Real Estate Bill: What it means for Buyers? Part I

The Real Estate Regulatory Bill, which was first introduced by the UPA government in the Rajya Sabha in August 2013, was recently approved by the Union Cabinet. The Bill is expected to ensure greater accountability towards consumers, and to significantly reduce frauds and delays. The proposed legislation is expected to promote regulated and orderly growth of the real estate sector through efficiency, professionalism and standardization.

The Bill provides for a uniform regulatory environment, to protect consumer interests, help speedy adjudication of disputes and ensure orderly growth of the real estate sector. It aims at restoring confidence of the general public in the real estate sector by instituting transparency and accountability in real estate and housing transactions. This in turn will enable the sector to access capital and financial markets essential for its long term growth.

Key Measures of Real Estate Regulatory Bill: Where it stands today

Applicability of the Bill

The proposed initial Bill was applicable for residential real estate. It is now proposed to cover both residential and commercial real estate.

Establishment of Real Estate Regulatory Authority

The Bill provides for the establishment of one or more ‘Real Estate Regulatory Authority’ in each State/Union Territory (UT) for oversight of real estate transactions. It also proposes to appoint one or more adjudicating officers to settle disputes and impose compensation and interest.

Registration of Real Estate Projects and Registration of Real Estate Agents

Developers have to mandatorily register the projects with the Real Estate Regulatory Authority. Real estate agents who intend to sell any plot, apartment or building also have to get themselves registered with the authority.

Mandatory Public Disclosure of all project details

The Bill proposes mandatory public disclosure norms for all registered projects such as details of promoters, project, layout plan, plan of development works, land status, status of statutory approvals and disclosure of proforma agreements, names and addresses of real estate agents, contractors, architect, structural engineer etc.

Functions and Duties of Promoter

The Bill spells out the duties of developers including disclosure of all relevant information of project, adherence to approved plans and project specifications, obligations regarding veracity of the advertisement for sale or prospectus, rectification of structural defects and refund of money in cases of default;

Compulsory deposit of 50 per cent

Promoters have to compulsorily deposit 50 per cent (or lesser percentage as notified by the authority) of the amounts realised for the real estate project from the allottees in a separate account in a scheduled bank within a period of fifteen days to cover the cost of construction to be used for that purpose. This is aimed at preventing developers from diverting money raised from allottees.

Adherence to declared plans

Under the Bill, promoters are barred from altering plans, structural designs and specifications of the plot, apartment or building without the consent of two-third allottees after disclosure. However, minor additions or alterations are allowed due to architectural and structural reasons.

Functions of Real Estate Agents

The Bill makes it mandatory for real estate agents to sell properties registered with the Authority. They are also required to maintain books of accounts, records and documents and are barred from getting involved in any unfair trade practices.

Rights and Duties of Allottees

The Bill spells out the right of the allottee to obtain stage-wise time schedule of project and claim possession as per promoter declaration. He is also entitled to refund with interest and compensation for default by the promoter. On their part, allottees must make payments and fulfill responsibilities as per agreement.

Functions of Real Estate Regulatory Authority

According to the Bill, the Authority must act as the nodal agency to co-ordinate efforts regarding development of the real estate sector and render necessary advice to the appropriate Government to ensure the growth and promotion of a transparent, efficient and competitive real estate sector

Fast Track Dispute Settlement Mechanism

The Bill also establishes a fast-track dispute resolution mechanism through adjudication and establishment of a Real Estate Appellate Tribunal.

Punitive Measures in Case of Non- compliance

The penal provisions under the proposed law include a payment of 10 per cent of project cost for non-registration and payment of additional 10 per cent of project cost or three-year imprisonment or both if still not complied with. For wrong disclosure of information or for not complying with the disclosures and requirements, payment of 5 per cent of project cost will be imposed. The Bill provides regulatory authorities the power to cancel project registration in case of persistent violations and decide on further course of action regarding completion of such projects.

What are the recent changes in the Real Estate Bill?

• The Bill was originally envisaged for residential transactions. It is now proposed to cover both residential and commercial real estate.
• Earlier, the Bill stated that 70 per cent of the amount collected from buyers should be deposited into the escrow within 15 days of receiving the amount, unless the state government permits an allowance. The final version has reduced the limit to 50 per cent and no preferential allowance can be given by state authorities.
• In the new Bill, ongoing projects that have not received completion certificates have also been brought under its purview and such projects will need to be registered with a proposed regulator within three months.
• Another addition is the inclusion of brokers and agents under the proposed legislation’s purview, effectively rendering them punishable in case of non-compliance with the rulings of the watchdog and the dispute settlement tribunal.
• The changes proposed also dilute the authority vested by the legislation in that the regulator and agencies to be set up under the proposed new legislation will not be the sole recourse to address the grievances of customers, and would allow petitions before consumer forums.
• The current bill makes provision for a model buyer-seller agreement and stipulates that the developer agreements will have to be in line with the model buyer-seller agreement set out by the regulator.
• The bill now mandates that the carpet area of the flats be disclosed and homes cannot be sold on super built area, a laudable step towards transparency.

Impact on Consumers and Builders

Major things expected that didn’t shape up

• Despite continuous demands from industry stakeholders for single-window clearance, the Bill does absolutely nothing to streamline the 50-plus approvals required for a housing project.

• The proposed new legislation continues to exempt the government and its agencies that have slow clearing processes, contributing to overall delays. Developers feel that urban local bodies and development authorities should be brought under the ambit of regulators, since the process of issuance of certificates is under their control.

Major Loopholes to watch out for!

• Certain provisions in the Bill which need to be relooked at, like bringing ongoing projects under the ambit of the proposed law. Experts feel this will create a lot of confusion and will this mean that work will stop in such projects till registration of such ongoing projects is given. They believe that the Bill should be prospective not retrospective as it will stall ongoing projects and all including consumer will suffer.

• The Bill now covers commercial real estate also, however the two asset classes of residential and commercial real estate need to be looked at differently. According to developers, a commercial asset is often leased and about 80 per cent of the business of commercial sector is of leasing, wherein cash flow for developers only begins after the building has been constructed and clients have moved in. In such a scenario provisions such as maintaining 50 per cent receivables may not be suitably applicable to commercial real estate.

• Promoters have to deposit 50 per cent instead of the earlier proposed 70 per cent of the amounts realised for the real estate project from the allottees in a separate account in a scheduled bank. Experts feel that a leeway of 20 per cent will effectively leave more in the hands of developers to continue their practice of diverting funds collected for a project towards other projects.

• Market analysts feel that once the Bill becomes a law, supply shortage is imminent in the residential sector as developers cannot market or launch a project before obtaining all necessary project-related permissions. This means they will have to arrange funds for obtaining approvals and registering projects, squeezing out cash from balance sheets.

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Part II: Major Loopholes in the Real Estate Bill to watch out for