15 suggestions to make RERA more effective

Seven days from now, the Central Real Estate (Regulation and Development) Act 2016 will complete one year of implementation. Till date, a total of 27,000 real estate projects have been registered with the regulatory authorities across the country. As many as 27 states and union territories have notified rules under RERA so far and 16 states and union territories have a fully operational web portal for enabling online registration of real estate projects and agents. But much more needs to be accomplished.

Most states have diluted rules to favour developers. Many states have moved away from the Centre’s definition of ongoing projects and excluded projects for which lease deeds of either 50 percent or 60 percent of the apartments have been executed or for which partial completion or occupation certificates have been obtained by the developer. This leaves little hope for homebuyers stuck with old unfinished projects.

An Assocham report titled 'RERA as growth impetus: Does the Promise Hold Out On The Ground has made 15 suggestions to make RERA more transparent. Among other things, it has said that states should refrain from introducing exceptions to the definition of ongoing projects, government agencies should be made accountable for delay in granting approvals, a uniform payment schedule should be put in place for home buyers across states, that both Centre and states must collectively resolve any future conflict arising out of RERA implementation and that alternative formal financing modes such as REITS and endowment funds should be made available to developers. Homebuyers should be clearly defined under the category of creditors to avoid conflict between IBC and RERA.

Here are some of the suggestions made by the report prepared by Thought Arbitrage Research Institute (TARI) jointly with ASSOCHAM.

1. States should refrain from introducing exceptions to the definition of ongoing projects

Dilution of the definition of “ongoing projects” creates a conflict with one of the main objectives of RERA, which is to provide transparency and better delivery to the home buyers. Central RERA is quite clear on this issue.

States should refrain from introducing exceptions (as is the case with many states) and uphold the simple yet very clear definition of “ongoing projects”.

2. Make government agencies accountable for the delay in granting approvals

Delay in granting required government approvals for a real estate project (like ownership certificate, land use conversion, environmental and pollution no-objection certificates, non-encumbrance, road access and other related infrastructure related approvals) can delay projects.

To broaden the scope of RERA, an objective performance assessment of various government agencies in the process of granting various approvals should be incorporated in the Act for closer scrutiny. If each and every approval process is legally made time bound, it will prevent the probability of delay in delivery.

3. Single-window disbursal of all regulatory approvals

Digitisation of the documentation/approval process, integration of certain clearances at Master Plan level, outsourcing certain procedures to competent third parties – among other related initiatives can drastically reduce the time taken for approvals and clearances.

Risk-based classification of all building proposals can fast-track permission procedures. Low-risk constructions proposals made by competent professionals may start with some automatic approvals based on self-declaration and high-risk proposals can be submitted online and be approved within 15-30 days of time. Expediting the process of approvals will also depend upon the effective establishment of a single-window system for this purpose

4. RERA provisions for punishment of violations, in the form of imprisonment and fine, should be kept intact in all state laws

States should do away with the compounding options of imprisonment/ penalties in state laws for different violations.

Central RERA 2016 recommends imprisonment for a term, extendable up to 3 years, or fine which may go up to 10% of the estimated cost of the real estate project, or both, in case of non-compliance – for developer, real estate agent and buyer. But, except for Kerala all other states and union territories have added a clause of compounding of offence to avoid imprisonment, and Goa draft is silent on this.

RERA is a quasi-judicial body, and instilling faith in its redressal mechanism will require, to a large extent, trusting its judgement to redress. So, instead of creating a replacement of any specific punishment the Central RERA provisions for punishment of violations, in the form of imprisonment and fine, should be kept intact in all state Laws – leaving the actual judgement to the regulator itself.

5. Create a uniform payment schedule for home buyers across states

Central RERA specifies that the model sale agreement should clearly state that a 10% advance payment is made by homebuyers, or charge an application fee from the buyers, while entering into a written agreement for sale.

Notified rules for Andhra Pradesh and Kerala clearly mention that, and notified rules for Gujarat and Maharashtra brings in further clarity by linking all phases of payments with different stages of construction.

But other notified and draft rules for states/union territories have no clarity on the issue.

The Maharashtra template in payment schedule may be implemented across the nation, as this form of payment schedule brings in more clarity.

6. State laws must not dilute the ‘proportional withdrawal’ clause for an escrow account

Central RERA stipulates that 70 percent of the amount realised by developers from home buyers (for a particular real estate project) must be deposited in a separate account, and money can be withdrawn from that account in proportion to the percentage of project completed, as certified by the project architect, a qualified engineer and a practicing chartered accountant.

Kerala, Madhya Pradesh, Telangana and Goa have diluted this norm either by removing the “proportional withdrawal” clause or by remaining silent on the issue.

State laws should refrain from diluting “proportional withdrawal” clause as this undermines the entire “escrow account withdrawal” stipulation.

7. Mechanism required to monitor fund transfer from an escrow account for land acquisition

The Act allows for use of funds for both construction and land cost. It says that the separate escrow account is “to cover the cost of construction and the land cost and shall be used only for that purpose”. This may lead to ambiguity in implementation as most of the times land cost is the principal among the overall project cost, and that may, in turn, lead to malpractices in fund disbursal.

The legislation is also not clear on this aspect with regard to ongoing projects. There are projects which have all necessary approvals but do not have the requisite funding in a dedicated account.

A detailed mechanism needs to be charted out to monitor the fund allocation for land acquisition, along with the monitoring of construction cost. The escrow mechanism needs to be clearly defined for “ongoing projects”.

8. Clearly define ‘structural defects’ and fix liability on to the developer

There is a need to clearly define “structural defects”, and the central and state governments should bring more clarity on the issue after collective consultations.

Some states have diluted the “defect liability” provision.

Central RERA states that in case of any structural defect (or any other defect in workmanship, quality, provision of services or any other obligations of the promoter as per the agreement of sale) arising within 5 years of handing over possession of apartment/house/plot to the buyers, developers will be liable to rectify such defects without further charge, within 30 days. In the event of promoter’s failure to do so within the stipulated time, the aggrieved allottees will be entitled to receive appropriate compensation.

Kerala and Tamil Nadu rules diluted this “defect liability” provision. Gujarat, Haryana, Karnataka, Uttar Pradesh and Uttarakhand rules are silent on this clause, and Puducherry notified rules clearly lack clarity on this issue, but rest notified/drafted rules are compliant or “in line” with this clause.

Liability of successfully repairing the “structural defect” within 5 years of possession should lie with the developer, as stipulated in Central RERA, in all RERA laws governing the real estates of all states and union territories

9. Set timeline for allottees to communicate opinion on layout changes

RERA specifies that “any additions and alterations in the sanctioned plans, layout plans and specifications and the nature of the fixtures, fittings and amenities and common areas, of the apartment, plot or building” have to be done with the consent of the allottees.

If such changes are “necessary due to architectural and structural reasons” then those have to be “duly recommended and verified by an authorised architect or engineer after proper declaration and intimation to the allottee”.

However, care needs to be taken to ensure that the process of making these additions and alterations do not unnecessarily delay the delivery of the project and should not result into unfair penalising of the developer.

There is a need to set a timeline for allottees and the relevant authorities to communicate their opinion about the layout changes/transfer of rights (to a third party) so that the developer is not penalised.

10. Both Centre and state must collectively resolve any future conflict arising out of RERA implementation

Both the Centre and the states have individual and collective responsibilities to resolve any future conflict arising out of implementation in RERA, particularly on land title, deed, and land policy. A permanent consultative committee formed with representations from both central and state ministries may help bringing in resolution, in case any clash in jurisdiction arises in future.

State governments regulated real estate before RERA as land and land improvement are in the State List of Seventh Schedule of the Constitution.

After RERA that has changed as it is clearly mentioned that the Central Act will prevail over state legislations in case of any discrepancy or conflict in any issue or aspect.

The purpose of RERA is to regulate transactions in the real estate sector. Regulatory bodies will be operating at the state level itself and the states will have enough freedom to make and constitute their regulatory bodies through state-legislated RERA rules. However, since historically land has been a volatile issue which bred many a controversy – any future flashpoint or conflict of interest may ultimately boil down to legal recourse where this centre-state jurisdictional gap may be utilised to score points.

11. Alternative formal financing such as REITS must be made available to developers

Though Securities and Exchange Board of India (SEBI) approved the REIT platform in India, further incentives are needed to popularise these platforms. Similarly, the endowment funds like pension funds are currently not able to invest in real estate sector. So, the legal obstacles need to be removed and more incentives should be provided to make alternative formal financing popular and available to the private developers.

Legal restrictions on REITs and endowment funds must be removed to enable them to invest in residential real estate sector. This will also help in the better implementation of RERA and formalisation of residential real estate sector.

12. Clearly define home buyers in the class of creditors to avoid conflict between IBC and RERA

Recent developments highlight the problem of builders declaring bankruptcy in ongoing projects. Home buyers being the “unsecured creditors”, their rights may get violated in such cases. Though the new Bankruptcy Act is applicable to these projects, a synchronised approach is required to protect home buyers’ rights.

While Insolvency and Bankruptcy Code (IBC) was passed with the intention to smoothen the process of “closing the business”, RERA has been implemented to “regulate and formalise the real estate sector”. But, in case of insolvency, the objectives of these two acts are often getting pitted against one another. Since IBC was legislated in May 2016, after RERA was passed in March 2016 – legal experts opine that the Insolvency Act will override RERA, in case of a conflict. In some cases, that might undermine the actual objective of consumer security, with which RERA was enacted.

For effective implementation of RERA, it is imperative to clearly define the home buyers in the class of creditors. Putting them in the “unsecured creditor” category takes the control effectively away from RERA to IBC, and that definitely dilutes the objective of RERA. Therefore, a committee of legal experts may be formed, which in consultation with all the stakeholders can recommend a resolution of these possible conflicts between two of the most important legislations.

13. Set up IT infrastructure

A robust IT infrastructure for RERA – along with effective monitoring structure and quick redressal of complaints in case of violations – is necessary for the long run success of this landmark legislation.

14. Create a template for submitting project-related information

A national template for submitting project-related information should be created and that can be one important step towards standardisation of the sector. The option of correcting details submitted by developers should be available in all RERA websites. Similarly, online filing of complaints should be made as smooth as possible, and doing that will take care of a large part of the effective data and information validation.

15. Introduce land title insurance to increase flow of funds in the sector

Land records in India are often not easily accessible, and due to the judicial and executive bottlenecks, only land title documents are available and not land ownership documents. As a result, land becomes a primary issue of dispute in real estate projects. A common mechanism which can be another tool to reduce such disputes is land title insurance. At present, no Indian insurance companies provide land title insurance, but a land title insurance can instil further confidence among buyers and favourably impact the real estate market. Introduction of land title insurance can open up new avenues of financing for the real estate developers. This insurance can work as another layer of scrutiny for the legitimacy of the land and also an extra shield of protection for the consumers.

Vandana.ramnani@nw18.com