Nothing much to write home about

Everything from the master plan, building layout, floor plan and amenities promised in the glossy brochures, hoardings and newspaper advertisements have mutated beyond recognition. The building in which he had booked an apartment no longer exists and the view he paid for has been replaced by the view of another building barely 25 metres away. Despite booking an eight-floor apartment, he was told he would have to shell out a few extra lakhs as floor rise charges since only apartments upward of 14 floors were available as per the new plans.

The price of his home too increased significantly as the developer increased the saleable area (the notional area) of the flat with no real increase in the carpet area, which is the actual liveable area. Pisharody was faced with the Hobson’s choice of taking the raw deal offered to him or losing five per cent of the price paid by him in case he wished to forfeit the apartment whose value had appreciated mani-fold.

Like most disgruntled buyers across the city, Pisharody too had to hear the rhetoric that tweaking of plans is the norm in Mumbai’s realty market. “Home-buyers have reconciled to such malpractices accepting it as the industry norm, but that doesn’t give it any legitimacy. In our case too, most buyers initially joined hands to battle it out, but eventually it all fizzled out as no one has the time or wherewithal to take on the might of a builder. At least, the new Act to regulate housing sector will bring in a much-awaited relief in such cases,” he said.

Getting the Act together

His faith is justified in many respects. After dragging its feet on the Bill for five long years, the state government has finally announced that Maharashtra Housing (Regulation and Development) Act, 2012, which received presidential assent last month, will finally come into force beginning June this year. The Act mandates that before selling or even advertising a project comprising more than five flats or coming up over an plot area of 250 square metres, the developer has to register it with the Housing Regulatory Authority.

Details of land title, name of the architect, structural engineer and contractor, layout plan, carpet area and utility areas, floor space index, common areas and amenities have to be updated on the website of the authority from time to time. The builder has to commit to a building-wise time schedule for completion. His building plans can no longer be amorphous as “nothing-can-be-altered-without-the-consent-of-buyers. The Housing Regulatory Authority and the appellate body provided under the Act are “effective implementation arm” that was lacking in the erstwhile Maharashtra Ownership Flats Act (MOFA), 1963. Unlike MOFA that left flat buyers with little option but to fight onerous cases in consumer or civil courts, the new Act that replaces MOFA requires cases to be disposed of within a three-month time-frame at each level.

The Act includes under its ambit all residential, commercial or retail projects. Failure to comply with the orders of the regulatory or the appellate authority can make builders liable to imprisonment of up to three years or penalty of Rs 10 lakh or both. In certain cases of violations, the fine can go up to as high as Rs 1 crore. Moreover, to curb cases of delay in handing over of possession, which is rampant in over 80 per cent of all realty projects, the Act requires developers to not sell 10 per cent of the total flats. These “retained flats” will be used to cushion buyers if developers fail to complete the project or procure a occupation certificate. In such cases, buyers can form a legal entity of sixty per cent of flat purchasers that acts as an escrow agent. They can then take over the “retained flats” and use it to cross-subsidise the cost of building construction.

Holes in the new Act

For all the hoopla around the Act that is expected to change the widely prevalent anomalies in Mumbai’s speculative realty market, the gaping holes are hard to miss. It provides no real succour in cases where builders are not able to deliver the house. In such cases, developers can get away by refunding the original amount along with a minimal penalty and a 15 per cent interest per annum. “People put their life-long savings on buying a house. If after years of waiting for their home, the builder fails them, he should be made to buy a house with the similar carpet area in the same vicinity as the project or else refund the buyer at the prevailing market rate,” said property lawyer Dilip Shah.

Its most glaring shortcoming is the fact that it effectively accords legal sanctity to many of the malpractices termed as downright illegal under MOFA or as per several court orders. “In contravention of MOFA rules, builders have been fleecing consumers by levying charges for free-of-FSI car parking areas or as well for common areas that belong to the society. The new housing Act allows developers to charge for such areas as long as they mention it in the agreement,” said Ramesh Prabhu, from the NGO Maharashtra Societies Welfare Association.

Moreover, the Act allows builders to start selling their project merely after registering with the Authority, it doesn’t make it binding for them to wait until the building plans are approved. This gives a stamp of approval to the common industry practice of pre-launches whereby builders sell a chunk of their project prior to even having basic approvals in place. This helps them recover their construction cost much before the construction actual begins on ground.

This is a major factor that fuels an investor-centric capital-driven instead of a sale-driven efficient market. Also, the Act does not require builders to keep 70 per cent of the proceeds from sale in an escrow account as mandated in the draft of the central real estate act. This is meant to ensure that the money from sales is used for project completion and not diverted for purchasing more land, as is a common practice in Mumbai. The Act does little to reduce the affordability gap, which is the biggest hurdle for home-buyers in Mumbai which has a massive pile-up of unsold homes despite a huge demand.

Above all, the perception of the Act heralding an era in transparency in real estate dealings may be far from the truth. While builders are required to put up all project details on the regulator’s website, home-buyers have no access to this vital information. The details are visible only to the regulator and the builder himself, who can access the website using the password allotted to him.

A work in progress

“We might think of throwing the website open to public at a later stage. Also, if the Act is successful in its current form, we will also take a decision on regulating the prices and sizes of homes. Currently, about 20-25 per cent of the total homes are vacant as they belong to investors. The Act also needs to look into this aspect and how such apartments can be put to use in the rental market,” says Minister of State for Housing Sachin Ahir.

According to Pranay Vakil, former chairman and founder of the real estate consultancy Knight Frank, the Act, which will bring in a much-needed discipline in the realty market, should be looked upon as something that will evolve with time.

“Maharashtra has managed to stay ahead of the Centre with passing of the law. The implementation of the Act has to be reviewed in another two years in consultation with all stakeholders in order to ensure it is serving its purpose,” he says. Vakil adds that instead of treading the same path as the Urban Land Ceiling Act where it took decades to realise that not more than 1.5 per cent of the intended surplus land has been acquired, a periodic review will help plug loopholes in the policy and its implementation.