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Real Estate (Regulation and Development) Bill: Missing the yardstick

The Indian Express examines the many omissions, dilutions & obfuscations of the legislation, likely to be tabled in monsoon session.

Written by Shalini Nair | July 11, 2015 12:30:24 am
real estate bill, Real Estate (Regulation and Development) Bill, real estate, india real estate, dubai, dubai real estate, bjp, nda, business news The Real Estate Bill has all along evoked much trepidation from developers and hopeful anticipation from home-buyers. (Illustration: Pradeep Yadav)

This monsoon session, the Parliamentary committee on the Real Estate (Regulation and Development) Bill will table its report, the culmination of a series of consultations, with residents’ associations, consumer activists, developers’ body, real estate agents, financial institutions and state governments.

Despite the many omissions, dilutions and obfuscations of the legislation the Bill has all along evoked much trepidation from developers and hopeful anticipation from home-buyers.

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Dubai’s frenzied construction boom may be the subject of many a sustainability debate but the emirate has a sound legislative framework for securing not only its home-buyers but also the rental segment. Since 2007, the Real Estate Regulatory Agency makes licensing of developers, brokers and projects mandatory and penalises transgressions such as operating without a license or carrying out fraudulent transactions, with a fine of anything upward of 1,00,000 dirhams and/or jail sentence. To ensure timely completion and delivery of the project, 100 per cent of money paid by buyers is to be maintained in project-specific escrow accounts managed by an independent escrow agent.

The agent ensures that 5 per cent of the total value of the escrow account is not released to the developer until one year from the registration of units in the name of purchasers. Just as in case of Indian cities, where much of the project is sold in the pre and under-construction stage, Dubai too witnesses maximum sales in its ‘off-plan’ properties. But to stem delays, the agency can deregister builders if they don’t commence construction work within six months of permissions to sell the units.

In comparison, India’s realty Bill, with its recently proposed amendments, is a much paler version. It does set the stage, for the first-time ever, for regulating all residential and commercial real estate sales through a regulatory authority and appellate tribunal. This will bring in much succour to harried home-buyers whose only recourse until now was pursuing long-drawn civil, consumer or criminal cases in the courts. The Bill mandates registration of projects and disclosure of all project details on the authority’s website. Failure to fulfill the stated obligations towards buyers will attract a fine of anywhere between 5 to 10 per cent to the total project cost while failure to repeatedly register with the authority can even entail a jail term of up to 3 years. Buyers too are liable to pay a penalty that is anywhere between 5 to 10 per cent of their apartment’s total cost in case they default on their payments to developers.

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However, the bone of contention with consumers are the loose-ends in the legislation. The initial draft of the Bill by the UPA government in 2011 made it compulsory for developers to deposit 70 per cent of the proceeds from sales into a separate account. The NDA’s 2013 Bill gave state governments the leeway to go for 70 per cent or below. The amendment introduced in the Rajya Sabha this year, further diluted it by asking for only 50 per cent or below to be kept aside

for construction of the project with developers being free to divert the remaining sum for buying additional land for another project launch.

Laws in Singapore require the entire proceeds from sales to be deposited in a separate project account so does cities such as Ontario in Canada or Utah in United States where an independent trustee has to authorise the payment depending on the progress of work on site.

Even the much-criticised Maharashtra Housing (Regulation and Development) Act, 2012 has a provision whereby 10 per cent of the total apartments in a project cannot be sold so that in case the builder fails to deliver, buyers can take over and sell it in order to cross-subsidise the construction cost.

Mandira Kala, research head, at PRS Legislative Research said that restricting use of sale proceeds only for construction purposes alone may not be practical. “In India, especially in big cities, land cost is often a major part of a project than the cost of construction. Instead of specifying that the amount collected has to be spent on construction alone, it might be more feasible to allow for the amount to be spent on the same real estate project. This would accommodate any variations in cost of land and cost of construction ratios across different cities.” Kala also stressed on single-window clearance so that builders can deliver on time, a constant demand by developer bodies such as CREDAI and NAREDCO, among others. Officials from the Housing and Urban Poverty Alleviation (HUPA) ministry state that the Bill deals only with regulating property transactions between builders, agents and buyers. “Streamlining construction and other permission in coordination various concerned ministries is underway as a separate project,” said officials.

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Last month, a bunch of home-buyers, at a proposed high-rise project in Mumbai’s eastern suburbs, approached the local police station complaining against their developer.

Launched five years ago, buyers were charged 10 to 25 per cent of the flat’s cost and promised possession of their homes by 2014 but a year later not a brick has been laid on site. Last year, buyers in an affordable housing project by the same builder had filed a police complaint about the inordinate delay in starting construction work on their homes. Data collated by the realty research agency Liases Foras, from 2008 till date, show that 88 per cent of the 25.51 lakh residential projects launched across 8 cities have been delayed. 25 per cent of these projects have been delayed by more than 4 years from the promised delivery date.

The maximum number projects have been delayed in the National Capital Region followed the Mumbai Metropolitan Region. Similar delays have been recorded across all cities included in the survey such as Ahmedabad, Kolkata, Pune, Bengaluru, Hyderabad and Chennai.

Delays are just one part of the problem. Last month, the Competition Commission of India ruled against the realty major DLF in a case filed by residents of DLF New Town Heights in Gurgaon. “We were given a non-negotiable one-sided agreement months after we had paid for booking our apartments. At that stage we could either forfeit the money or agree to the developer’s terms and conditions such as the one that allows them to increase the notional super-built up area by up to 10 per cent and charge the buyers a higher rate accordingly,” said resident Akhilesh Dwivedi who feels that the agreements drafted by developers often allow them to charge high interest rates of 18 to 24 per cent from buyers defaulting on their payments while any kind of project delay on developers’ part entitles buyers to an interest of not more than 3 to 4 per cent.

“This is the reason why the real estate Bill needs to have a model builder-buyer agreement in it,” he said.

The recent amendments to the Bill do not help much in alleviating these endemic issues in urban India’s realty sector. It has obfuscated the definition of carpet area, which is the standard wall-to-wall floor area excluding the thickness of the wall. It has now been redefined as ‘rentable area’ as stated in the National Building Code or ‘its later versions’. Former Union HUPA minister from Congress, Ajay Maken, points out this paves the room for the definition to be tweaked at any point in time in future.

“Also, builders are allowed to undertake ‘minor alterations’ in the project just by informing the buyers without seeking their permission. Builders can affect major changes through a series of such minor changes,” said Maken. He added that the amendment also allows builders to extend their delivery deadline in case there is delay on part of planning bodies in granting permission. “Builders can misuse this clause to purposely delay their construction if they are unable to complete it due to some other reason,” said Maken.

The report of Select Committee of the Rajya Sabha is expected to set right at least some of these power imbalances. Members state that they are looking at the possibility to include a model agreement in the draft provisions for prosecuting developers in case they fail to keep their obligations to buyers, prevent conflict of interest by disallowing the regulatory head from taking up private job once he relinquishes his post and redefine terms such as ‘carpet area’ and ‘promoters’.

“We have had representations from developers who say that the real estate industry will die if we impose provisions for prosecution. But nothing in the bill will affect fair businesses; it is about balancing the long-standing lopsided builder-buyer relations and fast tracking settlement of disputes,” said a member.

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