Central government draws up new Model Real Estate Act - International Law Office

Introduction
Current state law
Primary features of new act
Other functions of the authority
Developers' views
Comment

Introduction

In light of the substantial contribution of real estate to India's gross domestic product and its exponential growth in recent years, the central government has recently developed a Model Real Estate (Regulation of Development) Act, which it intends to present before Parliament. The model act encompasses the government's plans for the regulation of the development of colonies, the promotion of construction and the sale and transfer of real estate.

The model act is under approval by various ministries. It differs from the previous bill (mooted three years ago), as it concentrates on consumer protection, transparency and the establishment of state statutory bodies to control and regulate developers and certain developments. Once approved, states in India will have to adopt the model act, with appropriate modifications.

The inclusion of plots for residential, commercial and industrial purposes in colonies will bring commercial real estate in land developments exceeding 1,000 square metres within the scope of the model act.

Current state law

Most states have existing legislation that governs the promotion of construction and the sale of real estate, as well as ownership holding structures such as condominiums, cooperative societies and other entities. Several provisions of the model act borrow from such laws. However, while these laws contain provisions for determining developers' liability and impose fines or prison sentences upon those found guilty by civil or criminal courts or consumer forums, they do not include a mechanism for monitoring developments and securitising developers' obligations to buyers.

Primary features of the new act

Once a state enacts the model act, it must establish an independent real estate regulatory authority and a real estate appellate tribunal. The authority will principally:

• enforce the model act;
• approve and register developments;
• maintain a website;
• undertake enquiries;
• appoint officers to resolve disputes between developers and buyers; and
• have the power to order imprisonment of errant developers for up to three years or to levy monetary penalties.

The tribunal will hear appeals against the directions or orders of the authority. Both the authority and the tribunal will be vested with the powers of civil courts (which will not have jurisdiction) - the tribunal's orders will therefore be executable as decrees of a civil court. Further, on a written complaint from the authority or tribunal, offences punishable under the model act may be tried by certain criminal courts.

A developer (defined as a 'promoter' under the model act) that proposes developing a project on land in excess of 1,000 square metres, or with more than the stipulated number of apartments, must register its project with the authority and provide a declaration stating that it (or a third-party owner) has clear title to the project land. It must also undertake to complete the development at its cost, in accordance with the project registration conditions. The developer must provide the authority with a bank guarantee not exceeding 5% of the estimated project cost, enforceable in case of default.

If the project is delayed beyond the permitted period due to reasons outside the developer's control, the authority (if satisfied) may extend registration for two further one-year periods. Developers may therefore find it easier to develop their projects in phases and apply for phased registrations, which will be treated as standalone projects.

A developer whose project is registered with the authority will be bound by the following major conditions:

• to provide buyers with full disclosure of its enterprise, details of the project and copies of relevant plans, documents, records and permissions;
• to submit project-related advertisements and a prospectus to the authority, including certain mandatory details and information. Any untrue statements therein may render the developer liable to pay compensation to affected buyers. Alternatively, buyers may rescind their agreements and receive a full refund of payments made, with interest;
• to enter details and records of its project on the authority's website as a self-declaration (including approved plans, carpet areas, plinth areas, facilities, estimated costs and details of authorised agents engaged in the project, as well as architects, engineers and contractors);
• to enter into agreements for sale with buyers containing mandatory information and disclosures regarding the project, the sale premises, the development schedule, specifications of external development and other details, without which it would be prohibited from accepting any payments or deposits. Termination of an agreement must be preceded by a written notice by the developer specifying the reasons for termination. On termination, a buyer will be entitled to a full refund of amounts paid with interest;
• not to mortgage or charge any sale premises without the buyer's consent;
• not to make alterations to plans or specifications of any sale premises without obtaining the buyer's permission, and thereafter to obtain approval of the planning authorities and file details of the changes with the authority; and
• after obtaining an occupation or completion certificate from the planning authorities to transfer title of the developed project to an association comprised of the buyers, and within the earlier of one year from obtaining a completion certificate or delivery of possession of 75% of the premises in the project, to deliver possession of all common areas in the project to such association.

If a developer's registration is cancelled, or if it lapses before completion of the project, the authority will be entitled, after hearing the developer, to list it as a defaulter and debar it from accessing the website. The authority may then enforce the bank guarantee, recover balance development costs from the developer and direct the planning authorities to complete the project through the buyers. The authority may also direct the developer to transfer possession and title of the project to the buyers, failing which the authority may itself effect such transfer on receipt of outstanding amounts payable by the buyers. The buyers' principle liabilities include:

• the purchase price;
• registration charges and taxes;
• statutory impositions;
• ground rent in accordance with their agreements; and
• obtaining the developer's permission to mortgage, in case payments remain due to it.

Other functions of the authority

The authority has also been mandated to promote a healthy, transparent, efficient and competitive real estate market, by:

• recommending buyer protection and improving processes and procedures for the approval of projects by planning authorities;
• developing consensus between the central and state governments and other stakeholders for mandatory structural safety norms;
• establishing a framework of standard procedures and norms for the speedy processing and granting of building permits;
• promoting the rating of real estate projects and developers;
• coordinating easy access to credit facilities, land title certification, speedy and transparent registration of properties and institutional arrangements for the maintenance of developed projects; and
• promoting construction of Leadership in Energy and Environmental Design-rated environmentally friendly or green buildings and measures for water conservation and recycling.

Developers' views

Although developers have been consulted, several items on their wish list have not been incorporated into the model act, including bringing statutory or planning authorities and financial institutions within its scope and penalising them for delays. Developers have also expressed concerns over bureaucratic and procedural delays, in addition to their existing burden of obtaining numerous licences and permits for developments.

Comment

While the aims of the model act are laudable, the question that will be answered only in time is whether its implementation, and the exercise of powers and authorities by the authority and tribunal, will be undertaken without curbing the growth of the real estate sector. To achieve this, the authority, tribunal and state governments must operate proactively, in a cohesive and coordinated manner, and maintain an open dialogue with all stakeholders, including developers.

Failing this, the model act may meet the same fate as the (since repealed) Urban Land (Ceiling & Regulation) Act 1976, which failed to achieve its primary objective of preventing substantial land holdings in the hands of a few and making real estate affordable and available to all strata of society.

For further information on this topic please contact Viren Miskita or Mani M Miskita at MT Miskita & Company by telephone (+91 22 2204 4238), fax (+91 22 2282 8456) or email (viren@miskitaco.com or admin@miskitaco.com).