News: Buying a House? RERA Likely to Make 20:80 Schemes Unviable-31.05.2017

Buying a house? RERA likely to make 20:80 schemes unviable

By Aditya Khadria & Babu Sivaprakasam

While RERA aims to: (i) promote and regulate the real estate sector, (ii) bring efficacy and
transparency in the sale of plots/apartments/units etc., (iii) protect the interest of the
buyers/consumers in the real estate sector, (iv) establish a mechanism for a speedy
dispute resolution, the myth remains that only promoters shall get affected.
RERA has stipulated various obligations and duties not only on the promoters but also on
allottees, real estate agents and the Authority.
 

PROMOTER'S DUTIES & OBLIGATIONS

Registration
Where completion certificate was not received prior to May 1, 2017, promoters are required to register each phase of projects prior to
any advertisement, marketing, booking or sale.
Registrations with RERA requires prior approval of the layouts plans and hence the pre-launch booking concepts may no longer be
available. Further, schemes like 20:80 etc. would also need to be revisited.

The 20:80 and similar schemes worked for the following reason:
Under the 20: 80 scheme, promoters used to take up the obligation to pay interest in relation to the entire disbursement under the home
loan up to the house/flat possession date or any other specified date. As per the arrangement under this scheme, the home loan lenders
used to make the entire disbursement of the loan on day one by paying the money to the builders and the builders utilised the same to
repay/reduce the existing debt in the project or any other purpose (the benefit for the builder being that the interest paid under the home
loan is generally much lower than the interest required to be paid under the project finance loan). Now, since the builder is obligated to
deposit the 70% of such receivables, the entire calculation has to be revisited and hence this may not be a lucrative proposition for
promoters in all projects.

Pre-launch sale of projects: It may be noted that any advertisement, marketing, booking etc. for a real estate project may be done only
after registration with RERA. As per the FAQ 13 on MAHARERA website and the provisions of Section 4 of the RERA Act, the
registration may be done only after certain approvals in relation to the project have been obtained and the same are required to be
submitted for registration of project with RERA. Pre-launch normally was done prior to any approval by advertisements, marketings etc..
Now this would be hit pursuant to the provisions of Section 3 read with Section 4 and the clarities under FAQs.

Promoter's Track Record

Fitness of promoters is proposed to be monitored under RERA, through a requirement that at the time of registration of a project, the
promoter is required to provide information of projects launched during past 5 (five) years in addition to the details and the information in
relation to proposed project.

Transparency

RERA regime aims at ensuring transparency through the requirement for disclosure of architects, contractors, engineers and others
involved in the development of the project along with the existing encumbrances over the project property. Promoters are also required
to prominently mention the website address of RERA, wherein details of project have been entered and include the registration number
in all advertisements and prospectus.

Formation of and Conveyance to Society/Association
The requirement of promoters to apply for the formation of society/association of the allottees within 3 (three) months from booking by
51% allottees and conveyance by the promoter within specified timelines will act as a huge relief to allottees.

Separate Account, Change and Other Obligations
The Act requires promoters to deposit at least 70% of the amounts realised from allottees in a separate bank account with a scheduled
bank which may be utilised only for the purpose of covering land and construction costs. The withdrawals from such account may only
be made after certification by engineer, architect and chartered accountant, in relation to the proportion and cost of construction
completed and incurred. This would ensure that there is no siphoning of the money received from the allottees.
The Act also requires the promoter to obtain consent of allottees for any change in the plans in a project.
Uncertainty in title is generally a concern for allottees. RERA seeks to address this through requirement of the title search at the time of
registration and also through requirement of title and construction insurance for each project. It would be interesting to see the response
of insurance regulator and insurance companies regarding the title insurance requirement.
To curb the fraudulent and unfair practices and irregularities by the promoters, RERA authority is empowered to revoke the registration,
freeze the separate RERA account and take actions for carrying remaining development.
In case the allottees exercise their right to cancel booking and demand refund of the money paid along with interest, the promoter is
obligated to pay the same.

Allottees
In order to take care of the interest of the project as a whole RERA obligates the allottees to make payments in a timely fashion failing
which they would be required to pay the interest to the promoters.
The penal provisions for non-compliance of an order by RERA authority may lead to fine and imprisonment.

Real Estate Agents
The Real Estate Agents would have to ensure registration/disclosure at dual stage to be able to assist in sale/purchase of a unit in a
project registered with RERA : - (i) as a real estate agent with the RERA authority in the concerned state, and (ii) disclosure of the real
estate agent by the promoter in respect of a project.
The Real Estate Agents are required to display the registration certificates under RERA at its offices. Even online housing advertisement
platforms would now require registration as real estate agents for all states and UTs.
Provisions regarding penalisation on unfair practices and non-compliance are applicable to real estate agents too.

RERA Authority
Interestingly, even the RERA authority is required to discharge certain obligations including revocation of registrations, freezing of the
separate RERA Account, facilitate remaining development of project etc. depending on circumstances.
While the Act has strived towards addressing the concerns of buyers/allottees in the real estate sector, the RERA rules in Maharashtra
has provided an opportunity to the lenders/equity investors to present their case prior to revocation of a registration.

Sale of Car Parking Areas
As per RERA, the covered car parkings and garages may be sold to allottees but the open car parking spaces have to be conveyed to
the society/association of the allottees as a part of common areas.
Various other aspects such as clarities regarding co-promoters etc. are being addressed by the Authority as and when noticed.
However, the efficacy of RERA is also dependent on various other factors independent of the stakeholders in a project including a
requirement of a single window approving authority, robust approval process, and amendments to archaic laws in various locations in
the country.

Authored by: Aditya Khadria, Senior Associate, Economic Laws Practice and Babu Sivaprakasam, Partner at Economic Laws
Practice