On
Wednesday, January 11, the Ministry of Housing and Urban Poverty Alleviation
invited comments on the draft Real Estate Regulation Bill (RERB). In
Maharashtra, the state government has released a draft version of its own real
estate regulation Bill, the very first state government to take the step.
In this backdrop, it would be instructive to take a look at the draft
legislation once again. There are some loopholes in the legislation that need
to be examined thoroughly so that the interest of the buyer is protected.
SIX
AREAS OF CONCERN
A
lot has been said and written about the provisions of the Bill and its
benefits. Even as the intent of the Bill is laudable, there remain some
concerns arising out of its provisions that need to be examined in detail.
Plot
Size: The provision of minimum plot size could potentially create problems. The
proposed minimum of 4,000 square metres to be covered under the legislation
leaves out a substantial portion of the market unregulated. Let us look at
three examples of how this can be circumvented:
Case
1: Developer “A” has, say 3,800 sq mt (40,888 sq ft) plot to develop. He can
carry out everything as he likes as he is out of the purview of this
regulation. Most standalone projects, and most of the redevelopment projects
are under this segment and also the subsequent litigations. This could also
lead to unauthorised development in tier-II and tier -III cities and towns
where local forces may prevail more than laws.
Case
2: Developer “B” has plot larger than 4,000 sq mt, say, 7,500 sq mts. He may
divide the plot into two and propose two separate projects say, 3,800 sq mt and
3,700 sq mt. As per the Bill, each project needs separate registration if the
area crosses the threshold. But in this case he develops the land smaller than
that size as one project, and is out of regulatory ambit. This can happen with
still larger plots if division is allowed or managed as per local regulations.
Case
3: Developer “C” has the same size of land. This fly-by-night operator does not
want to wait for two projects to be done one after the other or cannot afford
the cost of waiting. He may be able to sell the part of it-on paper, of course.
So, he creates another entity and then selsl/transfers/gifts the other half of
the plot. Now both the projects can be carried out simultaneously with
different names of the company and yet without adhering to the conditions of
the regulation. There are no specific provisions or restrictions in this
regard. Besides, many builders operate under more than one name for different
projects. There are many projects, which are carried out under joint-venture
agreement. These possibilities must be considered specifically.
Delay:
The Bill makes it mandatory for each developer who registers with it to declare
the time frame of the project. Regulation does not insist or compel anyone to
declare a particular time frame, the freedom rests with the developer who has
to adhere to it throughout the construction process till it is completed.
So,
we assume that the developer must have calculated all the factors — raw
materials, labour, approvals etc. If he thinks he can finish the project in
three years he may very well declare four to be on the safer side. But then the
Bill also provides for an extension of 1-2 years. This should not be open to
all and should be on case-to-case basis especially during circumstances beyond
control as the regulator may feel fit. If the extension is allowed to all there
would be no point in declaring the time-frame. Projects will be delayed
officially, with permission from the Regulatory Authority.
Conveyance:
This is a very important legal status, which every housing society must have.
Most of the societies in Mumbai do not have conveyance despite laws mandating
it. There are several court cases on this issue. After giving possession with
garden and open spaces to the society, the developer delays conveyance.
Later,
he begins construction on the open spaces or garden claiming it to be his land
as it is not conveyed to the society. Residents are just owners of the flat and
the society has only the building under its control is the usual ploy. There
are laws that the conveyance must be done within a stipulated period once the
society is formed but like many other rules, this time-frame is mostly
neglected and then misused. The proposed Bill should reaffirm or establish a
new time-frame within which the conveyance must be done by the developer.
Area
Measurement: The proposed Bill is not specific about the space measurement
requirement. Most developers mention carpet area in the agreement of sale but
in reality make the buyer pay enormous amounts for the super built-up or
saleable area. Developers include staircases, dry areas, open areas, flower
beds, common areas – areas that have not consumed Floor Space Index (FSI) – in
the flat area and extort payments.
For
example, a flat in an upcoming project on the out skirts of Pune mentioned
around 700 sq ft carpet area in the agreement with the buyer, but actually
demanded payment for 1,100 sq ft. The situation in Mumbai is particularly
worse. Here a flat of 650 sq ft carpet area was sold on payment for twice the
area.
The
proposed Bill expects every developer to declare the carpet area of the flat
but does not specifically restrict them from adding up other areas into it. The
developer has already charged a high rate for those extra amenities and common
facilities. Therefore, charging for them in the form of additional area should
be stopped on an all India level.
Payment
Schedule: The major reason for the helplessness of the flat buyer in case of
delay in possession is that the developer drafts the agreement in a manner that
he takes away almost 80-90 per cent of the payment on completion of the
skeleton of the structure. This is the stage, where many developers are
allegedly diverting the funds keeping the home buyers in lurch. No fund, no
work, no possession. The customer is very vulnerable as he cannot withdraw, he
cannot move court. He is at the mercy of the developer. The Bill should
consider this aspect and regulate the demand schedule as well. For example, at
the last stages of the construction, a developer can demand payment of 15 per
cent of the cost on receiving Occupation Certificate (OC) and the last 15 per
cent of the amount on possession.
One
Agreement: The Bill makes it compulsory for the developer to deposit 70 per
cent of the funds collected from the buyers of the particular project in an
escrow account so that the funds can be used to for the project in question.
There is a potential loophole here. Some developers may begin making two
agreements with the buyer, one for the flat and another for the amenities.
Indeed, the practice already exists to save stamp duty and other taxes. Now,
this will be used to split cash flow. As per the Bill, only sale agreement is a
must for all declaration. The Bill must ensure that only one agreement is made
for the entire transaction along with amenities etc.
INDUSTRY
VIEW
Anuj
Puri, chairman & country head, Jones Lang LaSalle India lists three
lacunae. First, unless further safeguards are in place, the mandatory
registration and licensing of projects may increase the scope for corruption.
Second, it is also not certain how a central regulatory body will address land
acquisition at the state level, with different laws in different states. Third,
streamlining of approval procedures into a single window system is necessary
for they are burdened with NOCs from multiple departments at the state and
central levels. Lalit Kumar Jain, national president, CREDAI said, “The
regulator should look into delays that are not in the hands of the developer
and should have control over all stake holders including approval authorities,
and financial institutions. We do not want licence Raj.”
The
proposed legislation makes it mandatory for all state governments to set up a
Real Estate Regulatory Authority in every state but difference in state laws
will create variations in enforcement of the proposed law. Only pro-active
state governments can remedy the situation. All eyes are on Maharashtra now.
Source: Financial Express
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