Real Estate (Regulation and Development) Act, 2016

The UPA government had introduced a Real Estate (Regulation and Development) Bill, 2013 in August, 2013 in the parliament.  The most recent version of this bill was passed in both the houses of parliament in February 2016. The bill has become effective on May 1, 2016 as Real Estate (Regulation and Development) Act 2016.

Background

The real estate sector comprises activities of sale, purchase and development of land for commercial, residential and industrial purposes. Since land is a state subject, real estate sector comes within the ambit of the state governments. Town and country planning acts regulate the land use and development whereas apartment ownership acts regulate individual ownership of apartments within buildings of multiple apartments. Approval for construction is given at central, state and local levels. Unfair trade practices under this sector are challenged under the Competition Act, 2002 and consumer grievances are redressed through forums established under the Consumer Protection Act, 1986.

Need for the act

India falls in the ‘semi-transparent’ category as per the Global Real Estate Transparency Index. There is a lack of trust and confidence between the buyers and sellers in this sector. The need for the reforms has been underlined by various commissions and committees in the past. The Competition Commission of India has observed that this sector has poor grievance redressal mechanism due to the absence of a single regulator for this sector.  The Committee on Streamlining Approval Procedures in the Real Estate Sector in 2013 acknowledged the lack of transparency and recommended making this sector more transparent. It also recommended strengthening of grievance redressal mechanism to address the issue of non-compliance with building standards or contracts.

Salient Features of the Act

Regulatory authorities

• Under this act, it is mandatory for all the states and union territories to establish state level regulatory authorities called Real Estate regulatory authorities (RERAs) within a year of the act coming in to force. It is provided that two or more states can establish a common RERA and each state/UT can also establish more than one RERA.
• Each RERA should consist of a chairperson and at least two full time members with experience in sectors such as urban development, real estate, law and commerce.
• Functions of a RERA include:
  1. ensuring registration of residential projects and ensuring the availability of relevant details on the RERA website
  2. ensuring that all the stakeholders such as buyers, sellers, and agents comply with obligations under the Act
  3. advising the government on matters pertaining to the development of real estate.
• Regulatory authorities have to draft regulations within 3 months of establishment. They shall promote a single window system of clearances, grade projects and promoters and ensure digitization of land records.

Appellate tribunals

• To hear appeals against the decisions of RERAs, each state/UT has to establish one or more Real Estate Appellate Tribunals. Each Tribunal will consist of a chairperson and two members (one with a judicial background and one with a technical background).
• An issue impacting competition may be referred to the Competition Commission by RERA.
• Appellate tribunals must adjudicate cases within 60 days and regulatory authorities must dispose of complaints within 60 days.

Central advisory council

Under this bill, a Central Advisory Council is to be constituted to advise the central government on major questions of policy and protection of consumer interests. The council will have representatives from union ministries, state governments, RERAs and representatives of the real estate industry, consumers, and labourers.

Registration of projects and agents

All the residential projects are to be registered under this act. Without registration, the promoters cannot book or sell the projects. However, registration is not required for the projects:

• Where the area of land does not exceed five hundred square meters or the number of apartments does not exceed eight inclusive of all phases.
• Involve renovation/repair/re-development without re-allotment or marketing.

Also, the state governments can prescribe the lower limits for exemption.

Real estate agents must also register with a RERA in order to facilitate the sale or purchase of property in registered real estate projects.

Duties of the promoter

• Promoters should make site and layout plans for the project and upload all the relevant details of the project on the website of RERA. They should also update quarterly updates on status of the project.
• In case, if a buyer wishes to withdraw from the project due to loss incurred by him because of a false advertising, then the promoter must return the amount collected with interest to the buyer.
• Promoters must deposit at least 70% of their funds, including land cost, in a separate escrow account to be used for construction purpose only. However, state governments can change this amount below 70%.
• Promoters should not accept more than 10% of the total cost of the property as advance without a written agreement.
• Promoters should help in providing essential services till the association of buyers takes over the maintenance activities.
• Promoters should obtain a completion certificate from the relevant authority.
• In case, if a promoter is unable to give possession of the property, then the money received for the property along with interest has to be returned to the buyer.
• Promoters are responsible for fixing structural defects for five years after transferring the property to a buyer.

Duties of buyer

The buyer has to make the required payments as per the agreement signed with the promoter. If there is a delay in payment, then the buyer will be liable to pay interest for the delayed period. Buyers must also cooperate and participate in the formation of an association/society/cooperative society.

Penalties

• If a promoter fails to register the property, he has to pay up to 10% of the estimated cost of the project as a penalty.
• Failure to register the property despite orders issued by RERA will attract imprisonment up to 3 years and or an additional fine of 10% of the estimated cost of the project.
• If a promoter violates any other provision he has to pay up to 5% of the estimated cost of the project.
• Real estate agents have to pay a fine of 10,000 for each day for the violation of provisions of the act.

How the regulators of real estate sector different from other sector regulators like telecom and insurance?

Unlike other sectors, regulators in real estate sector do not have the necessary powers to approve the projects and powers to determine the price of the projects. For example, they cannot even provide for the long standing demand of promoters for single window clearance. They could only advise the government on matters related to real estate sector including the demand for single window clearance.

Significance of the Bill

• The bill will ensure transparency and accountability in the real estate sector. It will enhance the consumer confidence and will benefit the whole sector. It will help to attract more investments into the real estate sector and may also open gates for FDI.
• The bill has a clear definition of carpet area. It means the net usable area of an apartment excluding area covered by external walls, service shafts, verandah, exclusive balcony and open terrace. Buyers will now be required to pay only for the carpet area and not to the super built-up area.
• This bill aids in effective implementation of projects such as Hosing for All by 2020 and Smart City.

Major concerns

Since Land comes under the state list, some states have enacted their own laws to regulate the real estate sector. With this act, real challenge would be in the implementation front and would depend upon how the states implement this legislation. At the same time, the contracts and transfer of property fall under the concurrent list; so provisions of the state laws will be overridden by the central law in case of inconsistencies. Some states consider this legislation as an encroachment in to their legislative sphere.

Also, other prickly areas in the real estate sector like lack of clear land titles, lengthy project approval process and prevalence of black money has to be addressed by the states as some of them falls under the legislative competence of state governments.

The bill asks the promoter to spend 70% of the project cost on construction activities. In case, if the cost of construction activities is less than 70% and cost of land more than 30%, then some part of the fund collected may remain unutilized while some financing from other sources may be required to cover the land cost. This could raise the project cost. It should also be noted that each state has its own rules on valuation of land further leading to ambiguity.