How will RERA impact the Real Estate industry and the home buyers?

The Real Estate (Regulation and Development) Act, 2016(RERA), intends to protect the interests of home buyers and enhance transparency in the real estate sector. It also would streamline the real estate sector.

 

Major Impacts on:

  1. Home buyers
  2. Builders
  3. Brokers

 

Let us see, what is RERA?

The Real Estate (Regulation and Development) Act, 2016 (RERA) is an Act passed by the Indian Parliament.

  1. The RERA bill was passed on March 20, 2016
  2. It Came into force on the May 1st, 2016
  3. 59 out of its 92 sections were notified on May 1, 2016
  4. Remaining provisions came into force from May 1, 2017

 

But why RERA?

For long, home buyers have complained that real estate transactions were unfair and heavily in favour of the developers.

  1. RERA will aim to create more equitable and fair transaction between the seller and the buyer, especially in the primary market
  2. RERA will make real estate purchase simpler
  3. It will bring better accountability and transparency
  4. Hoping that the states do not dilute the provisions and the spirit of the central act; it has been mandatory for each state to form its own regulator and frame the rules

 

How will RERA impact home buyers

  1. No launch or advertisement before registration with RERA
  2. Consent of 2/3rd allottees for transferring majority rights to 3rd party.
  3. Sharing information project plan, layout, government approvals, land title status, sub-contractors.
  4. Timely completion of the projects and submission to the customers
  5. An increase in the quality of construction due to a defect liability period of five years.
  6. Form the RWA within a specified time or 3 months after the majority of units have been sold.

The most positive aspect of the above act is that it provides a unified legal right for the purchase of flats and apartments, etc.

Establishment of the regulatory authority: 

  1. The Act establishes Real Estate Regulatory Authority in each state and union territory.
  2. Protection of the interests of the Stakeholders
  3. Accumulation of the data at a designated repository
  4. Creating a robust grievance redressal system
  5. Prevent the time lags by maintaining the submission of the applicants within 60 days

 

Compulsory registration:

  1. The total area that exceeds 500 sq. metres or more than 8 apartments is proposed to be developed in any phase), must be registered with its respective state’s RERA
  2. Existing projects are also required to comply with the registration requirements under the Act.
  3. Promoters are required to provide detailed information on the project e.g. land status, details of the promoter, approvals, schedule of completion, etc.

 

Reserve account: 

  1. The funds collected for one project were being used for other projects
  2. To Prevent such a diversion, promoters are now required to park 70% of all project receivables into a separate reserve account
  3. The proceeds could be used as construction expenses
  4. Projects must be Certified by a professional

 

Continual disclosures by promoters:

  1. Home buyers will be able to monitor the progress of the projects
  2. Periodic submission of the projects by the promoters

 

Title representation:

  1. Positive warranty on the rights of the title and interests on the land required to be made by the promoters which can be used by the home buyer
  2. Insurance is obtained against the title and the construction of the projects

 

Standardization of sale agreement:

  1. A standard model sale agreement to be entered between promoters and homebuyer
  2. Punitive clauses are put against the home buyers which penalise them for any defaults
  3. These penal clauses are to create more balanced agreements in the future

 

Penalty:

  1. To ensure that violation of the Act is not taken lightly, stiff monetary penalty (up to 10% of the project cost) and imprisonment, has been prescribed against violators.

 

Impact of RERA on Real estate industry:

  1. The backlog of inventory initially.
  2. The rise in project cost.
  3. Liquidity crunch.
  4. Increase in cost of capital.
  5. Amalgamation/Partnerships and takeovers
  6. Increase in project launch time.

Work that is to be done with the existing and the new project details, such as status of each project executed in last 5 years, promoter details, detailed execution plans, etc. needs to be prepared.

The development of the new disputes resolution bodies would depend on the fast-tracking of the older disputes. How the disputes are resolved quickly with a degree of finality.

Which projects come under RERA?

  1. Commercial projects and residential projects including plotted development.
  2. Projects that measure more than 500 sq. mts or 8 units.
  3. If the projects do not have completion certificate, before the commencement of the Act.
  4. If the project is only for renovation/repair / re-development.
  5. Each phase of the real estate project is to be treated as a standalone project requiring fresh registration for each phase.

How can a builder be RERA compliant?

  1. By registering the Project.
  2. By Advertisement.
  3. Withdrawal
  4. By updating websites on any developments/ Disclosures.
  5. By disclosing the Carpet area.
  6. In case of Alteration in project – approval of 2/3 allottees is a must.
  7. By conducting project accounts – Audit periodically.
  8. By depositing 70% of the funds collected from allottees in the project account. And all withdrawals to cover construction and land cost.
  9. All fund withdrawals must be in proportion to the percentage completion method.
  10. Withdrawal must be certified by professionals, an engineer, architect, and CA.
  11. Provision for RERA to freeze project bank accounts upon non-compliance.

How to register projects under RERA?

  1. Authenticated copy of all approvals, commencement certificate, sanctioned plan, layout plan, specification, plan of development work, proposed facilities, proforma allotment letter, an agreement for sale and conveyance deed to be given when the developers are applying for project registration with RERA.
  2. Mandatory registration of new and existing projects with RERA before launch.
  3. Registration of agents/brokers with RERA.
  4. Dispute resolution within 6 months at RERA and RERA appellate tribunals.
  5. Separate registration of distinct phases of a single project.
  6. Developers to share all the details of projects launched in last 5 years with the reasons for the delay, with timely updating to the RERA website.
  7. Maximum 1-year extension in case of delay due to no fault of the developer.
  8. An annual audit of project accounts by a CA.
  9. Conveyance deed for the shared area in favour of RWA.
  10. Construction and land title insurance.
  11. Project completion time

How will RERA impact insurance cost for construction and land title

  1. Land and approval costs to be meted out of internal accruals as the prelaunch concept may end. It may lead to a shift in equity financing from debt financing prevailing currently. For funding of the land and for approval cost through equity, the cost of capital would go up for the developers.
  2. With the frequent delay in obtaining approvals, debt funding may not be an ideal route for developers. With an entry in the sector made difficult, the sector may witness consolidation.
  3. Financial and execution capability is required for launching a project.
  4. The project launch time may increase since a lot of time will be involved in finalizing finer details before launching a project.
  5. Details such as complete drawings, utilities layout, etc., need to be finalized before the project starts.

 

Applicable sections Offences committed Applicable Penalties
 Section 9 (7)  Registration secured through  misrepresentation or fraud Breach of  terms  for which registration obtained  Revocation of Agent Registration Number
 Section 62  Contravention of Section-9 & Section 10  Penalty of INR 10,000/-day during which the default continues extending up to 5% of cost of unit sold
 Section 65  Contravention of orders of RERA authorities  Penalty up to 5% of cost of unit sold
 Section 66  Contravention of orders  Imprisonment for up to 1 years or with fine  extend up to 10% Of unit sold

 

In the end, RERA is aimed to streamline the unorganized Real estate sector and make the sector more friendly for the buyers.

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