REAL ESTATE BILL CONSUMER PROTECTION AT THE CORE

An expert analysis of the new real estate regulation bill that was passed by parliament last month

By Manohar Maheshwari and Naveen Mandovara

The Real Estate Regulator (Regulation and Development) Bill which was pending before the parliament since 2013 was finally passed by LokSabha on March 15, after various amendments suggested by a select committee and approved by cabinet.

The RajyaSabha had already passed the bill on March 10, thus paving the way for setting up the sectoral watchdog. The passage of this bill will usher a new era for consumers in the real estate industry.

It is a central legislation, which will provide a model law for states to implement as real estate is a state subject. States will have to make rules within six months of notification of the proposed Act.

The new act aims to bring stringent regulation, more transparency and accountability into the most unorganised sector, which will in turn help reduce the cost of capital. It will provide a solid foundation for the development of the real estate industry.

Since the sector will become regulated, there is scope for institutional money coming into it in a big way thus reducing the cost of capital for the sector, which is known for high cost of funding and for parking of a lot of black (or unaccounted) money.

This would also lead to the elimination of unscrupulous elements from the sector. There is a chance that the real estate sector may get the infrastructure status as well. All these positives will be good for both developers and buyers.

While it will provide protection to home buyers, in the long run it will also help the real estate sector by way of more investments, less regulation, reduction in cost of funding, transparency, blockage of unaccounted money and stability in price due to proper demand and supply balance, as the focus would be on timely completion of projects.

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While the protection of consumer interest has been the main objective of this bill, it has also tried to address certain concerns of the industry. The salient feature of the legislation are:

 Builders have to register the project and only then can they launch it. A project cannot be launched, offered for sale and advertised without all the required approval in place. The bill provides for compulsory registration of all projects of at least 500 sq m or with eight flats, thus providing the regulatory mechanism from the inception of the project. Failure to register will attract a penalty of 10% of project cost or three years imprisonment.

 At the time of the registration, the developer will have to disclose all project information including details of promoter, project plans, including implementation schedule, land status, layout plan, status of approvals, agreements, details of real estate agents, among many others, empowering buyers.

 Builders will have to deposit at least 70% of the sale proceeds i.e. money received from the buyer including land cost, in an escrow account to meet construction cost and payment of land, ensuring that the fund is not diverted to other projects and protect their money if the project does not take off.

 Builders have to pay interest to home buyers for any default or delays at the same rate as they charge them. It will also hold builders liable for structural defects for five years.

 The concept of built-up area or super built-up area has been given a burial for good. It was an unethical and vague terminology used by builders to cheat customers. Dwelling units to be sold on the basis of carpet area basis only. Thus, a consumer will be fully aware what he would be getting for his use. Carpet area has been clearly defined to include usable spaces like kitchen and toilets. Garage will be kept out of the purview of definition of apartment.

 Builders will not be able to give misleading advertisements and false promises as the project needs to meet all the specifications given to the consumer at the time of selling the unit.

 Commercial real estate projects are also under the ambit of the bill, and the provisions are applicable to all projects

wherein sales are still in progress. It also provides for a mechanism whereby they would require consent of two thirds of the buyers in a project for changing the plans. Thus having retrospective effect.

 The regulatory authorities will promote a single-window system of clearances for real estate projects. This will speed up construction work, which is normally paralysed because of delays in getting permissions, causing cost overrun. This is the main reason for most of the problems faced by the sector. If this can be implemented in true spirit, the sector can create employment at mass level for unskilled and rural folks.

 The buyer shall take possession of houses within two months of issuance of occupancy certificate. The formation of residents’ association is compulsory within three months of the allotment of a majority of units in a project. This will provide members participation in the administration of projects at early stage thus checking builders and preventing them from diverting maintenance deposits and other money.

 Land insurance is a must. This will protect the buyer in case land title is held to be invalid. This measure coupled with the escrow deposit account will almost fully protect the prospective home buyers.

 The bill seeks to allow aggrieved buyers to approach consumer courts at the district level, instead of only the real estate regulatory authorities. The regulatory bodies will mostly come up in state capitals. Additional benches of appellate tribunals can be set up in a state if required for speedy adjudication of grievances.

 The regulatory authorities will have to dispose of complaints within 60 days. Similarly the appellate tribunals will have to adjudicate cases in 60 days.

 For violation of orders of the appellate tribunals, imprisonment of up to three years in case of promoters and up to one year in case of real estate agents and buyers or monetary penalties, or both have been provided.

 The bill also provides for optional grading of projects along with grading of promoters and digitisation of land records.

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Despite all the positives, not all is as rosy as it appears to be with the real estate bill. The industry has raised concerns about micro management of all the projects, as it covers projects as small as 500 sq m. This may result in regulators being over-burdened, leading to delays.

Some are apprehensive that it may lead to addition of one more regulatory hurdles in an already permit and permission controlled sector. Some are also apprehensive about its implementation.

Since the bill also covers under development projects, thus having retrospective effect, it would raise many practical issues like how to put money in escrow accounts, what if the project is already completed more than 50% and sold to the prospective buyers, and what would be the effect on ongoing projects which are not able to comply with new requirement.

Therefore, some industry veterans opined that the bill should not be retrospective in nature as it would lead to a lot of confusion and delays. Some also suggested that commercial real estate should be kept out of the ambit of the regulator.

There would always be some teething problems wherever something new is put in to place. However, despite these issues and concerns raised by the industry, which would be addressed or clarified over a period of time, and as implementation takes place, consumer protection remains at the core of the legislation , which may lead to ‘achhe din’ for home buyers and investors in times to come.