Real Estate Act: Scrutinising Regulation Plans for Reality

The article critiques the Real Estate (Regulation and Development) Act, 2016, which is an attempt by the Central Government to provide a blanket regulation for the Realty business in India.

Ages back the society harped upon the need for ‘Roti, Kapda Aur Makaan’, thus needless to say that there was always a demand for land, to build shelters and that is what translated to present day’s  need  and often want for residential real estate.

Introduction

A brief look into the etymology of “real estate” affirms the need that man has always felt for land. While there exists a folklore etymology of the term “real” being associated to royal, the one of the most accepted legally is the one that interprets “real” in terms of “actual matter or thing, distinguished from a person”, so to say “land and anything affixed to it”.

Real estate in the present day can be broadly categorised into purchase, sale and development of residential, commercial and industrial land. Since independence, there has been no Central legislation, uniformly governing this field singularly[1]. However, legislation or regulation cannot be used as a scale of measuring the importance of this sector, which has assumed growing importance with the liberalisation of the economy and since then has been the second largest employer, next only to agriculture[2], the fact that it remains uncontrolled becomes all the more imperative to be changed.

It is alleged that in the meanwhile owing to the privatisation of this sector, the builders and developers have come to cheat or use fraudulent means with the customer, or so to say the consumer, by inter alia taking the major instalments and not giving the possession, not adhering to the project deadline and extending the same by unreasonable time.

One of the probable reasons cited for such a circumstance was that of “land”, which is essential in the housing, being in the State List of the Constitution of India. However, in the light of the said assertion, the subject?matter of concern moves from regulating real estate to protecting consumer’s interest. The power to legislate over the latter is vested in the Centre through Article 246 of the Constitution of India read with Schedule VII. Thus, with the growing voices of such allegation that the buyer or the end user and the investor suffers and are being exploited at the hands of the unscrupulous builder or the developer, the Centre brought real estate/housing constructions within the definition of “service” under the Consumer Protection Act, 1986. However, this move did not yield much solution to the problem that was posed, so taking a cue from it, Centre now decided to exercise its powers under the Concurrent List of the Constitution of India dealing with the Entry “Contractual Obligation and Transfer of Property”, in order to legislate a law over this subject, the same being incidental to land, introduced “The Real Estate (Regulation and Development) Bill, 2013”.

Chronology of events

There was a Real Estate Bill introduced in 2009 under the UPA Government, but it failed to see the light of the day owing to various reasons — some politically driven as well. After undergoing numerous changes it was finally discarded. And then came up for consideration the Real Estate (Regulation and Development) Bill in 2013 (hereon referred to as the “Bill”) introduced by the NDA Government. In the context of Real Estate regulation in Maharashtra:

1963 Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (hereafter referred to as “MOFA”) was introduced to regulate the promotion, construction, sale and management and the transfer of flats on ownership basis.
2012 Maharashtra Housing (Regulation and Development) Act, 2012 (hereafter referred to as “MHRA”), replaced MOFA, as the latter failed to deliver on its objective of providing relief to flat purchasers against sundry abuses and malpractices and also did not provide an effective implementing arm for its various provisions. MHRA provided for the establishment of the Housing Regulatory Authority and the Housing Appellate Tribunal.
20-8-2013 The Bill was introduced in the Rajya Sabha by Dr Girija Vyas, Minister of Housing and Urban Poverty Alleviation.
9-9-2013 The Bill was referred to the Standing Committee on Urban Development for examination and the Report thereon, by the Speaker, Lok Sabha under Rule 331-E of the Rules of Procedure and Conduct of Business in Lok Sabha.
8-10-2013 The Standing Committee had the briefing of the representatives of the Ministry of Housing and Urban Poverty Alleviation.
6-11-2013, 6-12-2013 and 12-12-2013 The Standing Committee heard the views of some of the NGOs working in the field of real estate and in addition also took oral evidence of the representatives of the Ministry of Housing and Urban Poverty Alleviation, Ministry of Finance, Ministry of Consumer Affairs, Ministry of Law and Justice and sought clarifications on various issues that were brought to their notice by various stakeholders during their sittings on the aforesaid dates.
12-2-2014 The Standing Committee under the Chairmanship of Mr Sharad Yadav, prepared its Report after having sought public opinion through a press release and having analysed the memoranda/suggestions received from various stakeholders/experts such as Ficci, CII and Associations working in the field of real estate on the various provisions of the Bill[3].
13-2-2014 The Standing Committee on Urban Development submitted its report on the said date.
7-4-2015 The Union Cabinet under the chairmanship of the Prime Minister, Mr Narendra Modi gave its approval to amendments in the Bill, vide a press release[4].
6-5-2015 The Bill was introduced in the Rajya Sabha, and vide a successful motion was referred to the Standing Committee comprising of 21 members of Rajya Sabha. The said Bill was referred to the Select Committee along with amendments proposed by the Government as well as by the private member as per Rule 83 of the Rules of Procedure and Conduct of Business of Rajya Sabha.
3-7-2015 The Select Committee held 17 sittings in all. And post?examination, submitted its Report to the Rajya Sabha on 30-7-2015[5].
10-12-2015

 

10th March 2016

 

15th March 2016

25th March 2016

The Cabinet vide a press release, accepted 20 odd major amendments to the Bill[6].

The Rajya Sabha passes the Bill, with the support of the Congress.

The Lok Sabha considers the Bill and passes it[7].

The Bill received the assent of the President.

26th March 2016 The Real Estate (Regulation and Development) Act, 2016 published in the Gazette of India[8].

 

Scrutinising the Act

The Act as has been projected seems like an angel legislation aimed at consumer protection and at bettering the flow of finances through Indian financial institutions and vide FDI, by regulation of the real estate sector by establishing a governing body. The Act also seeks to bring about transparency in the transactions. The Act overrides the current State legislation of MHRA to the extent of repugnancy, as being a Central legislation shall uniformly govern the areas as are taken up therein.

The salient features of the Act, as was initially proposed, are as follows:

  1. The Act is applicable to the residential as well as the commercial areas of real estate.
  2. Registration of real estate projects after mandatory public disclosure of the project details, plot size of 1000 sq m or 12 apartments exempted.
  3. Registration of real estate agents.
  4. Compulsory deposit of 70% of the amount collected, by the builder or developer, in a separate account.
  5. Establishment of authorities in States/UTs to regulate real estate transaction.

(a) Real Estate Regulatory Authority.

(b) Real Estate Appellate Tribunal.

  1. Fast track dispute settlement mechanism.
  2. Bar of jurisdiction.
  3. Written agreement after 10% payment by the buyer or the investor.
  4. Punitive provisions, imposing penalties.
  5. Establishment of Central Advisory Council.

The recommendations as made by the Standing Committee on Urban Development are as follows:

  1. The commercial and industrial areas of real estate be brought under the ambit of the instant Act.
  2. The size of the excluded projects i.e. as per the Act plot size of 1000 sq m or 12 apartments, be reduced to 100 sq m and 3 apartments.
  3. The real estate agents be required to register with RERA and undergo training in consonance with a draft model code of training for the agents.
  4. Single window system and digitisation of records in order to ensure that land is not sold to multiple independent individuals.
  5. As regards the disclosure documents for registration of the projects, RERA be the authority governing and codifying the manner and conditions of registration of real estate, vide a delegated legislation.
  6. The definition of “carpet area” was recommended to be the “net usable floor area”, and free of ambiguity, since the definition was silent on the inclusion or exclusion of balconies, terraces and verandas. The definition recommended is akin to the one in the National Building Code of India, 2005.
  7. The sale agreement and the sale deeds to have the area of common area mentioned.
  8. The registration to be automatically approved within 30 days of application rather than a mere 15 days of application.
  9. The appeal time to be reduced from 90 days to 45 days.
  10. The promoter be liable to fix the structural defects arising within 5 years and not only 2 years.
  11. The conveyance deed must be registered by the promoter within two months of handing over possession.

The recommendations as made by the Select Committee of Rajya Sabha are as follows:

  1. The size of the excluded projects, i.e. as per the Act plot size of 1000 sq m or 12 apartments, be reduced to 500 sq m and 8 apartments
  2. The 50% of the amount collected from the buyer or investor be used, rather than the earlier 70% amount, for construction purpose.
  3. The definition of “carpet area” should be independent of the National Building Code of India, 2005, contrary to the recommendation of the Standing Committee.
  4. A thin line created between promoter and investor. The Select Committee recommends that the investor having two or more than that be termed as “promoter”.
  5. The term of the office of RERA reduced to 3 years or less, as against 5 years or less.
  6. The new provision recommended is that of the promoter bearing all liabilities till flat is transferred in the name of the allottee.

Features of the Real Estate Act, inter alia are as follows:

  1. The 70% of the amount collected from the buyer or the investor, be deposited and be used exclusively for the purpose of covering both construction cost as well as land cost.
  2. Registration as devised under the Act is mandatory for both the Real Estate Project as well asmReal Estate Agent.
  3. Commercial Real Estate is roped in, under the ambit of the present Act.

Thus, conclusively the issue that remains is as follows:

  1. Myopic view of the real estate sector

The legislators have considered a typical myopic view by not considering the grievances of the builder and developer community, and thereby missed a balanced vision. The Act, and the subsequent Standing Committee and Select Committee have failed to consider or recommend the concerns of all stakeholders and the Act conclusively makes no exception.

    2. Limited object of the Act

The Act operates to provide for consumer protection in Real Estate, however it overlooks the major vice of this sector, i.e. Short supply of housing as well as Black Money. No provision in the Act addresses these two issues. In fact in the light of the procedure as laid down by this Act, the shortage of Housing Supply is expected to further increase.

  1. Only 70% in a separate account

The Act mandated that 70% of the amount collected from the buyers of a project be used only for construction of the project. As per this there is no use mandated for the remaining 30% of the amount collected, thus the same would remain unutilized, while there would still be a need of the same amount or less, depending on the construction cost for the completion of the project. Since some projects have a small ratio of profit as compared to others, when the construction cost itself is more than 70% of the project. Under these situations there would arise a need for additional financing.

The Select Committee recommended that a mere 50% of amount collected from the buyers of a project be used for the construction of the project. The integral part ignored herein was the fact that the cost of construction and land of certain projects is much more than just 50% of the project. Thus if only a part of the cost is collected and mandated for use, then the builder and developer shall need additional fund for the project construction and completion.

Though under the Act it has been revived to 70% of the amount collected, The stress on the finances and the cash flow within the Real Estate sector shall continue to  sweat out the investor and financer, both of who do not have adequate motive.  There is also a likelihood of increase in the cost of capital. The Act is silent on the differential amount, i.e. hypothetically if the project cost is 80% of the cost amount collected, even then as per the Act 70% is to be used.

  1. More regulations leading to delay

Unfathomable delay already exists, additional layer of regulation and longer chain of intermediaries, shall only delay the project further, and builder and developer shall be blamed for such delay caused, even when it was beyond their control. As it is getting construction permits in time is one of the worst benchmarks in World Bank’s Doing Business in India metric. It was suggested thus that a ‘Single-window scheme’ be introduced for all clearances.

     5.  Effect on Soft Sale

Most builders and developers undertake pre-pre-launch or pre-launch, wherein they promote for sale and sell at a subsidised market rate to the buyer or the investor. Though the investor remains the focal point often, as this is one of the ways for even the investor to increase the level of profit it makes when at a later stage the investor would sell to the end user at the existing market rate. Thus the benefit being of the subsidy provided at the time of such soft sale and that by virtue of fluctuating market price

     6. Ongoing projects would be subject to the Act

Certain provisions of the Act bring the ongoing projects also under the ambit of the proposed law, which shall inevitably lead to utter chaos and numerous litigations. Though the ongoing projects shall not come to a standstill, the Act does not envisage such a situation. Instead it expedites the completion of near-complete projects, but the question on the fate of the phases of large projects far from completion, continues to bother.

      7.  Punishment is too harsh

The punitive provisions as in the Act are unreasonably retributive in nature, since there is a severe punishment imposed for cases where the builder or developer may not be the ones driving the violation, but it may be some other parallel, that has come to cause the violation. For instance, in the case of delayed approval, the project is bound to be delayed and for this the builder and developer cannot be held guilty of causing violation and be accordingly penalised.

The legislators have overlooked the vital linkage between project delays and administration bottlenecks which existed till now owing to bad regulation and shall persist owing to over-regulation by authorities.

     8. Delegation legislation of an essential legislative function

The Standing Committee recommended the delegation of the legislative function of the manner and conditions of registration of real estate agents and project to RERA. This being an essential function of the legislation and the cornerstone of the Act, is excessive in nature and thus ultra vires the Constitution.

    9. Increased scope of preferentialism

Government vide the establishment of Central Advisory Council has vested in itself the power to supersede the statutory authority being set up under the Act. Thereby, subjecting the entire real estate sector to whimsical and arbitrary rule, in addition to the vice of excessive red tapism.

    10. Act vis-à-vis federalism

The act, being a Central Act and by virtue of clear provisions, repeals State laws regulating Real Estate, for instance Maharashtra Housing (Regulation and Development) Act, 2012. For the sake of argument it can be contended that the Act so passed infringes upon the subject matter of the State List and thereby takes a hit on the federalism as exuberated by the Constitution.

Suggestions

  1. As a collateral law, enact the unfair terms in contract law, to provide for scrutiny of one-sided clauses, which are often the cause of disputes, not only in real estate but also in other consumer contracts. The said has been recommended by the Law Commission of India, but has not been implemented so far[9].
  2. Instead of bringing in the procedural paraphernalia, Government should target on facilitating such mechanisms that streamline approval procedure at Central and State level so that the Act eases realty environment rather than garrotting it with bureaucratic procedures[10].
  3. There is no blanket solution to the problem as presented by the instant situation, but the fact that there needs to be equity and on the basis of generalisation one cannot penalise a complete class of professionals. It comes to lack intelligible differentia thus being violative of Article 14 of the Constitution of India.
  4. The fact that even if the aim is consumer protection and objective is to regulate real estate as to resist the odd acts by the unscrupulous set of builder and developers, assuming the latter to be the representative of the seller community in the real estate context, there is no liability arising for fake complaint being registered, as is in the Consumer Protection Act, 1986. There is no provision for penalising frivolous and vexatious litigation filed by the buyer or the investor. In the absence of such provision there is a scope for undeterred litigations, which may be completely false, as is in the case of consumer cases. The saving grace therein is Section 26, however, the instant Act an extended form of consumer protection has no such clause at all, which is prejudicial to the interests of the builder and developer community.

Conclusion

While all in all, the Act may be the knight in shining armour for the buyers and investors, it is akin to a hanging sword for the builder and developer community. The issue herein is not with the protection envisaged to be given to the former class, but with the level of reprimanding that the Act suggests. The Act while focusing on the former class has completely overlooked the grievances of the latter, forgoing the essential balance of interests and thus created an incubator of a draconian legislation to follow. The need, therefore, is to consider the opinion of all stakeholders in unity and not isolate one alone and build legislation on that. The need is to regulate, while the word itself carries a negative notion of imposing restriction and obligation, the same cannot be unreasonable such that instead of increasing the real estate sector’s efficiency completely stalls all developments in the sector.

*   Student of IInd year of BA LLB course, ILS Law College, Pune.

[1]   While there currently exists the archaic Transfer of Property Act, 1882, and several State level laws for ownership of flats, rent control, town planning and redevelopment for instance, Maharashtra Housing (Regulation and Development) Act, 2012, but there is no uniformity in the laws neither are all States having a State legislation regulating this sector.

[2]   <http://planningcommission.nic.in/plans/planrel/fiveyr/10th/volume2/v2_ch7_6.pdf>.

[3]   Standing Committee on Urban Development, Thirtieth Report, Introduction.

[4]   <http://pib.nic.in/newsite/PrintRelease.aspx?relid=118039>.

[5]   Report of the Select Committee on the Real Estate (Regulation and Development) Bill, 2013, Introduction.

[6]   <http://economictimes.indiatimes.com/wealth/real-estate/cabinet-clears-20-major-amendments-to-real-estate-bill/articleshow/50111009.cms>.

[7] http://pib.nic.in/newsite/PrintRelease.aspx?relid=138014

[8] http://egazette.nic.in/WriteReadData/2016/168720.pdf

[9]   CIRC, Regulating Realty: Cabinet’s Nod to Real Estate Bill, Issue Note 12-4-2015.

[10]  Regulating Realty: A Missed Opportunity, CIRC, November 2014.

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