The RERA Act – An Explainer

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By Bradley Dunseith

Effective May 1, 2017, the Real Estate (Regulation and Development) Act, 2016 (RERA) will regulate all land development bodies (public and private) that develop real estate for the general public. This includes both residential and commercial real estate.

RERA is an ambitious attempt by India’s federal government to regulate the country’s real estate sector – a sector notorious for its corruption and lack of transparency. The maximum penalties for non-compliance under the Act range from a fine equivalent to ten percent of the property in question or up to three years of imprisonment.

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In order to enforce the rules of the Act, RERA aims to establish a Regulatory Authority (RA) in each state. This is because land is a state-subject in India and regulations impacting land come under the jurisdiction of state governments. Thus, individual states will have the final authority to interpret and implement RERA.

To ensure the Act is effectively not diluted, India’s federal government has drafted the model rules for states and Union Territories (UT), which each state can adapt from when developing their own version of RERA.

In this article, we highlight some of RERA’s major regulations and discuss its implications for key stakeholders in the real estate sector – buyers, developers, and real estate agents.

Scope of RERA

All building projects with an area of more than 500 square meters or more than eight apartments are subject to the provisions of RERA. RERA prohibits all firms who fall into this category to sell or even promote a building until the developer (alternatively referred to as the promoter) registers their building with the local state’s Regulatory Authority (RA).

RERA provisions also apply to the developers of ongoing and under-construction projects, who must register with their state’s RA by July 31, 2017.

The registration is especially important for firms whose ongoing projects are without a completion certificate. A completion certificate asserts that a building is compliant with all the safety regulations outlined in the National Building Code of India, 2016 and is issued by municipal authorities.

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Registering with RERA

Building developers

To register, a real estate firm must provide their state RA with the following information:

  • Name and contact information of the building developer;
  • Description of projects launched by the firm in the last five years (including their current status);
  • All land approval forms;
  • Number of homes and types of homes for sale within the given project;
  • Exact size and layout of each home within the given project;
  • Names and addresses of all affiliated contractors, real estate agents, architects, and structural engineers; and
  • Any police complaints currently against the building developer.

Upon the submission of all these documents, the RA will have 30 days to approve or reject the firm’s application. In the case of approval, the RA will provide the firm with a unique login ID and password to make an account on the RA’s website.

Subsequently, RERA rules require the developer to upload a similar set of documentation onto the RA’s website. This information will be available to the public and will additionally include:

  • Payment schedules;
  • Schedule of completion; and
  • Quarterly updates on the project’s status.   

Firms must register each real estate project individually. If, for example, a developer plans on releasing a housing project in phases, then each phase must be individually registered with the state’s RA.

Real estate agents

RERA also requires real estate agents – colloquially known as brokers – to register with their state RA. Real estate agents will have to register under each specific project they are authorized to sell and will, subsequently, have to provide their unique registration number for every new sale.

RERA mandates that agents document all sales they make; agents who are caught spreading misinformation to homebuyers can face fines starting at US$150 (Rs 10,000) or even a year in jail time.

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Transparency and accountability in India’s real estate sector

Indian home and commercial estate buyers have long struggled to discern the reliability of building developer’s promises. Many developers exaggerate the features of their properties or advertise unrealistic move-in timelines when buildings are still under construction.

RERA provisions ensure transparency and accountability by making critical and updated information easily accessible to buyers, which minimizes their risk of being misled or cheated – by both developers and real estate agents.

RERA regulations also direct developers to include their RERA registration numbers on any material used to advertise buildings; this must not contradict information uploaded to their RA webpage.

Furthermore, RERA mandates that developers can sell a home only in ‘carpet size’. Carpet size refers to the actual size of a given apartment, excluding exterior walls, areas under service shafts, and balconies. Previously, developers inflated the dimensions of advertised property by including spaces inaccessible to actual buyers.

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Regulating construction time

In the past, when a homebuyer made a payment for a new home, developers would immediately invest it into other projects. This practice led to unreasonably long construction delays, and homebuyers were given no assurance that their money was used for the construction of their property.

The RERA curbs this practice by requiring building developers to deposit a minimum of 70 percent of all funds paid for the completion of a specific building project into a state-supervised bank account, which firms can only use to cover the unique costs of that building project.

Additionally, RERA caps the maximum amount that buyers can pay building firms – to ten percent of the overall cost – for the possession of their property. Previously, developers were free to demand huge payments without having built anything.

Further, any changes to the building’s layout plan from what the firm has documented on their state’s RA website has to be agreed upon by a majority of the future home owners. If the developer fails to meet the timeline stated on the website, then they are obliged to pay interest to the homebuyers.

Building developers will also be required to fix any defect in their buildings free of cost within the first five years of buyers receiving their homes.

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Judicial recourse

RERA mandates that each state establish its own Appellate Tribunal that will oversee real estate related grievances. Earlier, India’s courts did not have a separate route or judicial mechanism for real estate disputes, meaning that a case against a developer could drag on for years.

RERA’s implications for homebuyers

The Real Estate Act (RERA), 2016 is decidedly pro-buyer legislation. It introduces much needed accountability in an industry that is plagued with corruption and outlines serious consequences if building developers default on their promises to buyers.

As building developers recalibrate their operations to align with RERA rules, homebuyers can anticipate an increase in property prices. Developers will almost certainly transfer their new compliance-related costs to homebuyers. However, the long term benefits of buying a home in a transparent environment and as per RERA standards should offset this initial cost increase for buyers.

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RERA: Challenges in implementation

India’s real estate sector – one of the most popular avenues through which domestic money laundering is facilitated – is facing a sharp increase in government scrutiny and compliance enforcement.

Small and mid-sized developers will face difficulty in suddenly conforming to these new regulations. As more states enact real estate legislation under RERA, the number of housing projects launched may reduce.

The federal Ministry of Housing has given building developers until July 31 to register existing real estate projects with their state RAs. However, only nine states and six UTs have enacted their own rules of implementation under RERA, raising concerns that building developers and real estate agents will not have the ability to meet the Ministry of Housing’s deadline.

Homebuyer rights groups have already criticized the governments of Madhya Pradesh and Punjab for watering down their state versions of RERA and providing too much leeway to developers. Similarly, many developers and real estate agents themselves struggle to understand how to properly comply with the Act.  

Ultimately, the defining strength of RERA will be contingent on state interpretation and enforcement.

 

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India Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Eurasia, including ASEAN, China, Indonesia, Russia, the Silk Road, & Vietnam. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.
Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout India and the Asian region. We maintain offices in Delhi and Mumbai and throughout China, South-East Asia, India, and Russia. For assistance with India investment issues or into Asia overall, please contact us at india@dezshira.com or visit us at www.dezshira.com.

 

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