India’s Real Estate (Regulation and Development) Act 2016 (the “Act”), which seeks to transform India’s residential and commercial conveyancing market by increasing transparency and improving accountability, received assent from India’s President Pranab Mukherjee on 25 March 2016 and will be brought into force incrementally. The Act applies to specific projects forming a large proportion of India’s real estate sector which are either in the development phase at the date of the Act’s commencement or are yet to commence. It contains a number of requirements aimed at regulating project promotors, a term widely defined under the Act to include developers, government authorities, builders and any other person who constructs any building or apartment for sale to the general public (“Promotor”), and real estate agents. Alongside implementing structural reform, the Act aims to improve consumer confidence by putting measures into place which tackle project delays, prevent the misapplication and diversion of purchaser’s funds, dissuade Promotors from providing misleading information and changing project plans and from transferring projects to alternative Promotors without first obtaining the consent of purchasers.
Despite the contested passage of the Act, which was introduced as a bill in 2013, its approval has been seen as a turning point for the development of India’s real estate market and will hopefully act to further encourage foreign investment in the sector.
Establishment of a regulatory authority and appeals process
Under the Act, India’s Government will establish a Real Estate Regulatory Authority (“RERA”) within a year of the Act’s commencement in order to ‘facilitate the growth and promotion of a healthy, transparent, efficient and competitive real estate sector’. In the interim period, the Government may designate a regulatory authority to fulfil the prospective function of RERA. The Act also creates a Real Estate Appellate Tribunal (the “Tribunal”) to hear appeals originating from RERA decisions, directions and orders. The Tribunal has powers to pass such orders as it thinks fit in response to an appeal of a RERA decision, with the appellant having the opportunity to file a further appeal with the High Court if aggrieved by a decision of the Tribunal.
All commercial and residential projects fitting into the following categories under the Act must be registered with RERA before being advertised, marketed, booked, sold or offered for sale by a Promotor. Similarly, projects which are on-going at the date of the Act’s commencement have three months in which to apply for project approval. Registrable projects include those which involve:
- the development of a plot of land in excess of 500 square metres; or
- the proposed development of over eight individual apartments, inclusive of all phases of development (which are treated as separate).
Where project development is phased, each phase is treated as a separate project and will therefore require independent RERA approval. If a project involves renovation, repair or redevelopment but where no sale, marketing or advertisement of land will take place, the requirement to gain RERA approval does not apply.
RERA may impose penalties of up to 10% of the estimated cost of the real estate project on Promotors who fail to comply with this section of the Act. Continued non-compliance is punishable by imprisonment of up to three years and/or a fine of an additional 10% of the project’s value. The Act gives RERA the ability to require consent fees from applicants as part of the approval process, though no fees have yet been specified.
These requirements place reasonably onerous obligations on Promotors in an effort to curb the practice of initiating building work prior to approvals being obtained. This will improve the regulation and efficiency of the market and is likely, in practice, to be the most significant reform brought about by the Act. However, uncertainties remain over the exact definition of a ‘phase’ which requires separate approval and what will happen to projects which are under construction when they come to apply for approval.
When submitting the application to RERA, Promotors must provide a number of details including:
- details of the Promotor’s business (such as its name and address alongside the names and photographs of the owners of the enterprise, details of the real estate agents, contractors, architect, structural engineers, and other persons concerned with the development of the project);
- details of previous projects launched by the business including details of any delays experienced and pending cases or payments; and
- details of the project to which the application relates including any approvals gained, project plans, specifications and layouts, details of the project’s location and the number, type and size of apartments.
Alongside the above information, a declaration must be made stating:
- that the Promotor has legal title to the land associated with the project;
- the time period in which the project will be completed; and
- a statement that 70% of the funds received from buyers will be placed in a separate deposit account. Drawdown from this account is only permitted for land costs and construction costs which are in proportion with the percentage of project completion.
The requirement to protect 70% of the proceeds received from buyers was a reaction to developers diverting funds attributed to one project to finance another. This practice was thought to cause delays and put purchasers at risk. Whilst the measure is primarily aimed at purchaser protection, there has been some concern that it will result in an increased reliance on institutional capital which could have a knock on impact on project costs. However, other commentators have suggested that the reduction in liquidity brought about by the 70% requirement could facilitate the stabilisation of land prices, as developers will be unable to begin new developments using earmarked funds until projects have been completed and have generated revenue.
Upon receipt of an application from a Promotor, RERA is obliged to grant registration within 30 days of its receipt, or to reject it with written reasons for doing so. RERA may not reject applications without giving the applicant an opportunity to speak in relation to the matter. If they fail to make a decision within 30 days, the project is deemed to have been registered.
Once registered, RERA will provide the project Promotor with a registration number and access codes to enable the Promotor to make online filings in relation to the project. Project information provided online by the Promotor will be publically accessible, in line with the Government’s aim to improve the transparency of real estate projects. Information that must be provided includes details of the consent granted, a list of the number and types of apartment and the status of the project. Online filings are to be updated on a quarterly basis, to enable the public to have an up to date overview of the project’s progress.
Project registration is valid only for the period specified by the Promotor in their project application, at the end of this period, the project loses RERA consent. It can be extended by RERA under certain circumstances, with RERA having the ability to determine the next steps.
The Act intends to expedite the application process, placing some of the onus on the Government to streamline project timelines whilst ensuring that project Promotors comply with timeframes proposed in initial applications. Promotors will have to be attentive in the transition from the project’s construction phase to completion in order to avoid penalties being imposed on them for untimely completion.
Revocation of consent
RERA has the power to revoke project consent where the Promotor has failed to comply with the Act, such as, where the Promotor has made a false representation of the standard of services to be provided, has made misleading statements in relation to the project or has failed to act in line with project approvals.
If project registration is revoked, the bank holding the project funds may be given a notification by RERA to freeze the project account to prevent further work from taking place. The work that is required in order to complete the project may be handed over to another body, pursuant to a determination from RERA.
Consumer protection measures
Alongside the requirement outlined above for Promotors to place 70% of the funds received from a purchaser in a separate deposit account, the Act sets out a number of additional measures aimed at protecting purchasers.
Promotors are unable to accept a deposit from a purchaser (including an advance payment or application fee) of over 10% of the cost of the property, unless a formal sale and purchase agreement has been entered into and duly registered with the relevant authority. Relevant planning or building consents are usually required before registration can take place.
Advertisements and prospectuses
Where a deposit is received on the basis of information contained in the advertisement or prospectus, the Promotor must make good any loss or damage caused to the purchaser as a result of any false statement. If, as a result of the statement, the purchaser wishes to withdraw from the project, the Promotor must return the deposit with any interest and compensation due under the Act.
Consent to amend plans
Once plans have been approved by RERA and shared with the prospective purchaser, Promotors are unable to make additions or alterations to plans, layouts and specifications of apartments unless they have received consent to do so from the purchaser. Similarly, the structure of the building and common areas may not be amended without the consent of at least two-thirds of the prospective purchasers.
In order to prevent Promotors from attempting to escape liability by transferring projects to other Promotors, two-thirds of prospective purchasers must provide consent to the transfer and RERA must provide approval. The transferee must comply with the obligations set out in the Act and the transferee is liable for any delay in the project after the transfer.
If a structural defect or other defect in the property comes to light and is brought to the Promotor’s attention within five years of the transfer of the property to the purchaser, the defect must be rectified by the Promotor, without charge to the purchaser, within a period of 30 days.
Promotors are obliged to ensure that all necessary project insurance is obtained and must transfer the benefit of this insurance to the purchaser upon entry into the sale and purchase agreement.
Real estate agents
Alongside the requirement for project consent, real estate agents who buy and sell land are also required to be registered and are regulated under the Act by RERA. Amongst other requirements, the Act expressly prohibits agents from falsely representing details and from making misleading statements in relation to the services.
The Act sets out a detailed procedure for Promotors to follow when undertaking real estate projects in India. Whilst the structural provisions set out in the Act involving the establishment of RERA, the online information filing system and the creation of a Tribunal will inevitably take some time to put in place, the Act provides the basis for a transparent and formalised regulatory system. These measures are likely to create greater opportunities for and attract increased investment in Indian real estate from international private equity, as developers may need to look at funding sources other than from purchasers, the risks involved in property development are lowered, with project timelines being shortened, mandatory insurance meaning that risk is more considered, and online publication of Promotor’s details meaning that the risk of investing with errant Promotors is reduced.
The increased transparency of the Act alongside the focus on consumers is likely to have a homogenising effect, helping to improve the competitiveness of the Indian real estate sector and its attractiveness to international investment.