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Tuesday, May 24, 2016

Real Estate Act

 
 

Delhi-based Vipin Tyagi, 37, had booked an apartment in a project in Noida in 2009. He and others who bought into this project, were assured a delivery in 2012 but have been waiting for 7 years for their houses. "Looking at the current situation and the pace of work, it will take another 2-3 years for the developers to complete the work," said Tyagi.

 

Another buyer, Meenu Yadav, 37, a Delhi-based teacher, had booked a flat in a housing society in sector-110A on Dwarka Expressway in the city. She and other buyers are waiting for the developer to form a Residents' Welfare Association (RWA) and handover the maintenance of the buildings, even as more than one year has passed since possession and many buyers are now living in their houses. In the same area, buyers in other projects are fighting cases against developers for not providing basic facilities and amenities as stated at the time of booking.

 

The condition is worse in the National Capital Region (NCR) but is also prevalent in other cities. Residents of Nalin-Malad housing society in Mumbai had signed a redevelopment agreement. But the developer left the construction in between and now 22 families of the housing society are left with incomplete work and rent to pay

 

These are not isolated cases; there are many home buyers throughout the country who are facing problems. There is little clarity on where and whom to approach in case the developer defaults. Because of all these issues, there was a strong demand for a regulator for the sector, which is what the real estate Act aims to provide.

 

It has taken eight years for the Real Estate (Regulation and Development) Act, 2016, to come in force. It was proposed in January 2009, and came into effect from 1 May 2016. It is expected to bring in much needed transparency and accountability into the sector. The Act tries to cover a vast range of areas, starting from launch of projects to post-sales issues. But in many quarters, there are doubts about the Act's implementation. We look at some of these points.

 

Registration of projects
When a potential buyer goes to buy a house, she has to rely on information provided by a marketing representative of the developer or a real estate agent. As of now, there aren't any authentic sources of information related to a particular project, such as land title, approvals, building layout and plans that a buyer can access.

 

The real estate Act states that projects of above 500 sq. meter (around 5,380 sq. ft) be compulsorily registered with the real estate regulator once it is set up. This will bring a large proportion of projects under the purview of the regulation. But each state will have the flexibility to reduce the threshold as per regional requirements. So, a state can also bring in even smaller projects or those that have less than eight units, under the Act.

 

Moreover, to register a project, a builder will have to disclose names of promoters, project layouts, plans of development works, land status, statutory approvals' status, draft of builder buyer agreements, and names and addresses of real estate agents, contractors, architects and structural engineers, to the authority. Once a project gets registered, all this information will be readily available on the authority's website, which should help buyers take more informed decisions. Plus, the information has to be regularly updated by the developer. A clear picture of number of units sold and construction status has to be available on the website. You will also be able to get information of defaulting developers.

 

Hurdles: Many departments and processes have to be streamlined to make this part of the Act successful. "Land records need to be updated. Parity between circle rate and market rate needs to be established. In some localities, there is a gap between these rates," said Rohit Inamdar, senior vice-president, ICRA Ltd spokesperson.

 

Some consumer activists share the view. "We cannot overlook the fact that a completion certificate that is issued by a government agency should necessarily be issued in a time-bound manner. So, a time frame should be fixed for government agencies to provide services. Otherwise, this can be used by the promoter as a plea for unnecessary delay," said S. Saroja, director, consumer advisory and outreach, Citizen Consumer and Civic Action Group.

 

When the bill was being discussed in the Rajya Sabha, the government had given the assurance that it will work on providing a single window and speedy clearances of approvals. The revised Delhi building by-laws, which provide single window clearance facility and approvals in a time-bound manner, is a move in this direction.

 

Advance payment and escrow account
The Act requires written agreement for sale or builder buyer agreement (BBA) to be submitted along with other documents at the time of registering the project with the authority. Moreover, BBA must be offered for signing to the home buyer, before more than 10% of the property value is accepted as advance. Till now, schedule of signing a BBA was on the developer's discretion. Often, a buyer gets it after she has already paid a substantial amount. If she does not agree with the terms and conditions, there is little scope for change in the agreement. Moreover, till the time the agreement is not signed, a home buyer does not have any right over the booked apartment.

 

Besides that, "diversion of funds by promoters is a common problem these days, resulting in inordinate delay in completion and handing over of projects," said Saroja. To mitigate this problem, the Act makes it mandatory for a separate escrow account to be opened for each project. As much as 70% of the money collected against a particular project has to be deposited in this account. "This step will help curb diversion of collected funds," said Binaifer Jehani, director, Crisil Research.

 

According to the Act, any amount from the account can only be withdrawn after it is certified by an engineer, an architect and a chartered accountant that the withdrawal is in proportion to the stage of completion of the project.

 

Hurdles: Some consumer activists are not convinced. "Who will ensure how much is the 70%?" asked Arun Saxena, president, International Consumer Rights Protection Council. "The onus is on the builder to inform. How will cash transactions be accounted? The architects and the accountants are all paid by builders, and they will make reports as per builder's suitability and convenience," he added. In fact, said Saxena, this clause may create further problems. "Delays and disputes in withdrawal of amounts will become reasons for delays, and litigations will come up, jeopardising the construction projects."

 

Sale based on carpet area
Typically, most developers sell apartments on the basis of super built-up area. Carpet area is usually 25-35% lower. For instance, if an apartment is said to be the size of 1,500 sq. ft, the actual usable area, or the carpet area, will be 975-1,125 sq. ft.

 

The Act states that developers have to now sell only on the basis of carpet area so that a buyer will get to know how much she is paying for the each sq. foot that she will get for her use. This, however, may not impact the total price of the property as developers are likely to club all other costs of development and raise the per sq. ft rate. It will, however, help home buyers get a clearer picture of the space.

 

Also, there was ambiguity around the definition of carpet area. Different developers define it in different ways. However, the Act now has a clear definition of the carpet area: "...the net usable 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."

 

Promoters will also not be able to change the design of the projects without the consent of buyers. In case of any change in the number of units to be built or any other structural change, a developer must have consent from two-thirds (66%) of buyers in favour of the change.

 

Hurdles: Builders argue that it will be difficult to sell units on the basis of carpet area in an under-construction property in which many units have been already sold on the basis of super built-up area.

 

Penalties
There are several clauses of penalty in case of default by the developer. Incorrect or incomplete disclosure will attract a penalty of 5% of the project cost. In fact, the project may even be cancelled if rules are regularly flouted.

Hurdles: The Act has provisions for penalising developers in case of delays. But many developers say that the main cause of delay is slow approvals from government agencies. "A single-window clearance is needed now, without which there may be cases where bona fide delays by developers may still result in an unfavourable penalty," said Anuj Puri, chairman and country head, JLL India.

Incomplete projects
There are many cases where construction work has come to a standstill or the developer has left without completing the project. The Act also covers such issues. In case a developer leaves a project half way, the association of allottees will have the right to refusal and get back their money along with interest. The allottees can also demand that a government authority get the project completed either through another developer or some other means.

Hurdles: "Under the Act, if the registration is revoked by the regulatory authority, who will complete the construction? How will that be managed looking at such a vast number of projects?" said Saxena.

Faster judgements
So far, when developers defaulted on their responsibilities, home buyers didn't have a fast legal recourse. Once a real estate regulator is established, buyers would find it easier to settle disputes with developers by approaching the consumer courts. A time limit has also been prescribed for adjudication of cases by tribunals and for disposal of complaints by regulatory authorities.

Hurdles: Some consumer activists believe that the real estate regulator may not be effective in this matter. "The manner in which a complaint will be handled about the various defects, that the Act points at, are already being handled by consumer courts. So nothing new," said Saxena. "The consumer courts were also set up to give fast redressal, within 3 months, under Section 13(3A). Has anyone got a redressal within 90 days? Not a single complaint has been decided within 90 days," he added.

A long way ahead
Though the real estate Act has come into force, it will take a long time to have an impact. Each state will have to form its own rules and regulator, based on the Act's guidelines. "We will have to wait and watch how things turn, once everything is clear. It is too early to predict any consequences of the Act on the sector," said Jehani. "We may see some consolidation, as better organised developers will be able to survive. Small developers will have to push up themselves," she said.

 

The Act is a step in the right direction, and most stakeholders believe that it will help boost home buyers' confidence.

 

When Mint asked Tyagi what his views were on the Act being implemented and whether it will help him get his apartment any sooner, Tyagi laughed and said, "We will see."

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