisions in it. Consumers have also been granted the right to seek relief for unilateral termination of such agreements by promoters without cause.

Stricter Penalties:

RERA imposes monetary penalties on the promoter of up to 5% of the ‘estimated cost of the project’ (as determined by the RERA) for disclosure related defaults, and up to 10% for other defaults, along with a maximum imprisonment of 3 years. Consumers are liable to a fine of up to 10% of the apartment cost or imprisonment up to 1 year for non-compliance with orders of the real estate appellate tribunal.

Challenges in RERA:

Since the act requires depositing 70% of sale proceeds in a separate account. It will take away the opportunity to invest the idle funds and thus hamper the growth of business. Blocking funds will increase dependency on institutional generation of capital such as private equity or banking finance and since the cost of borrowed capital for the sector is currently very high it will result in escalation of project costs, which may then be passed on to the consumers.

RERA somehow was not able to constitute a single clearance window regarding approvals from authority. With an increase in approvals and disclosure under the new act will lead to it reduction of projects and will slow down the pace of projects.

RERA seeks to protect the rights of homebuyers, mandates registration of projects, including those that have not got completion or occupancy certificates but in doing so it created a much stricter system to protect the interest of homebuyers. To the contrary the changes are likely to impose financial challenges on the developer

RERA would lead to transitional difficulties for builders/developers. Unscrupulous players will have no way to thrive and a consolidated and strong sector is what one can expect in 5-10 years from now.

 

Sumes Dewan,

Managing Partner

Lex Favios

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