Real estate involves the sale, purchase and development of land for residential, commercial and industrial purposes. Different aspects of real estate are regulated by different levels of government. Real estate projects are currently regulated by state governments under their respective state town and country planning or apartment ownership statutes. Approvals for construction of real estate projects are primarily given at the local and state level. Certain approvals are given by the central government. Consumer grievances may be redressed through forums established under the Consumer Protection Act, 1986. Several court cases have addressed issues in the sector such as unfair buyers’ agreements and illegal construction. The Competition Commission of India has pointed out that the absence of a single regulator for the real estate sector is partly responsible for poor grievance redressal.
The Real Estate (Regulation and Development) Bill seeks to regulate contracts between buyers and sellers in the real estate sector to ensure consumer protection, and standardisation of business practices. It had been first conceptualized by the UPA, but never saw the light of the day in their tenure, not in the least because of the disruption politics of the BJP in opposition, with the same having continued recently in reverse.
It is also set to ease the home-buying process. It establishes regulatory authorities at the state level to register residential real estate projects. It has been envisaged as a landmark reform for the real estate sector. This proposed legislation had been introduced mainly to reach the objective of the Government of India to provide “Housing for All by 2022”, a promise they must be seen as close to completing by 2019, not just shirking it off as a “jumla”!
With a focus on improving the transparency, governance and accountability in the sector, the law is expected to segregate the quality and time-focused developers from casual operators.
It is expected to bring in a correction in the realty market in the city and weed out fly-by-night developers. Even the big players will be forced to conform to norms by and large.
The proposed legislation will be effective in bringing transparency and accountability in the real estate sector, thus increasing consumer confidence and benefiting the sector as a whole.
With the changing skylines in many cities, the proposed legislation takes within its ambit many factors, including development and redevelopment, thus paving the way for a smooth road ahead. It will impact the sector as a whole along with is primary stakeholders i.e. the buyers.
Project delays are one of the major issues currently plaguing the middle-class buyers. In the residential property sector, a delay of three to four years is the accepted norm; in certain cases, it is more than seven to eight years. Over-leveraging by developers is the primary reason for such delays.
At present, rights of both the developer and the home buyer emanate from the agreement for sale. But these agreements are heavily loaded in favour of the developer. For example, interest on late payments for consumers is as high as 18%, but the compensation to them by developers in case of a project delay, is abysmally low and varies across contracts. Henceforth, both developers and consumers will have to pay the same rate of interest for delays on their respective parts. Developers will now have to deliver on time, adhering to the level of quality stated in the information provided to the regulatory authority during registration.
To counter issues related to building defects and promote good practices in the sector, some developers provide a warranty for structural damages for 1-3 years. Extending this period, the proposed legislation states that the liability of the developers for structural defects will now be five years from the date of handing over possession.
Developers cannot make alterations or additions in the sanctioned plans and specifications of the building or the common areas without the consent of at least two-third of the buyers. Such provisions in the proposed legislation will ensure that home buyers are getting the exact apartment for which they have paid and have a say in layout revision. However, this provision of obtaining consent of two-third of the buyers may cause delay. Buyers may raise unnecessary objections and it may result in legal proceedings.
For the sectoral upgradation, with a regulator in place, the sector will be more efficient, prices will be more rationalised and most importantly, the regulator will ensure that malpractices are weeded out well in time.
There is no doubt the proposed legislation passed for parliamentary consideration is a step in the right direction in an industry where builders are known to take the money from middle class buyers and then making them pay in so many ways – in time lost due to delays, higher interest payments on home loans, missed quality specifications and other aspects that violate the letter or spirit of purchase agreements.
The Real Estate Proposed legislation can bring greater credibility to the sector through more transparency as well as accountability and could encourage flow of FDI funds into the market. “Mandatory disclosures and registration may reduce black money transactions in this sector; and greater credibility of the real-estate sector (through greater transparency and accountability) could encourage flow of FDI funds into the sector,” Nomura said in a research note.
Under the new realty Proposed legislation, 70% (or less, determined by states) of the amount collected from buyers for a particular project will be deposited in a separate bank account and be used only for construction of the project. The provision seeks to address the practice of builders using money from an existing project for other projects, resulting in delays in completion .While this will aid consumers, single-window clearances for projects, digitization of records and grading of developers may help create a culture of quality in the sector.
The Proposed legislation mandates that all states and union territories (UTs) must establish state level regulatory authorities, called Real Estate Regulatory Authorities (RERAs) within one year of the proposed legislation coming into force. The proposed legislation makes it mandatory for promoters to register all projects with the State Real Estate Regulatory Authority (RERA), along with extensive information about them, the project implementation schedule, layout plan, land status, government approvals, sub-contractors, etc., which will be made available to consumers. All commercial and residential projects with a plot area of more than 500 square metres or eight apartments inclusive of all phases will have to be registered with RERA. The states will have the right to lower this ceiling. This will bring more projects into the ambit of the proposed legislation. Projects which have not received a completion certificate and are ongoing will also be required to be registered with the Authority within a period of three months of the commencement of the proposed legislation. The proposed legislation stipulates that all real estate brokers should be registered with state-level Real Estate Regulatory Authorities (RERAs). This would go a long way in bringing about transparency and professionalism in real estate broking and creating a positive perception of brokers in the minds of home buyers.
If a RERA observes that in case of an issue impact competition, it may refer the case to the Competition Commission. Besides, a Central Advisory Council, consisting of representatives from union ministries, state governments, RERAs and representatives of the real estate industry, consumers, and laborers will be established.
Homebuyers facing problems with developers currently have to resort to the existing judicial mechanism—consumer courts or civil courts—if meetings with the developer fail. Obtaining justice through this route is a very lengthy and tedious process. The proposed legislation bars the jurisdiction of civil courts and empowers the appellate tribunals and the regulatory authorities to resolve complaints faster, with clearly specified timelines. Erring parties face a prison sentence of a year (for real estate agents and homebuyers) or three years (for developers). But given the experience of consumer courts, it’s only a matter of time before the new mechanism gets as clogged as some of the others. The fact is that regulators and regulations can hardly be a substitute for a vibrant and dynamic market. The experience of regulatory overload can also be seen in other sectors, such as banking, electricity, etc. All these sectors are plagued by stressed corporate balance sheets and poor quality of service to consumers.
The real estate market is largely non-transparent. Due to the non-transparent nature of the sector, the flow of information is not seamless. Thus the consumer instead of making an informed decision at most times makes a choice by force. The absence of a regulator is to a great extent responsible for this plight. With a regulator in place, the real estate sector will be a much more efficient sector, prices will be much more rationalised and most importantly, the regulator will ensure that the malpractices are weeded out well in time.
While the Land Acquisition, Rehabilitation and Resettlement Act, 2013 (LARR) and RERA reflect the changes in political perception due to rising social concerns and protests, what both laws fail to recognise is the root of the problem — over-regulation. Although land and real estate are bought and sold all the time, India doesn’t have a functioning market for land and real estate. The high prices in real estate are a reflection of an artificial scarcity caused by over-regulation, as well as bad regulations, by multiple agencies. The builder-babu-politician nexus is a corollary of this distorted environment.
Recent floods in Chennai and studies in various cities, especially Chennai and Bangalore, show that pressures on space have led to approvals for real estate projects in defiance of environmental objectives. Marshlands and lake beds have given way to apartment blocks. Perhaps, the environment ministry and the housing ministry need to work together on this.
Last August, the environment and forest ministry finally approved a notification to define an ecologically-sensitive zone around Delhi’s Okhla bird sanctuary, giving a sense of relief to at least 90,000 home buyers in nearby Noida after the National Green Tribunal ordered that projects in a 10-km radius cannot be given completion certificates.
More than 70,000 buyers were affected by two NGT orders that stopped construction, while another 20,000 home buyers could not take possession of completed homes.
The NGT was basing its views on wildlife regulations put in place more than a decade ago and a subsequent Supreme Court order, but flat buyers was affected as they were unable to back-track on their purchase plans. They would have never guessed the regulatory threats faced by their would-be homes. The authorities must make amends to make sure such unforeseen risks are not faced by consumers.
Controversial environmental approvals may be a looming issue in future, unless steps are clearly made – because the real estate industry is often treated in isolation from larger urban issues including traffic, cleanliness and provisions for water and clean air.
There has also been talk by the BJP government of making this legislation an instrument to avoid housing discrimination based on creed or ethnicity (Muslims and those from the northeast indeed often, though not always, face housing discrimination), which would be laudable, but it is not exactly clear how. Also, while regulators are welcome, there should be enough checks and balances in the bill itself so as to prevent them from adding to the red tape or taking wrong decisions by way of bribes.
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