Real Estate (Regulation and Development) Act and its implications

Practice Areas

The Real Estate (Regulation and Development) Act, 2016 (“the Act”) came into effect on 01st May, 2017 (59 sections were notified on 01st May, 2016).

Before the commencement of the Act, there was no specific legislation governing the matters with respect to real estate, which everyone is majorly involved in their daily lives. Upon arising of any dispute, people resorted to claim (i) relief as a consumer under Consumer Protection Act, 1986 and (ii) damages under the Indian Contract Act, 1872, both of which tended to be curative and not preventive.

In order to systematically regulate the real estate matters, the Real Estate (Regulation and Development) Act, 2016 has been introduced with specific provisions where disputes have been proven to arise in the past. The key provisions of the Act have been summarised below for better understanding:

Real Estate Regulatory Authority: The institutional structure of the Act consists of establishing a Regulatory Authority and Appellate Tribunal, which shall handle all matters with respect to the real estate sector including but not limited to all the issues between the Promoter and the Consumer. Further, a Central Advisory Council may be set up to advice and recommend to the Central Government, on issues arising out of this Act.

Obligations of the Promoter:

  • Every person engaged in carrying out any real estate project (“Promoter”) shall register every project undertaken by him with the respective Regulatory Authority by making an application under Section 4 of the Act.
  • The Promoter is required to update all project information as furnished at the time of application (as provided under Section 4 of the Act) on the website of the Authority.
  • The Promoter shall rectify any structural defect in the workmanship, quality or provision of services which is brought to his notice within a period of 5 (Five) years from the date of handing over possession to the said consumer. If the promoter fails to do so, he shall pay an appropriate compensation to the aggrieved consumer as prescribed under the Act.

Separate Account for Every Project: Every Promoter shall open a separate account in a scheduled bank for every project in which 70% (Seventy per cent) of the amount realised shall be deposited to cover the cost of construction and the land cost and shall be used only for the said purpose. This provision prevents the Promoters from using the proceeds of one project in respect of another which ultimately results in delay in delivery to the consumer.

The Promoter is required to withdraw the amounts from the separate account, to cover the cost of the project, in proportion to the percentage of completion of the project. In addition, the Promoter is permitted to withdraw from the separate account after it is certified by an engineer, an architect and a chartered accountant in practice that the withdrawal is in proportion to the percentage of completion of the project.

Cap on the Advance: The Act mandates that the Promoter cannot accept a sum more than 10% (Ten percent) of the apartment / plot cost as an advance payment / application fees. For any further collection towards the apartment / plot cost, the Promoter is required to enter into an ‘Agreement for Sale’ with the consumer.

Restrictions on the Promoter:

The Promoter is not entitled to transfer or assign his majority rights and liabilities in the project to a third party, without obtaining the prior written consent of two-third of the consumers and the Regulatory Authority. In addition, for arriving at the number of two-third of the consumers, the number of apartments held by the promoter will be excluded. Also, irrespective of the number of apartments held by a consumer he/she shall only be entitled to 1 (One) vote.

  • The Promoter is not allowed to make addition or alteration in the plan already approved, structural designs, specifications and amenities of the apartment, plot or building, without the previous consent of the consumer.

Role of State Governments: Effective implementation of the Act can be done only through specific rules formulated and notified by the States since ‘Land’ falls under the State list. According to a news report in Economic times dated May 05, 2017, only 14 States and Union Territories have notified their respective rules. However, the Rules made by certain States have diluted the provisions of the Act with respect to the following key provisions:

  •  The Rules implemented by the States of Andhra Pradesh, Delhi, Gujarat and Kerala, provide for the term ‘project’ for mandatory registration and do not specifically include ‘ongoing project’ although the Act specifically thereby exempting mandatory registration for ongoing projects.
  • Guidelines or rules pertaining to withdrawal of money from the escrow accounts are not specified in the State rules implemented by AP, Kerala, Madhya Pradesh and Gujarat thereby creating ambiguity.

Inference

Based on the aforementioned key provisions, it can be inferred that the Act has enunciated various protection measures aimed to ensure proper delivery of the buildings to the consumers without undue delay to ensure transparency and good governance in the manner of carrying out of the projects.

As we explore the various implications of the Act, it is pertinent to note that various consumer friendly provisions introduced in the Act, to effectively regulate the real estate sector have been attempted to be diluted by certain States as explained above. Therefore, their effectiveness can be better validated only after the issues regarding dilution of provisions by States has been ironed out and after the notification of rules by all other States.

Bibliography:

  1. Article from ‘The Business-Standard’ [https://thewire.in/136445/cbi-files-fir-karti-chidambaram/]
  2. FAQs issued on Real Estate (Regulation and Development) Act, 2016 by Ministry of Housing & Urban Poverty Alleviation Government of India
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