Real Estate Act 2016: A watershed moment for Indian property

India Inc. property expert evaluates the recently passed Real Estate Bill in India, why it means greater security for the buyer and what it means for the Indian realty sector as a whole. The draft Real Estate bill was put up for consultation way back in late 2011 and was finally passed in March 2016 after a lot of debate and drama. The bill marks a watershed in the Indian Real Estate market, which despite being an essential requirement for all citizens did not have a framework of compliance nor a regulatory authority. Entry barriers were so low that anybody could start a development company and take public monies, with the buyer having to turn to the courts. There the cases themselves were known to take as long as 30 years to reach a decision, and in most cases a sub-par outcome for the buyer. This bill aims to protect the interest of buyers of plots, apartments and buildings by creating a dedicated appellate authority (Real Estate Regulation Authority) that will attempt to resolve disputes quickly. While the initial draft was quite limited to a residential unit, the final bill covers shops, offices, storage spaces and showrooms. In smaller towns, there is a practice of building small commercial units on the ground floor, with parking over ground, while higher levels had residences. The bill now covers almost all developers in the country. Until now, unscrupulous developers operated knowing that disputes would drag on in courts. The creation of an appellate authority alone will bring with it a fear of the law and prevent bad intent in majority of the cases, which in turn will take the pressure off the judicial system to a reasonable extent. Key Highlights: # Carpet area will be the sole measure of quoted prices. Current practice is to quote built-up, super-built-up and super-super-built-up areas. As there are no standard definitions for these measurements and tend to be unique to almost each developer in what was included in the saleable area, it was a challenge for the lay buyer to compare projects. This invariably led to customers being disappointed with the purchased unit many years later, as the projected space sold did not meet the impression that was given at the time of sale. While this single definition of saleable area will eliminate majority of wrong selling practice, developers these days build fancy show apartments that may have the right square footage but with higher than delivered ceilings and bangs and whistles that make the apartment look perfect. But they would choose to not give the buyer a clear idea of all the additional expenditure required to achieve the same standard for the unit that they will be purchasing. # Penalty rates for delayed delivery to be at the same rate as the developer charges the buyer for delayed payments. Sale agreements are so one-sided that developers can charge 18 per cent to 24 per cent for delayed payments made by buyers but in the case of delayed delivery, clauses normally carry a square foot rate per month that works out to 3-5 per cent per annum. The bill states that the rates will be the same for parties and the developer will be obliged to refund the sums paid with penalty interest. In the case of cancellation due to delayed delivery, it will be due from the day that sums were paid to the developer and not from the day the delivery was committed. # Defined use of funds collected for the sold unit. The bill states that the developer must use 70 per cent of the funds collected for development of the project and these sums must be placed in an Escrow account dedicated for the project. The current practice of developers using funds to acquire more land, build other projects that have lower sales, buy luxury cars or any expense will come to a grinding halt. In most of the past cases of disputes, diversion of funds has emerged as the key reason for delayed project delivery. This clause is causing a lot of heartburn among the unscrupulous lot and possibly one of the key reasons why this bill was delayed for so long. That said, genuine developers are quite concerned that this clause could be interpreted with retrospective effect - in which case the industry as a whole would be defaulters. # Registration of all projects that are ongoing and have not received a completion certificate need to be applied for with the authority within three months of this bill i.e. by June 26, 2016. The exception being for developments where the land is less than 500 square metres and less than eight units are being delivered. Along with the application for registering the project, the developer will have to submit their past track record of development, including details of delayed deliveries and disputes. # Registration of real estate agents: Until now, anybody could become a real estate agent in India. No qualification or registration was required. It was a true cottage industry, with every home or shop possibly doubling up as a real estate agent outlet. This inclusion will bring about professionalism to the selling process # The sale of units to commence only after the project has received plan sanction and commencement certificate. It is common practice to launch off plan sales before any regulatory authority has given its approval. The buyer after having paid 5-10 per cent of the sale consideration invariably has a long wait before the construction actually starts. Given that many projects are joint development projects, where the developer pays a small fraction of the land cost to the land owner, the developer is effectively using the buyers funds to draw up plans and submit it for sanction and paying all licence monies too. # Land owners roped in as the end beneficiaries of the sale proceeds of the land on which the development is being made. Besides creating a defined framework of procedures and standards, the bill has brought about coverage to all concerned parties to a sale and has defined penalties for violation that could even lead to various parties being debarred from future development activity. In all, a desperately required bill for an activity that contributed to a large portion of the national GDP. Deepak Sam Varghese, founder-director of Moonbeam Advisory, is a career banker with nearly two decades of experience in retail and private banking. He is a specialist in banking services and wealth advisory and has been advising domestic and non-resident Indians (NRI) in Mumbai, Delhi, Dubai, Singapore and London, where he was based. Now Bangalore-based, his special emphasis is on financial advisory in real estate transactions, advising investors and developers in key Indian metros.