rera

In this article, Harshal Joshi pursuing M.A, in Business Law from NUJS, Kolkata discusses how will RERA, 2017 impact Indian real estate industry in the long term.

INTRODUCTION

“RERA is going to be a game changer for buyer and developers and the wider industry. With its implementation, the act will bring in greater transparency and further consolidation of the industry. A more regulated market means that the lines of laws and policies will no longer be blurred and for the first time, every developer will be on a level playing field that puts the interests of the consumer above everything else.”[1]

From the time we obtained independence, the citizens of the country are aware that the builders/promoters have been cheating customers in various ways, and the general public has endured incalculable suffering and have been facing injustice while trying to buy an apartment/plot/building. This has been due to the lack of an effective and suitable law to control, regulate, and monitor the activities/dealings of builders/promoters in the Real Estate industry.

The Real Estate Regulatory Act, 2016, popularly known as the “RERA” Act, is a unique legislation made by the Central Government led by our Honourable Prime Minister Shri. Narendra Modi. The purpose and objective of this Act is to reduce the mental and financial distress that consumers have suffered from the fraudulent builders/promoters and the Real Estate lobby. The RERA Act will help the consumers to get possession of their units in a timely manner as per time schedule, with better condition and without much hassle with the fraudulent builders and promoters. This Act will also bring complete transparency in the Real Estate Sector benefitting both the home buyer’s community and the Developer’s Community. This article briefly states various aspects of RERA and its impact on the Real Estate Industry.

SOME OF THE KEY PROBLEMS FACED BY CONSUMERS AND BUYERS OF APARTMENTS, PLOTS, SITES AND BUILDINGS ARE AS FOLLOWS.

  1. Long term delays up to 3-5 years, in handing over of units has been common in most of the projects related to Apartments, Sites, buildings in layouts in contravention to the agreement of sale with the home buyers;
  2. Decamp and abscond after collecting substantial deposits and funds from the home buyers;
  3. Abandon the projects during construction;
  4. Modify and change building plans without any information to the consumers;
  5. Dishonor some or all the terms and conditions laid and signed by the home buyers and builders in the Sale Agreement/Memorandum of Understanding without any explanation or compensation resulting in not providing the amenities and facilities in the project/individual units;
  6. Even though the Sale agreement has clauses for withdrawal or cancellation of the agreement by the home buyers, the builders refuse to adhere to these clauses and refuse to refund the amount invested by the home buyers;
  7. Construct homes, flats, apartments on illegally encroached government land/lake beds;
  8. Poor quality of project execution;
  9. At the time of construction, grossly violate all the approved building plans and sanctioned project plans, deviate from the original plans, and thereby penalize and fail to provide the consumers with Occupancy Certificate and Completion certificates;
  10. Obtain illegal permissions from BESCOM, BWSSB, and other government controlled bodies to get power, water and other legally required utilities by producing forged documents which will put the consumers in great difficulty after occupying the units.

MAIN PROTECTION TO CONSUMERS FROM THE CENTRAL RERA ACT

The promoters

  1. Cannot register their proposed duly sanctioned project by the Local Authorities/Planning Authorities under RERA without obtaining a Commencement Certificate of the project from the sanctioning authority. Cannot advertise or sell the units of the proposed project before Registering with the RERA Authority;[2]
  2. Must complete the project before the completion date mentioned in the Agreement and hand over the project to the home buyers, in case of delay, the promoters are required to pay the agreed upon fair compensation to the purchasers of the units, for the period of delay;[3]
  3. Promoters have to sell the units on carpet area basis which can be easily measured by purchasers.[4]

The RERA Act recommends and provides the framework for formulating an effective Regulatory Authority in the Real estate sector.[5] The RERA Act also provides an effective resolution mechanism for resolving disputes between home buyers and promoters, by appointing of Adjudication Officers and constitution of the Appellate Tribunal at the state level[6].  All disputes must be resolved within a period of 60 days from the day of complaint.[7]  The home buyers and promoters cannot approach the High Court, before obtaining the decision and judgment from the Appellate Tribunal constituted under the RERA Act.[8]  As per the provisions of the RERA Act, civil cases cannot be filed by Promoters and consumers in any of the lower courts.[9]

The primary objective of the Central RERA Act is to bring in the much-needed transparency, effective management, efficiency and adequate quality control in Real Estate Industry so that the home buyers are benefitted and protected as consumers and investors.[10]

This RERA Act has been enforced all over Indian States and Union Territories (except Jammu & Kashmir) from May 01, 2017 by the Notification issued by Government of India on April 19, 2017 but the same has been only implemented so far by 13 States.[11] RERA cannot be implemented in other states as they have not framed rules and notified the same to enable the implementation of the Act.

                                                                                                                                    Rest of the Governments by failing to implement such a pro-buyer, pro-consumer RERA Act is only contributing to the hardships of the poor, middle and lower middle classes, who have invested their life time savings in the hope of owning a home. The delay in implementation of the RERA act is also hampering the business activity of the honest Promoters who are unable to register their new projects and ongoing projects due to non-constitution of required RERA Authority in the States. This inordinate delay in notification and implementation of RERA in other States and Union Territories is highly condemnable as the entire Real Estate Industry will come to a grinding halt which will affect all homebuyers.

                                                                                                                                   In this Central RERA Act, there are 92 sections, of which 60 sections were notified and enforced by the Ministry of Home Affairs from May 01, 2016.  While enforcing 60 sections of the RERA Act, the Central Government has given a hint to all States that entire RERA act will be enforced from May 01, 2017, and hence has asked all state Governments to facilitate the implementation of this Act, by fulfilling the following responsibilities in a timely manner.[12]

  1. Immediately appoint a senior officer of the State, the Principal Secretary of the State Housing Department, as the designated Authority for the State, until such time the Regulatory Authority is functional under this Act; (by June,2016);[13]
  2. Diligently frame the State Government Rules, and notify the final Rules under RERA Act, by October 31, 2016;[14]
  3. As directed in this RERA Act, form the Selection Committee inclusive of the Chief Justice of the High Court to select the Chairman of the State Regulatory Authority and the remaining two members before April 30, 2017, in the process of establishing the State Regulatory Authority;[15]
  4. In consultation with The High Court Chief Justice, appoint the present or retired judge to the State Appellate Tribunal as president before April 30, 2017;[16]
  5. Complete the Appointment of the remaining two members of the Appellate Tribunal by the Select Committee inclusive of the Chief Justice of the High Court before April 30, 2017;[17]
  6. Appoint Adjudicating Officers before April 30, 2017;[18]
  7. Provide all facilities and infrastructure facilities and staff to The State Regulatory Authority, Appellate Tribunal and Adjudicating Officers to effectively carry out their functions and duties.[19]

Unfortunately, most of the state governments have not fulfilled any of the above-mentioned responsibilities in the last 15 months. These Governments have failed totally to implement RERA Act since its inception and we are not sure how many more months it would require for implementing the Act by following various procedures mentioned above.

There is no evidence to see the desired level of interest and intentions of these governments to firmly implement this Act for providing the relief and redress the issues of defrauded and cheated apartment/site/building buyers, who have been suffering from the last 5-6 years. These governments have failed to safeguard the financial interests of the lakhs of already suffering home buyers and provide remedy to their financial problems.

Only the Karnataka government’s housing department’s secretariat on October 24, 2016, issued a draft of appropriate RERA Rules, and Karnataka was the country’s first state to issue a draft rule. As per standard process the Government of Karnataka provided 15 days’ time for public to give their suggestions on the draft rules and promised to notify finalized rules by the end of November 2016. However, the citizens have been disappointed by the inordinate and inexplicable delay and frustration has set in among the existing buyers of home property and the persons planning to buy home property.

IMPACT OF RERA IN THE LONG RUN

After enforcement of RERA act legally no registration of sale deed of any unit of the project in planning areas of the state can be done in sub-registrar’s office without obtaining the Completion Certificate/Occupancy certificates of the project by the promoter. Currently, registrations of units in the project are occurring unchecked in contravention of the Central RERA Act without obtaining completion/occupancy certificate and without fear of legal consequences. Though the senior officials of the Department of Stamps & Registrations are aware of the implications of the Central RERA Act on such illegal registration activity taking place, they have not initiated any steps or passed any orders to stop the illegal registration of sale deeds of such property. This has resulted in more blatant corruption in the already corrupt Registration Offices, across the state.

The Central Government has notified model and sample RERA Rules and Agreement of Sale eight months back, but very few States have taken the initiative to notify their State Rules/agreement of sale in accordance with the central government guidelines. In a classic example of feet dragging, the Government of Karnataka instead of adopting the model Rules/Agreement of Sale notified by the central government has taken a different decision in the Cabinet meeting held on 30 May 2017. It is reported that the Cabinet has decided to study the RERA Rules of different states, that too after delaying the notification for more than 7 months. Instead of becoming the torch bearer and model for the whole country by notifying strong RERA rules, the Government of Karnataka seems to resort to an easy way of studying RERA Rules of states where the RERA Act has been diluted, resulting in anti-consumer, and anti-home buyer approach to the issue.

According to Media Reports, many state cabinets are contemplating the exclusion of projects promoted by Housing Boards, Cooperative Housing Societies etc (all government controlled organizations) to keep outside RERA and challenge the Central RERA Act on this issue in the High Court/Supreme Court.[20]

The Central Government after analyzing and understanding that the projects developed by institutions like the BDA, Housing Board, Cooperative Housing Societies throughout India are poor in the Project management, unsatisfactory quality control and inordinate delay in completing the project had taken a long-term solution approach to include all housing project developments of such entities within the purview of the RERA Act. These institutions and their projects were also included even in the RERA bill introduced to Rajyasabha 2013 by UPA government during August 2013. On March 10, 2016, when passing RERA bill in the Rajyasabha where NDA government has no majority, the Congress Vice-president Mr. Rahul Gandhi agreed to support the bill only if the bill is not diluted from earlier RERA bill introduced by UPA government in Rajyasabha. As a classic example of the Government Apathy, the Cabinet Ministers of Government of Karnataka have forgotten the stand taken by their own Congress party and its Vice-president while passing the RERA bill in Rajyasabha within 15 months.  To say the least the present stand of Cabinet Ministers of Government of Karnataka to challenge these provisions of the RERA Act at Higher courts is laughable, and highly condemnable. Citizens are losing faith in the congress party, its policies and its leadership, because of such decisions of the Cabinet of GOK.

IMPACT

Fewer Project launches

The number of projects launched by builders and promoters will drastically come down initially as the Real Estate Industry will study and analyse the impact of regulations and policy change and its resultant impact on the business. However, those honest developers/builders/promoters that are known for timely delivery of their projects will only benefit from this situation as there will be lesser competition for them in the market.[21]

Fly-by Night Builders to disappear

Many fly-by-night builders, who dupe innocent investors/homebuyers, will be thrown out of market and only genuine builders will sustain, post RERA implementation.[22]

Beneficial for developers with sound financial status

The newly added 32 sections to the Real Estate Regulations Act will induce a financial discipline in the real estate sector. Before RERA implementation, Developers would normally circulate money/advance collected from one project to the previously initiated project thereby increasing the chances of defaulting on the new project for which the advance was collected. However, this is not possible with the provisions in RERA.[23]

Increased Compliance for Developers

Compared to pre-implementation, post RERA implementation, Developers will be required to follow many formalities if they happen to make any changes in the projects post initiation. Proper reporting to the authorities will be required for any minor changes in the project.[24] This will create short term chaos in the industry but in the long term this will increase the customer confidence in the industry and customers will invest more.

Increased Cost

Timely completion of projects will have its own side effect on the cost of the project. The developers/builders will pass on the cost of timely completion to its customers in turn raising the cost of the apartments. As developers will be required under RERA to timely notify completion of every stage of the project, the cash starved developers will borrow money from lenders at higher rate of interest and pass on such cost to their customers. Increase in the construction cost will be passed on to the buyers. “Seeing the current scenario of uncertainty, property rates may rise for home buyers. After notification of these sections, the number of project launches will be limited and this will affect the demand supply equilibrium in the market”.[25]

Demand Supply Equilibrium will be affected

The number of projects launched will come down and the demand supply equilibrium in the real estate market will get affected. This will also result in increased rise in the cost of the projects.

Transparency

With the registration of project and property being compulsory with the Regulatory Authority under RERA sections, there will be increased transparency in the marketing and execution of the projects. If any developer fails to comply with the provisions of RERA, it may cost him 10% of the total cost of the project in terms of penalty and a repeat offence would land him in jail.[26]

Protection of Homebuyer’s Interest

Real Estate Projects and Real Estate Agents are mandatorily required to register with the Regulatory Authority under new sections of the RERA. There are severe penalties under RERA with respect to project delays and completion time. This will have a positive effect on the Homebuyer’s confidence while investing in real estate. Further, the developer is also required to put 70% (seventy percentages) of the advance collected from the buyer in a separate escrow account. This is to stop the developer from diverting money collected for the project for any other purposes and to ensure timely completion and delivery of the project. “Due to strict regulations and norms, now it will not be easy for developers to skip from their due commitments. Right from project approvals to delivery and later possession, developers will now be seriously responsible and answerable.”[27]

Healthy Competition

Apart from the Home buyers who are the direct beneficiaries of RERA implementation, Developers who are genuinely interested in the business of Real Estate will certainly gain from the timely delivery of projects. It will instill customer confidence in to the projects and in turn will help them build developers their brand and reputation in the market. The presence of the projects of reputed builders will increase in the market creating a healthy competition. This will immensely help credible developers and weed out unorganized and fly-by-night developers who thrive on the innocent homebuyers.[28]

Lower Equity Cost

Due to lack of trust amongst the lenders towards developers, developers end up taking huge amount of loans at a very high rate of interest. . Once the real estate regime is organized post RERA implementations, Private Equity Players (PE), Banks and other Non-banking financial Companies (NBFCs) will not hesitate in funding projects proposed by developers. Institutional Funding will play a major role in real estate. Developers having all the requisite permits will find it easy to fund their project through these lenders. This will in turn amount to lower cost of equity and lesser debts for the developers.

Impact of RERA on the residential under construction Projects

There will be huge impact on the on the ongoing projects due to RERA. Pre-launches by developers are barred under RERA, so developers will find it difficult to channelize liquidity. This liquidity crunch will delay the ongoing projects.[29]

Developers’ Rush to get completion Certificate

Many developers are rushing to acquire Completion Certificate as they do not want to default under the provisions of RERA Act. Some of the large township developers are rushing to procure partial completion certificate from authorities in order to avoid default on the completed blocks of apartments. As per some media reports, some unscrupulous developers have obtained Completion Certificate from Authorities by producing fake and fraudulent permits.[30]

RERA Impact on Ready to Move Residential Market

As the effect of RERA on the real estate market is uncertain, many home buyers refrained from taking the plunge. There is a significant drop in the ready to move in residential market. However, as compared to under construction projects, ready to move in projects observed increased inquiries. This has further fueled the rental activities across major cities like Bangalore, Delhi, NCR, Chennai and Pune.[31] The ready to move in residential properties will remain major attraction for homebuyers as opposed to the under construction projects.[32]

Impact on Retail Investors

Retail investors who rely heavily on under construction projects for assured returns will have more clarity and confidence in to the project owing to strict regulations under RERA. They will now have access to the transparent information about the developer, developer’s track record and his financial stability.[33]

Impact on the Commercial Space Occupiers

Those who occupy Office Space will not worry about the clarity in terms of building layout plans, statutory approvals etc. The competition between the developers will lead to availability of better quality office space in the future.[34]

Conclusion

While RERA promises to transform the Real Estate Industry in to an organized, transparent and a profitable Sector, one has to wait and watch to really understand, the impact it will have in the long run. The initial hiccups in the implementation of RERA are unavoidable but the holistic impact of this revolutionary Act will definitely be positive and beneficial for the homebuyer’s community.

References

[1] Gaurav Sawhney, President Sales Piramal Realty @ http://www.99acres.com/articles/expertsonrera-gaurav-sawhney-president-sales-piramal-realty.html

[2] Section 4(2) (C) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[3] Section 14(1), Section 15(2) and Section 18 (1) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[4] Section 1(k), Section 4(2)(h) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[5] Section 20(l) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[6] Section 43 of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[7] Section 29(4) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[8] Section 58(1) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[9] Section 56 of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[10] Preamble of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[11] http://profit.ndtv.com/news/property/article-rera-comes-into-force-from-today-only-13-states-notify-rules-1687960

[12] http://realty.economictimes.indiatimes.com/news/industry/ministry-of-housing-notifies-remaining-sections-of-rera/58264133

[13] Section 20 (1) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[14] http://timesofindia.indiatimes.com/city/ahmedabad/Realtors-request-Gujarat-government-to-frame-rules-under-RERA/articleshow/54760270.cms

[15] Section 22 of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[16] Id

[17] Id

[18] Id

[19] Section 22 Supra of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[20] http://realty.economictimes.indiatimes.com/news/regulatory/are-on-going-realty-projects-being-covered-under-rera-in-your-state/58164948

[21] http://www.99acres.com/articles/rera-implementation-immediate-and-long-term-impact.html

[22] Id

[23] Id

[24] http://www.99acres.com/articles/rera-implementation-immediate-and-long-term-impact.html

[25] As quoted by Suresh Garg, Chief Managing Director, Nirala World in RERA Implementation: Immediate and Long Term Impact.

[26] Id

[27] As quoted by Jetaish Gupta, Director Adore Realtech in RERA Implementation: Immediate and Long Term Impact.

[28] Id

[29] In Focus RERA by 99 Acres.com

[30] Id

[31] Id

[32] Id

[33] In Focus RERA by 99 Acres.com

[34] Id

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2 COMMENTS

  1. Those who occupy Office Space will not worry about the clarity in terms of building layout plans, statutory approvals etc. The competition between the developers will lead to availability of better quality office space in the future.

  2. The benefits of Goods and Services Tax (GST) are quite big. Providing input tax credit will bring the developer’s cost down, which is a positive outcome of GST on under-construction property. Also, the reduction in number of taxes will benefit the home buyers.

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