Ushering in a New Era of Transparency in Real Estate Sector

The Govt (both central and state) are coming with new regulations to bring much needed rules of the game for real estate sector. Central Govt bill i.e. Real Estate Regulatory Bill will be law relating to conduct of buyer and developer during pre-possession period. This law will effectively regulate the marketing of the projects, possession timelines, timely payment by the buyer, utilization of fixed percentage of amount received from buyer towards construction of project, stability in project design with changes becoming next to impossible and legal vetting of all projects by RERA. This bill will create an authority across India with powers equivalent to judiciary. The second bill which is brought by state government is “The Rajasthan Apartment Ownership Bill 2015”. Today, we will be discussing this bill and its provisions in summarized manner for better understanding of the law. This act extends to whole of rajasthan and is applicable on all Complexes whether constructed previously, under construction and all future complexes/buildings. Apartment for the purpose of this act means all buildings which are used for residential, commercial, professional, occupation and business or any other independent purpose having four or more apartments/units. Obligation/Responsibilities of Developer/Promoter: Ø Promoter has to specify in the Deed of Apartment, the percentage of undivided interest of Allottee in the common areas and facilities. Ø Promoter shall grant in respect of the land as many sub-leases as there are apartments in such building. Promoter shall execute separate “Deeds of Sub-Lease” in respect of such land in favour allottee before handing over the possession of apartment. Promoter is bound to transfer all his right to the allottee including the right of transfer for the remaining period of sub-lease. Ø Promoter shall be bound to supply the plans and other Legal documents to the Allottee. Promoter can provide said Legal documents within a span of 3 months if the building was constructed before the commencement of this Act. In the case of a building constructed after the commencement of this Act then Promoter can provide the documents within three months from the date on which the possession of apartment is delivered to the allottee. Ø Every promoter shall submit a declaration to the Competent Authority in respect of every building. Promoter may at any time before the booking of apartments can amend its declaration. Ø Attach with the agreement a self-certified photocopy of the title documents of the land, Approved building plans, Details of common areas, Details of Limited Common areas, Details of built up area, Floor plan of the concerned apartment, Date by which construction of the apartment is to be completed, Date by which possession will be handed over to the purchaser subject to force majeure clause and intimation sent to such purchase, Specify in the agreement the penalty for delay in completion or handing over the possession, Payment schedule, Penalty in the event of non-payment or late payment of instalment by the purchaser, condition of cancellation or withdrawal of allotment, Condition of extent of refund, Specify in the agreement the compensation either way in the event of violation of any of the conditions of allotment. Ø The Promoter also needs to handover many of the documents as mentioned above along with some other documents like plumbing layout, diagram layout, electrical drawings, etc to the association of the building. Ø Also the promoter needs to execute “Deed of Apartment” with all the documents as mentioned above in various points along with certain other legal documents as specified in the act. Ø Every promoter along with apartment owners shall make an application for registration of the Association. If apartment has already been sold before the commencement of this Act then filing of application should within be six months of such commencement. If apartment has been sold after the commencement of this Act then filing of application is within six months from the date on which, the apartments in the building are sold. In case, the promoter fails to make an application to the Registrar the persons who have been sold shall apply for registration of the Association. The promoter shall continue to be the member in relation to an apartment not sold. Ø Every promoter shall render an account to the Association for the amount collected by him, from the apartment owners before the formation of the Association, towards common expenses, sinking fund for replacement of fixed assets and payment of State Government and municipal taxes and shall transfer the balance, if any, with him to the Association within three months of the formation of the Association and in case of an Association deemed to be registered under this Act, within three months from the commencement of this Act. Obligation/Responsibilities of Buyer/ Owner: Ø The percentage of the undivided interest of each apartment owner in the common areas shall have a permanent character and shall not be altered without the written consent of all the apartment owners. Apartment owner shall use the common areas in accordance with the purposes for which they are intended. No apartment owner shall bring any action for partition or division of undivided share in common areas. Ø The allottee shall not become entitled to the ownership and possession of the apartment until full payment has been made of the consideration. Ø Allottee shall also not become entitled to the ownership and possession of that apartment until he clears amount due in respect of common expenses and payment of State Government and municipal taxes incurred by the promoter before the formation of the Association together with interest, if any due thereon. Ø In a case where, after full payment has been made, any expenses have been incurred by the promoter for providing any common facility in terms of any subsequent requirement of the State Government or a local authority, such proportion of the expenses incurred by the promoter shall be payable by the apartment owner to the promoter. Ø Each apartment owner shall comply strictly with the provisions/ bye-laws given in this act. Each apartment owner shall also comply strictly with the conditions and restrictions set forth in the Deed of Apartment. Ø No sub-lease in respect of any land shall be granted except on the same terms and conditions on which the Promoter in respect of the land has been granted by the Local Development authority. Allottee shall have the same liabilities as the Promoter to the extent of the area given under sub-lease. Ø No apartment owner should do any work which would be prejudicial to the soundness of the property to the safety of the property; Reduce the value of the property and apartment owner shall not add any material structure or excavate any additional basement or cellar. Ø No apartment owner may exempt himself from liability for his contribution towards the common expenses by waiver of the use of enjoyment of any of the common areas and facilities, or by the abandonment of his apartment. Common expenses shall be charged to the apartment owners according to the percentage of the undivided interest of the apartment owners in the common areas and facilities. Common expenses shall be due from the expiry of seventh day from the date of service of demand notice on the apartment owner. Interest on delay payment shall not exceed fifteen per cent per annum. Where the apartment owner is not himself in the occupation of the apartment owned by him, the common expenses payable by such apartment owner shall be recoverable from the person in the occupation of the apartment. Powers& Responsibilities of association: Ø There shall be an Association of apartment owners for the Administration and Management of common areas and facilities. Requirement is ten members or more than two-third, whichever is higher. Where there are several buildings in the form of block or pocket there shall be a single Association in such demarcated area. Ø The Association shall have the irrevocable right to have access to each apartment during reasonable hours for the maintenance and repairs of any of the common areas. The necessary work relating to maintenance, repairs and replacement of the common areas shall only be carried out only in accordance with the provisions of this Act and the bye-laws. Ø No apartment shall be transferred without obtaining No Dues certificate from the Association. In case of failure to comply with any of conditions/bye laws then in that case Association can take action to recover damages or for injunctive relief. Ø The labour performed and material furnished for the common areas and facilities, if duly authorized by the Association shall be deemed to be performed or furnished with the express consent of each apartment owner and shall be the basis for a charge or encumbrance. Allottee is bound to pay proportional amounts to release such charge or encumbrance. Ø The Association shall, at its first meeting, make its byelaws in accordance with the provisions of the model bye-laws prescribed under this Act and no departure from, variation of, addition to, or omission from, the model bye-laws shall be made except with the prior approval of the Competent Authority and no such approval shall be given if, in the opinion of the Competent Authority, such departure, variation, addition or omission will have the effect of altering the basic structure of the model bye-laws. Ø All sums assessed by the Association, but unpaid for the share of the common expenses chargeable to any apartment, shall constitute a charge on such apartment prior to all other charges. Ø If an apartment owner either willfully:- Not use the common areas with the purpose for which they are intended Or Encroaching the lawful rights of other apartment owners Or Fails to pay the common expenses which are payable by him for a period of more than six months , The general body of the Association may, after giving notice of not less than seven days to such apartment owner, may pass a resolution to cut off or reduce essential supply or service enjoyed by such apartment owner. Provided that Association shall not take any action in furtherance of the resolution referred to above unless a certified copy is sent each to the Competent Authority and the concerned Apartment owner by registered or speed post and one month expires from the date of its being sent and its copy is displayed at some conspicuous place of the building. There are many other provisions which need careful study before implementing the act. The points discussed above are the ones which are deemed as important by the writer and which everyone should know as part of general discussion. Writer does not claim that this is the complete gist/study of the act as it’s only a summarization of the important points of the act, as deemed important by the writer. Reader’s opinion may differ and same is respected.

DAWN OF NEW ERA OF TRANSPARENCY

Real Estate Regulatory Act has created a super buzz in the real estate market and industry. Everyone related to the industry whether its buyer, developer, local bodies, industry associations, etc are discussing the impact of this law and the way it will change this industry forever.

While there are many words used for this law like “Strict”, “Stringent”, “Draconian”, “Progressive”, “Consumer Friendly”, “Futuristic”, etc., I will describe this law in one sentence and i.e “A superb visionary Law which will usher in the era of transparency in real estate, though drafted badly”.

Sometimes we should keep aside the errors of drafting, short sightedness of the law, impractical expectations from developer, unreasonable penalties, no regulation for government bodies, no rules regarding timely approvals and absence of equilibrium & instead keep our focus on the positive developments that will happen because of RERA. In today’s discussion we will do that in a simplified manner to create better understanding under two categories i.e. buyer and developer.

Benefits to Buyer

Transparency: Biggest benefit of this law for the buyers. All developers will have to register their ongoing projects Where the area of land proposed to be developed exceed 500 square meters and the number of apartments proposed to be developed exceeds eight with the authority and provide all the legal documents, construction timeline, details of amenities and facilities offered, details of common areas, promoter company details and its background, details of previous completed projects, etc. prior to advertisement, marketing, booking, selling, offering for sale, inviting persons to purchase in any manner. The developer will also update the details on the website of RERA at the time of registration and then quarterly. Quarterly updates will be related to construction, sales and inventory.

Timely Delivery: As the promoter will be required to provide the date of completion of the project in the agreement, promoter will be under obligation to fulfil the commitment. Also as there will be quarterly updates on the RERA website regarding the construction stage of the project, there will be closer monitoring of the construction speed and thus timely possession. The chances of timely possession will also improve because of the fact that 70% of the sale proceeds from the project will have to kept in a designated escrow account and such amount can only be used for the project development. As 70% is a huge sum and there will no diversion of funds from one project to another, construction speed will improve considerably leading to timely delivery. The RERA law provides for stringent penalties like payment of interest for delayed construction period and full refund with interest in case of delays and if customer opts for full refund instead of delayed possession. Such strict norms will motivate the developer for speedy construction and adhering to the construction timeline.

Secured Transaction: The buyer/customer will no longer need a lawyer or chartered accountant or be one himself before entering into real estate transactions as all the ongoing and future projects Where the area of land proposed to be developed exceed 500 square meters and the number of apartments proposed to be developed exceeds eight, will be registered with RERA. Due diligence of legal title, promoter background, drafts of agreement and deed, maps approval, necessary certifications, NOC’s, etc. will be done by RERA authority before issuing registration certificate. The buyer before entering into transaction will take the registration code from the developer and enter that code on the website of RERA. Once right code is entered, the website will provide all information and documents as required by the buyer for taking an informed decision for buying the property.

Also the decision by central government to bring all real estate agents under the ambit of RERA is absolutely right and beneficial for the buyers. As in maximum transaction brokers are involved, there mandatory registration with the authority and regulation of their businesses as well provides further impetus to the government target of providing an environment where one can buy the property without any risk.

Product Quality: There will be a huge uplift in the quality of construction in India. Promoters will be liable for any structural defect or other defects in workmanship, quality or any provision of services noticed within a period of five years by the allottee from the date of handing over possession. The developers will make sure that buildings that are constructed adheres to best quality norms and that they sustain for long term and do not develop any structural or other defects. Also the promoter has to make sure that project is developed in accordance with the plans and structural designs and specifications as approved by the competent authorities. Promoter will not be able to make any major change in the project without written consent of two-third allottees after disclosure.

Benefits to Developer

Timely Payment: The RERA law makes it absolutely clear that all the buyers will have to adhere to the payment plan as decided mutually with promoter. Today one of the biggest problem faced by developers is that even after completing construction as per schedule, buyers don’t pay their instalments according to the decided plan and this leads to liquidity crunch and eventual delay in project completion. With clear guidelines regarding timely payment and right to the developer to charge interest in case of delays will nudge the buyer to pay his dues on time. Also in case buyer does not follow the ruling of the RERA authority and does not clear his dues, there are strict provisions for imposition of penalty and imprisonment for one year as well. We must understand and realize that both timely delivery and payment are the essence and soul of real estate transaction.

Clarity in Rules: Once all sections of RERA are notified and authority is established in every state, developers will be sure about the rules and regulations they have to follow. This law clearly states that No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Authority or the adjudicating officer or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act. Also once the authority issues registration certificate for the project, the buyer can be rest assured that all the documents of promoter/Project are proper and legally correct. This confidence in buyer about legality of any project will increase the number of transactions for RERA compliant projects. The developer also knows from the day one that what are his duties, responsibilities and the consequence he has to face in scenario where regulations are not complied with.

Ease of Project Finance: Develop and Promoters who adheres to RERA law and whose projects are registered with RERA will enjoy premium over the others. Banks/NBFC’s/ will be much more comfortable in financing a RERA registered project compared to one which is not registered. As the number of developers and projects will drastically reduce over time because of such stricter laws and raised regulatory bars, banks and NBFC’s will compete fiercely to provide finance to the serious promoters. Also the risk of banks will reduce quite a bit as RERA authority will be issuing registration certificate to a project only after complete due diligence thus reduction in risk premium. Project financing will be done at discounted rates and at faster speed for RERA compliant projects. FDI flood gates will also open as foreign investors will be comfortable and happy to invest with transparent and law compliant developers.

Stability and Trust: One thing which is sure is that number of players in the market will go downhill over next few years. Companies whose main business is real estate, who are serious about their business, wish to comply with laws & act in transparent manner and whose bread and butter is real estate business will only remain in this market. As the bar is raised to such high level and strict laws are imposed, people entering into any industry to make quick money through unlawful means goes down dramatically. The companies who remain in the business for long term after RERA will be stable and will enjoy trust of the buyer. One thing we must remember is that “Trust” is the most important factor for success of any business. Promoters who will have that stability and buyers trust will enjoy premium for their product resulting in better bottom line over coming years. Though costs will increase in short term and instability will be there for some time because of new and evolving law, in long term a massive uptick in real estate business is on the cards.

Different people have different understanding of the law and every law evolves because of the interpretations done by the judicial authorities, but the law stays. This law is here to stay and it’s better that developers tighten their belts and business practices and become law complaint as soon as possible.

At the end, I have one prediction to make and that is “Over next five years, a massive boom in real estate industry will unfold. This boom will be something not heard and seen before. Companies operating in this industry will be viewed with respect and valued at levels never seen before.”

Written By

Hitesh Dhanuka

Chartered Accountant

Director, Dhanuka Group