Real Estate Regulation and Development Act – Key Points

Real estate developers and agents do not really rate highly on trust factor. And examples are aplenty. It is not difficult to see stalled projects while driving along the city. Just think of those buyers who have purchased apartments (not as an investment) in those projects. They have been waiting to move into their dream house (or so it was when they purchased it) for many years. They were promised they would get possession in 3 years. It has been long since the deadline passed.

To rub salt into the wounds, even the construction work is stalled. Builders don’t listen to the buyers, give never-ending excuses, keep demanding more money on some pretext or the other, and in extreme cases even threaten buyers. Your hard earned money is stuck. You have to pay both rent and EMI. And there is infinite uncertainty if and when you will get possession of your house. Most buyers, in such situation, will find themselves hapless. It can be extremely frustrating.

It is with these issues in mind (and probably many more) that the Parliament has passed Real Estate (Regulation and Development) Bill, 2016.

Let’s look at some of the salient features of the Act.

  1. Real Estate Regulatory Authorities (RERA) will be set up in every state.
  2. The regulations apply to both residential and commercial properties.
  3. Real estate developers will have to deposit 70% of the collections from the buyers in an escrow account specifically meant for the project.  Please note cost of the land is included in the 70% pie. It is beneficial move for the buyers. It is a common practice by the builders to divert collections from one project to another project or even to purchase new tracts of land. With this rule, such practice will be restricted to some extent, especially in smaller cities where the land is not prohibitively expensive.
  4. A real estate project needs to be mandatorily registered with state real estate authority before it is offered for sale. There is relaxation for projects which are less than 500 sq. meters or 8 apartments. Such projects need not be registered. Please note the respective state governments can do away with the relaxation. At the time of registration of project, the builder will have to submit promoter details, project layout, implementation schedule, requisite approvals, number, type and carpet area of apartments etc. Even proforma of the allotment letter, sale deed and conveyance deed needs to part of the registration application.
  5. Even the real estate agents dealing in registered projects need to be registered with RERA.
  6. Developers cannot sell the project unless the project is registered with RERA and the commencement certificate is in place. This will bring relief to a number of buyers whose projects get stuck for the want of one approval or the other. With this, pre-launch sale of projects is now history. Bad news for speculators. Good news for genuine buyers.
  7. Any change in plan (submitted to RERA at the time of registration) by the builder will require approval from 2/3rd of the allottees or buyers in the project.
  8. Currently, the sale agreements are heavily skewed in favour of the builders. For instance, in case of any late payments, the buyer has to pay interest at rates as high as 18% p.a. However, if the builder fails to deliver on time, the buyers get penny change, if any. If you are very fortunate, you will get Rs 3-5 per square feet per month for delay in project delivery. After the passage of this Act, both buyers and the builders will have to pay the same rate of penal interest for delays.
  9. Builders will be liable for any structural defects occurring within 5 years of the date of possession. A few developers, not all of them, offer 1-3 years of warranty for any structural defects.
  10. Sale of property will be on carpet area. Multiple confusing terms such as built-up area, super built-up and carpet area give rude shocks to the buyers. More than the cost, it was difficult to assess what they were exactly buying. Carpet area is essentially the area where you can lay down a carpet. It does not include the thickness of the walls. Carpet area is the actual useable area inside the apartment. Under built-up area, thickness of walls and area of balcony is also included. Under super-built up area, in addition to built-up area, common areas such as lobby, lift, stairs etc is also included. Some smart developers also include swimming pool and garden. Sample apartments have thinner walls giving you a more spacious feel. Hence, you might feel you are getting carpet area but you are not. Your 1000 square feet apartment (super built up area) could only be 750 square feet (carpet area). 1000 sq. feet included your share of common areas too. With this, you can expect price per square feet to go up (as the builders will have to price accordingly). The Act puts an end to all this confusion. There is no other area other than the Carpet Area and it has been clearly defined in the Act. As per the Real Estate Act, Carpet Area is the net useable 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. With this move, you can expect price per square feet to move up but the pricing will be much more transparent. You know what you are buying. This is good development for buyers.
  11. In case a buyer has been tricked into purchase through false representation or advertisements, he has the option to exit the project. The developer, in such case, will have to return the money along with interest.
  12. Any grievance/complaint has to be resolved by the state RERA within 60 days. In case, you are satisfied with the decision of RERA, you can approach Real Estate Appellate Tribunal.
  13. Any real estate developer or real estate agent who acts in contravention of the provisions of this Act or refuses to follow orders or directions from RERA faces heavy penalty and even imprisonment for up to 3 year (1 year for real estate agent).
  14. Even buyers who do not comply with orders of the Authority or Appellate tribunal face heavy penalty and imprisonment of up to 1 year.

In my opinion, the provisions of the Act will bring much needed transparency to the Real Estate Sector. Till now, the balance was heavily tilted in favor of developers. The Act seeks to make it a level playing field. The developer needs to furnish all approvals upfront and submit everything (including plans, implementation schedule) in writing upfront. So, you know what you are getting into. If the developer deviates from the promised plan, you even have an option to exit the project. Moreover, developers may find it difficult to divert collections from one project to another project.

What Is in It for the Existing Investors? Does the Act Apply Retrospectively?

The new buyers get significant protection through this Act.  But what about the existing buyers? As I understand, there is little relief for existing buyers. Ongoing projects for which completion certificate has not been issued shall be registered with RERA within 3 months from the date of commencement of the Act (March 26, 2016). Even if such projects are registered, it does not bring much relief to the buyers. Money has already been siphoned off or the developer is already in financial crunch. If your project is stuck for the want of an approval, the project won’t get approval just because the builder wants to register the project. You cannot complain about misrepresentation or misleading advertisement as that happened before the Act was passed. In any case, passing an Act with retrospective effect can cause many problems.  This Act is an enabling regulation. Now, it is the turn of State Governments to take it further. They can make this legislation stronger for their respective states. They should start with setting up RERA.

You can read the Real Estate (Regulation and Development) Act, 2016 here.

Disclaimer: I am not a real estate expert. Some of my views may be far from ground reality. This is a very simplistic view of the Act. There are many conditions and sub-conditions under the Act which cannot be covered in a single post. Request you to share your experience and inputs in the comment section.

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