August 26 2011
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.
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.
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:
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:
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 authority has also been mandated to promote a healthy, transparent, efficient and competitive real estate market, by:
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.
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 (email@example.com or firstname.lastname@example.org).
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Mani M Miskita