RERA 2018: A Work in Progress

RERA 2018: A Work in Progress

Amit H Wadhwani

As far as the real estate sector is concerned, the year 2018 will go down in history as the year that almost brought the sector to a standstill with minimal sales and financial assistance caused majorly by to the so-called four tsunamis viz. demonetization, RERA, GST and IBC.

Home buyers no more seem interested in under construction flats due to the uncertainties surrounding these laws, and prefer ready to move in flats, thereby leaving the promoters with no option but to rely on project finance for competing their projects.

As far as the Real Estate (Regulation and Development) Act [RERA] is concerned, 2018 will be looked upon as the year that brought about major reforms in the real estate sector, marked a significant rise in consolidation, weeded out inefficiencies, and changed the manner in which a promoter goes about developing its real estate projects.

Since the implementation of RERA in its entirety on May 1, 2017, the journey for real estate promoters has by no means been smooth, to say the least. Many fly-by-night promoters have looked for consolidation. Investors and lenders have withdrawn their financial assistance to promoters until they feel confident that the promoter is capable of being RERA compliant and possesses the vision and determination to complete the project within the time period declared under RERA.

Considering the historical manner in which a real estate project is being administered and developed, it was an uphill task for the promoters to change their strategies and methods of operation and development of a real estate project under RERA regime. The promoters had, in fact, started looking at business under the RERA regime as a normal course of life and the sector had even shown signs of revival around August 2018.

Amidst these sentiments, in came another tsunami – the Non-Banking Financial Company (NBFC) liquidity crunch in October 2018, which further derailed the revival process. The representatives from NBFCs and housing finance companies have even met the Prime Minister and given suggestions on how to revive the sector.

Presently, the general public sentiment is that the sector is still reeling under the shadow of uncertainty; the days are numbered for real estate developers who have underperformed.

However, all stakeholders – buyers, promoters, investors and lenders – have a common belief amongst themselves that sooner or later, the sector will revive and be regulated as never before, buyers will have faith in the accountability and transparency of a promoter or his project, and promoters will receive optimal co-operation and assistance from financial institutions. It is also believed that government authorities will soon implement the single window clearance mechanism for issuing development permissions and approvals.

To achieve the above, the only major driver is RERA. Though these are early days, RERA will soon have to accelerate its performance and achieve success similar to its peers in other sectors It is hope that the way authorities like SEBI, CCI, IRDAI and TRAI have brought success and regulated their respective sectors, RERA will also follow suit and revive the sector on which the economy of the country is dependent the most.

This article highlights certain issues/embargoes faced by the stakeholders under RERA. These issues may be addressed by May 1, 2019. According to Section 91 of the Act,

“If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order, published in the Official Gazette, make such provisions not inconsistent with the provisions of this Act as may appear to be necessary for removing the difficulty. Provided that no order shall be made under this section after the expiry of two years from the date of the commencement of this Act.

It is imperative to note that Section 91 of the Act was notified on May 1, 2016 and the entire Act came into force a year later. The confusion here is whether Section 91 is time-barred and two years have expired as of May 1, 2018, or the provision continues to be valid until May 1, 2019.

Below are some of the issues surrounding the Act.

Ongoing Projects

As per the Act, ongoing projects are projects that are ongoing on the date of commencement of the Act and for which completion certificate has not been issued. The Act has merely defined an ongoing project to this extent and provided three months to all such ongoing projects to register their projects with the Real Estate Regulatory Authority (the Regulatory Authority) from the date of commencement of the Act.

The State rules prescribed under RERA gives another chance to a promoter to mention a proposed date of completion of the project.

The promoters had no option but to assess the present situation of their ongoing projects and register their projects with a proposed date of completion. One cannot deny that certain ongoing projects have genuinely been delayed due to certain vested interests. However, one also needs to bear in mind that there are certain ongoing projects which are held up due to various external factors which are not beyond the reasonable control of the promoters.

The following are certain external factors as a result of which certain ongoing projects may not have seen the light of the day:

  • Implementation of ease of doing business and a single window clearance mechanism for all project related approvals is still ongoing and it may take some more time to achieve this feat which will be a major booster for all the real estate projects thereby saving cost and time. There are about 100 or more development permissions and approvals a promoter has to obtain across 20 or more departments/planning authorities. A single window clearance is long desired, and will expedite and fast track the development of projects.
  • Change from the UPA Government to NDA Government after the General Elections in 2014 had further derailed the progress of ongoing projects as there were various portfolio changes within the statutory authorities, as a result of which the approvals were delayed.
  • In Maharashtra, the development control regulation and the development plans have been time and again revised and/or modified since the last 3-4 years, thereby leaving the promoters and even the municipal authorities confused as to selection of a prudent policy or scheme for the projects.
  • From November 2016 till date, there has been a tug of war between the Union Ministry of Environment and Forest and NGT on increasing the construction limit and empowering the municipal authorities to issue environmental clearances. The promoter of a real estate project is a major sufferer in the midst of this bureaucratic tussle.

Between all these complications and hurdles being faced by the promoters, in came RERA, or more particularly, Section 18 of the Act. Section 18 of the Act states that in case a promoter delays in handing over possession of an apartment, the allottee shall be entitled to either:

(i) withdraw from the project and seek refund of his amount invested together with interest as may be prescribed, or

(ii) to continue in the project and claim interest for every month of delay till possession of the apartment is handed over.

One would desire clarity on whether in case of ongoing projects, this section would be applicable from the date of the proposed date of completion of the ongoing project declared by the promoter before the Regulatory Authority.

Instead, this section came to be applied retrospectively, as a result of which many errant home buyers preferred complaints under Section 18, thereby burdening the promoter further to arrange for refund of booking amounts/advances to such allottees. Section 18 should have rather provided an opportunity or a last chance to the promoter to complete the ongoing project within the declared proposed date of completion, and thereafter, in case of further delays, complaints under Section 18 should have been entertained.

On the other hand, Section 18 became an easy tool even for those allottees who had a change of mind and wanted to voluntarily withdraw from the project and claim refund of their booking amount and also earn interest on such amounts. While contesting these complaints before the Regulatory Authorities, the promoters, whether rightly or wrongly, cited the above external factors which delayed their projects to some extent. However, the Regulatory Authorities put the onus on the promoters and termed such delays due to external factors as a “business risks” which a promoter should have ordinarily foreseen before committing a time line to its allottees for completion of the project.

One does agree with the Regulatory Authorities decisions to term such reasons for delay as a business risk which a promoter should have foreseen, but at the same time, one must also be mindful of the fact that promoters are also humans. If these reasons for delay due to external factors arrive one after the other at the same time, then you cannot reasonably expect a promoter to foresee these events coming all together and derailing the entire development of the project at one go.

Real Estate Appellate Authority

 The Appellate Authorities in several States are not yet fully functional, thereby denying speedy disposal of appeals filed by the allottees or promoters against the order of the Regulatory Authorities.

 70% Separate Account – Lenders

Under the Act, a promoter is required to deposit 70% of the amounts received from the allottees in a separate account which is to be maintained with a scheduled bank. Withdrawals of the receivables from this account are regulated and amounts can be withdrawn in proportion to completion of construction of the project after producing certificates from Chartered Accountants, Structural Engineers and Architects.

In case of project finance, a promoter receives the cost of its project upfront from the lenders and the lenders direct the promoter to deposit the amounts withdrawn from the 70% separate account into a designated escrow account maintained on behalf of the lender for securing the repayment of the finance advanced by the lender. In such an event, although the 70% separate account is a no lien account, lenders prefer to direct the promoter to open and maintain such 70% account in the banks suggested by the lenders as the same may enable the lender to keep a close watch on the account.

Now, there are instances where a promoter has availed more than one project finance for the same project and has mortgaged certain additional units/wings/towers of the project in favour of such other lenders. In such cases, even such other lenders would prefer to have the 70% separate account in a bank of their choice. However, there is already a 70% separate account being maintained with the bank of the first lender.

The question that arises here is whether a promoter can open two or more separate 70% accounts as per the choice of the lenders and the 70% received from the respective units/wings/towers mortgaged with such lenders will be deposited in the respective 70% separate account in order to secure the interest of each lender and administer such accounts. The Act or the State rules are silent on this aspect and it would be interesting to see whether such a mechanism can be possible in future.

Society – Whether a Promoter or an Allottee

In case of redevelopment of a property belonging to a Society wherein the members of the Society are entitled to receive new flats/units in the new building free of cost, the position is still unclear on whether the Society and its members will be treated as promoters along with the developer who is actually undertaking development of the property or whether they will be treated as allottee. The definition of ‘Allottee’ under the Act does not cover members of a Society. Hence such members may not be able to file their complaints before the Regulatory Authority for any delays committed by the developer in constructing and handing over the Society component to the members.

Forum Shopping

Last but not least, at present, complaints against promoters are being taken up before three different forums viz. RERA, NCLT and the Consumer Forum, as a result of which a promoter has to face multiple litigation on the same issue. Instead, a complaint should first be filed before Regulatory Authority, thereby reducing the backlog of the Consumer Forum. If the Authority fails to resolve the complaint, then the dispute may be referred to NCLT for adjudication. Recently, even NAREDCO has suggested to the Union Ministry of Housing and Urban Affairs to maintain uniformity in the implementation of this provision across the country.

Amit H Wadhwani is a practicing Advocate and a Legal Counsel to Radius Developers.

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