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Carpet area definition, regulatory sweep, funds in escrow remain concerns in welcome real estate law

Carpet area definition, regulatory sweep, funds in escrow remain concerns in welcome real estate law

VeraShrivastavThe objective of the Real Estate (Regulation and Development) Bill, 2013 (“Bill”) was to inject transparency and good governance norms in the real estate sector and to address some of the recurring grievances of consumers including unfair buyers’ agreements, unauthorised constructions, the diversion of funds by builders, black money transactions, regulatory delays, lack of clarity on approvals, failure to complete the projects within stipulated times, delays in delivering possession, delays due to litigations or proceedings arising during the development of projects, and the lack of accountability. The Competition Commission of India, in Belaire Owners Association v. DLF had highlighted the absence of a robust consumer grievance redress mechanism.

The Bill proposes to establish a Real Estate Regulatory Authority (“RERA”) in each state to regulate and monitor real estate transactions in an efficient and transparent manner. All projects have to be registered mandatorily with the RERA. Layout plans, builder details, and the status of land and approvals and other such information has to be mandatorily disclosed.

In 2014, the Parliamentary Standing Committee recommended some changes to the Bill but for the most part, recent amendments have not considered these recommendations.

Definition of “carpet area”

“Carpet area” has been defined as the “net usable floor area”. The Standing Committee had recommended clearly defining this term but the Bill has only defined it in relation to its definition under the National Building Code. Effectively, this means that the term “carpet area” can be revised without amending the law. The definition is thus easily susceptible to abuse.

Regulatory sweep

Projects smaller than 1000 square meters or twelve apartments are excluded from the Bill’s purview. The Committee had recommended excluding only projects smaller than 100 square meters or three apartments, but this has not been accepted. A large number of small housing projects will therefore be outside regulatory supervision.

Funds in escrow

A certain part of the buyers’ investment has to be maintained in a separate account to be used only for construction purposes. This was to ensure the proper use of buyers’ funds and to prevent the diversion of that money. The Bill had proposed that the buyer should maintain 70% of the buyers’ investment in this manner but permitted state governments to set a lower or higher standard. This was a major loophole as governments may be vulnerable to pressure from politicians and builder’s lobbies. The figure of 70% was further reduced to 50% with the amendment.

This provision should provide a fixed percentage of the funds to be maintained in escrow and state governments should only be allowed to modify this requirement under exceptional circumstances.

Post-grant registration

RealEstateIndiaOriginally, a project had to be registered within fifteen days of an application to the RERA but this period has now been extended to three months. This could lead to uncertainty about the project, which is compounded because the consequences of the rejection of an application are also not clearly spelt out. The buyer will be monetarily refunded but his time, effort, and cost of opportunity lost in finding other suitable projects are irreplaceable. Abhishek Sharma, a partner at Khaitan & Co. recommended retaining the original clause.

Extension of registration

Originally, the authority could permit the extension of a project  under conditions prescribed in the regulations by RERA. The amendment now specifically provides for extension on grounds of ‘regulatory delay’ in the act itself, which are  not attributable to the builder. This is over and above the conditions prescribed in the regulations.

This is a necessary and practical carve out so that the builder will not be unnecessarily blamed for regulatory delays on approvals and permissions. Even if these express exclusions are not eventually allowed under the law, the authority will have the discretion to provide them under the regulations.

In 2012-13, the Committee on Streamlining Approval Procedures for Real Estate Projects had recommended establishing a single window clearance system for approvals to fast track the process. It may be worth having another look at it.

Alternation of structure and rectification of defects

Once submitted to the authority, the alteration of the structure was prohibited. Moreover, a builder was required to rectify any structural defects without charge to buyer, if such defect was discovered within two years from handing over possession. The Committee had recommended increasing this time period to five years but this has not been adopted.

The amendment now permits minor alterations to the structure as required by the buyer or as recommended and verified by an authorised architect or engineer. The fact that minor alterations cannot be effected without the consent of the buyer or proper verification by authorised experts is sufficient safeguard for the buyers.

Any other alteration to the proposed structure would require the consent of a 2/3rd majority of the buyers. While this appears to be fair, Mr. Sharma points out that the well-intentioned deletion of a provision requiring the builder to provide, on the website of the authority, a quarterly list of the details of apartment or plots booked, will make it hard to ascertain the majority of buyers.

Further, builders now will need to not only cure structural defects but also defects in workmanship, quality or provision of services, and other obligations of the builder.

Bias

The Bill originally disbarred a chairperson or a member of RERA from accepting any employment with any person or organisation connected with any work regulated under the bill after retirement. By placing a bar for only two years after retirement, the amendment opens the door for bias.

Thus the Bill, barring a few contentious provisions, appears to be a welcome move to bring in accountability and transparency in the real estate sector. The RERA will have wide powers to regulate projects and penalise defaulters and the timely completion of projects will provide much-needed respite.

(Vera Shrivastav is an Associate at the LegaLogic law firm and is a part time researcher and writer.)

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