India's Real Estate Bill – a thorny rose?

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For a common man, buying a house in India has never been a cake walk, especially when that may be a decision of a life time! And while one may manage to book a property, there is always some level of uncertainty as to whether that house will match the expectations of a ‘dream home’.

The real estate canvas, has always been blotched – primarily due to lack of transparency, absence of regulatory framework and bureaucratic delays in approvals from multiple authorities. Builders many a times are upbeat on the approvals and in a bid to offer competitive projects, present a very optimistic plan to buyers, which in many cases is rarely accomplished. Lack of transparency and inability to source accurate information puts the buyer in a detrimental position, making him unable to take informed decisions, resulting in a perception that is marred by delayed construction and stalled projects.

The Government of India has become conscious of these creases and in a bid to iron these out, the Real Estate (Regulation and Development) Bill, 2015 (‘the Bill’) has been rolled outwith a view to make the real estate scenario in India more transparent and specifically to soothe agonised buyers.

The Bill seeks to address some of the perennial issues associated with the real estate sector and enhance the buyers’ sentiments, which is paramount to achieve the Government’s mission of ‘housing for all by 2022’.

The Bill casts an onerous responsibility on builders, in the form of project registration and mandatory disclosures on a regular basis through a portal to be maintained by the Real Estate Regulatory Authority (‘RERA’); thus giving buyers the ability to analyse the credibility of the builder as well as the project before making their investment decisions. One may also have to worry about similar obligations being cast on a real estate agent / marketing agents under the Bill; the definition of a real estate agent being wide enough to include even a person who simply introduces prospective buyers and sellers, regardless of the property being a plot, apartment (defined to include even a single unit) or building. Apart from the disclosures, the Bill also mandates the builders to honour their commitments in terms of timelines, quality, facility, etc and provides that any default on the part of the builder could result in revocation of the project registration, freezing of bank accounts and handover of development rights to the buyers or third party. Needless to mention, the Bill also provides for severe penal and prosecution consequences in case of defaults / non-compliances and entails listing the builder as a defaulter on the portal.  The Bill also seeks to structure a faster dispute redressal mechanism, with the establishment of the Real Estate Appellate Tribunal (akin to a Civil Court), which shall have the power to regulate its own procedure. While these disclosures will provide buyers the requisite data to take informed decisions, use of such data by unscrupulous elements needs to be addressed to maintain a healthy competition.

However, as fair and square as the Bill may appear, there are more than one imbalances foreseen to be added to the realty sector, let alone the ones that shall continue to persist.  For instance,

• The scope of the Bill is restricted to ‘purchase and sale’ of real estate projects and it fails to address the approval bottlenecks which continue to haunt builders.  Introduction of a ‘single window clearance’ mechanism was the need of the hour and the Bill has missed this important aspect.

• The registration and other related provisions, although would add to the goodwill of compliant builders in particular, would become cumbersome in general; specifically, registration being required even in case of ongoing projects, which might have been launched already.  This would end up adding to the ‘delay incompletion of project’ worries prevalent in the sector.

• The requirement to park 70 percent of the sales revenue in a separate escrow account, to be channelled only towards construction of the project, is likely to be a big dampener for the cash strapped builders. While the parking of funds in an escrow, to be utilised only for the project construction, provides buyers with some element of security and certainty, capping the amount to 70 percent may not be in the interest of the builders, especially where the land cost is significant.Furthermore, in case such escrow accounts are non-interest* bearing, the amount parked in such accounts may not generate any income, increasing the opportunity cost for the builder.

• Further, the bar to accept advance in excess of 10 percent, without entering into an agreement, is also not likely to find favour with builders as they will now have to scout for alternate funding options to fund the initial project costs, which in turn is likely to increase the initial funding requirements.

• The Bill enables completion of stalled projects by allowing buyers or the competent authority to complete such projects. One may have to evaluate this transition in light of several considerations, specifically restrictions imposed by lenders, mainly wherethe real estate projects per se are offered as collaterals for raising finance.

• Similarly, Rules need to be drawn up to streamline the vigorous disclosure obligations cast on builders; say for example, should the builder disclose litigations relating to a project or also company level tax litigations? What should be the requirement to disclose track records where projects are executed through special purpose vehicles?

One also needs to see how States react to the Bill, as some States like Maharashtra and Haryana have already implemented State laws, which may now become futile as the Bill, in its present shape, is proposed to have an overriding effect on the State laws, to the extent they are inconsistent.

With a noble intent to appease the needs of all, and the buyers in particular, the Bill, after much deliberation at the Centre, is crafted to set the stage for streamlining the real estate sector in India.  However, the actual implementation seems to be an uphill task, both for the Government as well as builders, who will now need to buckle up for a more transparent regime.

Key features

• Applicable to both residential and commercial developments, with some exemptions
• The Real Estate Regulatory Authority to be established for dispute redressal
• Greater disclosure on the part of builders – track record, litigations, project status, approvals obtained, etc
• Mandatory to deposit 70 percent of realisation amount in an Escrow Account; to be used only for construction
• Greater responsibility cast on the Real Estate Agents/ marketing agents
• Buyers bestowed with more rights
• In case of contravention by the builder, deregistration of projects, levy of penalty and other financial consequences
• Advance by builder not in excess of 10 percent, without written agreement

The thoughts and opinions shared here are of the author.