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Perspectives
19 May 2017

RERA: The final hope of home buyers?

While the RERA has several clauses in it that can truly protect the rights of home buyers, experts point out that the success of this Act will depend entirely on how the states implement it. Here’s a look at its most powerful clauses.

The Indian real estate sector has been largely unregulated except for a few states like Maharashtra, Uttar Pradesh, Andhra Pradesh, Delhi and Karnataka. Any pro-consumer development was solely a result of judicial activism. This legislative vacuum has given birth to various industry practices; most of which are against the interests of the consumers.

It is against this backdrop that the Parliament saw fit, to regulate this sector and consequently enacted the Real Estate (Regulation and Development) Act, 2016 (the Act) in the Budget Session of 2016. The Act has come into effect on May 1, 2017, though most of the states are yet to notify the rules.
 
Key highlights of the RERA

The most positive aspect of this Act is that it provides a unified legal regime for the purchase of flats; apartments, etc., and seeks to standardise the practice across the country. Below are certain key highlights of the Act:

Establishment of RERA:
The absence of a proper regulator (like the Securities Exchange Board of India for the capital markets) in the real estate sector, was long felt. The Act establishes Real Estate Regulatory Authority (RERA) in each state and union territory.

RERA shall act as the principal regulator and its functions include protection of the interests of the stakeholders, accumulating data at a designated repository and creating a robust grievance redressal system. This is beneficial, as prior to May 1, 2017, the preferred redressal mechanism for the consumers was to approach consumer courts which was not only time consuming but also expensive.

To prevent time lags, RERA has been mandated to dispose applications within a maximum period of 60 days; and the same may be extended only if a reason is recorded for the delay. Further, the Real Estate Appellate Authority (REAT) shall be the appropriate forum for appeals.

Compulsory registration:
Every real estate project (where the total area to be developed exceeds 500 sq mtrs or more than 8 apartments is proposed to be developed in any phase), must be registered with its respective state’s RERA. Existing projects where the completion certificate (CC) or occupancy certificate (OC) has not been issued, are also required to comply with the registration requirements under the Act.
While applying for registration, promoters are required to provide detailed information on the project e.g. land status, details of the promoter, approvals, schedule of completion, etc.

Only when registration is completed and other approvals (construction related) are in place, can the project be marketed, thereby, ensuring that a wide range of information on the project is already available on RERA’s website before the buyer makes a commitment to purchase a flat. The litmus test is that promoters are not permitted to sell any properties prior to registration. Since marketing is prohibited, buyers will not find themselves in a situation where complete payment has been made but possession is being denied due to non-receipt of requisite approvals.

Reserve account:
One of the primary reasons for delay of projects was that funds collected from one project, would invariably be diverted to fund new, different projects. To prevent such a diversion, promoters are now required to park 70% of all project receivables into a separate reserve account. The proceeds of such account can only be used towards land and construction expenses and will be required to be certified by a professional. This will ensure that promoters can no longer use the excuse of insufficient funds to stall construction of projects.

Continual disclosures by promoters: Lack of information regarding project completion is a common complaint amongst home buyers. After the implementation of the Act, home buyers will now be able to monitor the progress of the project on RERA’s website since promoters will be required to make periodic submissions to the regulator regarding the progress of the project. This is beneficial as consumers will now be privy to details of a project they are interested in on an ongoing basis.

Title representation: For most home buyers, it is impossible to carry out an independent due diligence to ascertain whether the promoter has a legitimate title (or the right to develop). Further, promoters invariably avoid making such warranties in sale agreements to avoid legal responsibility.

To prevent such abuse, promoters are now required to make a positive warranty on his right title and interest on the land which can be used later against him by the home buyer, should any title defect be discovered. Additionally, they are required to obtain insurance against the title and construction of the projects, proceeds of which shall go to the allottee upon execution of the agreement of sale.

Two-third consent:
Any change in the sanctioned and layout plan of the land, by the promoter, will now require the prior written approval of at-least two-thirds of the allottees and with respect to a specific apartment will require the prior approval of the concerned owner. This is highly beneficial as there have been complaints in the past, that promoters have converted common areas into new towers without seeking due consent. Further, promoters are not allowed to transfer or assign their majority rights and liabilities under the project without obtaining prior written consent from two-thirds of the allottees.

Standardisation of sale agreement and defects liability: The Act prescribes a standard model sale agreement to be entered into between promoters and homebuyers. Typically, promoters insert punitive clauses against home buyers which penalised them for any default while similar defaults by the promoter attracted negligible or no penalty. Such penal clauses could well be a thing of the past and home buyers can look forward to more balanced agreements in the future.

Penalty: To ensure that violation of the Act is not taken lightly, stiff monetary penalty (up to 10% of the project cost) and imprisonment has been prescribed against violators.

 
Implementation of the RERA will determine its success or failure

The implementation of the Act will be crucial to its success. Governments must ensure that proper infrastructure is provided to RERA and REAT so that they can discharge their services effectively. The real estate sector earns huge revenue for the government, and there were concerns that the state government may under pressure, dilute the provisions in the rules. While there is evidence of certain dilutions, its survival against the test of time is something to wait and watch for. It is important to note that many states are yet to release the final rules. Until these rules are eventually released, home buyers can only hope that these rules will be in the spirit of the Act.

By- Avikshit Moral & Sumitava Basu
This was first published on Housing.com