‘Know Your Regulator’ Briefing Note: Real Estate Regulatory Authorities

12 November 2021
‘Know Your Regulator’ Briefing Note: Real Estate Regulatory Authorities

Setting the context for real estate regulation

The establishment of a statutory regulatory authority for real estate regulation is a relatively recent phenomenon. The Real Estate (Regulation and Development) Act, 2016 requires each state to establish a Real Estate Regulatory Authority. As of July 2021, 26 States and Union Territories have established their own regulatory authorities. States are also mandated to set up a Real Estate Appellate Tribunal by this Act. 

The real estate sector is subject to several types of regulation and control, such as building and planning regulations, environment law and labour law. Moreover, land itself is subject to a legal and administrative regime that controls its ownership and transfer.

However, as the real estate sector grew in the decades of the 2000s, there were concerns about the risky financial practices and misselling by promoter companies, the prevalence of black money and shady dealing, and the imbalance of market power between buyers and sellers. This gap was sought to be filled through the establishment of the real estate regulatory authorities.

Interestingly however, the regulation of the real estate sector in this way is not a widely prevalent global practice. The formulation of Indian real estate regulation seems to have been driven by the particularities of the Indian real estate sector.

In the Indian Centre-State scheme, housing, land and planning are largely managed by the State. The Authorities under this Act are established at the State level, with no centralized organizational hierarchy and no role for the Centre except to make law and rules. However, the fact that the law was to be made by the Centre was the subject of considerable debate in the run-up to its enactment. It was finally agreed that it would be in the general interest to have a uniform regulatory framework, which could be established and implemented at the State level. Moreover, the Centre’s role in the enactment of the law was justified on the ground that the law regulates contracts (between buyers and sellers), and the transfer of property, both of which are subjects of the Concurrent List on which the Centre and States share powers.

Scope and design of real estate regulation

The Act states that RERAs are to be established ‘for regulation and promotion’ of the real estate sector, to ensure that sales are carried out in an ‘efficient and transparent manner’, to ‘protect the interests of consumers’, and for speedy dispute resolution. This was re-stated by a former RERA chairperson as follows: (i) to ensure transparency through disclosures, (ii) timely completion of real estate projects, and (iii) rebuilding trust between buyers and sellers.[1]

The Act requires that all real estate projects (above <500 sq. meters land area or more than eight apartments) should be mandatorily registered with the Authority set up under the Act. The Act prohibits the advertisement and sale of real estate projects that are not registered. Registration includes details of the promoter or promoter company, and of all plans, approvals and clearances obtained for the project. The promoter is also required to declare the time in which it expects to complete the project. These details need to be updated periodically, and are maintained on a website available for public scrutiny.

The Act also provides for mandatory registration of real estate agents. By way of the Act, and through this registration process, many of the terminologies, legal obligations, commercial practices and contract conditions of real estate projects have been standardized.

Most significantly, it is mandated that 70 percent of the proceeds from project sales are to be maintained in a separate bank account of the promoter, and are to be used only for land and construction costs. Breach of this condition, or any of the other conditions can result in revocation of the project registration (after which further sales are barred) and freezing of the project bank account. The Authority can also issue other directions and take steps to protect the interests of allottees. Upon lapse or revocation of registration, there is an option for the Authority to pass directions for the remaining completion of the remaining work of the project through a state government agency, or by an association of the allottees.

The promoter is barred from making any changes in the sanctioned plan – such as by building additional sale units on the same property – without the consent of 2/3rd of allottees. Any structural defects or defects in quality, workmanship and services that emerge within a period of five years from handing over possession to allottees are to be rectified by the promoter. The promoter is also not allowed to transfer its majority stake in the project without the consent of 2/3rd of allottees and of the Authority.

In case a promoter fails to complete a project, or to complete it in accordance with the agreement or within the time specified, allottees have the option of withdrawing from the project and are entitled to be returned whatever money they have paid to the project, plus interest and compensation. Allottees who choose to remain invested in a delayed project are entitled to interest payments for every month of delay, until the time of handing over possession. Allottees are entitled to be compensated for any defects in the land title of the project.

As a corollary of its regulatory strategy, the Authority has a significant adjudicating role. Regulatory adjudication is initiated principally through compensation claims and complaints filed before it.  In the event of violations of any of the conditions specified in the Act, it can revoke registrations and also impose penalties and interest payments. The Act also mandates the establishment of an Appellate Tribunal.

The Authority however has a limited role in setting up rules and policy for the sector. Much of the work of norm-setting for the sector is already done under the Act. The Authority can make regulations on specified matters, and make recommendations to the state government, and provide an opinion on real estate law and policy when sought by the state government. Rule-making power in relation to the Act is vested with the State government. The Centre can also make rules under the Act. All rules and regulations made under the Act are to be laid before Parliament or State Legislature, as the case may be.

Issues and challenges

Many of the provisions of the Act are designed from a consumer protection perspective, with emphasis on compensation and on creating an exit option for buyers. However, regulators have found that these remedies could either not be enforced fully, if there were insufficient funds in the project, or would lead to the collapse of the project. This was prejudicial to the interests of both buyers and promoters as it leads to loss of value for all the parties concerned. For this reason, there seems to be broad consensus around the idea that promoters and sellers should be encouraged to come to a settlement and re-working of terms as far as possible. This is perhaps a practical solution, but quite a significant transformation in the role originally envisaged for the Authority. Notably, there is no structure for conciliation or mediation provided for in the Act, but nevertheless, many regulators have developed a framework to facilitate dispute settlement.

There is are also challenges around the enforcement of regulatory orders, and the extent to which wrongdoers can be brought to book through the provisions of the Act. This could be on account of the fact that RERA orders cannot be enforced beyond the project and promoter company, or that the promoter company’s lawyers can stretch out the legal process to such an extent as to reduce the salience of whatever remedies are awarded. The Act itself does not provide for a bar on registration of sales related to projects that contravene the provisions of the Act, but some RERA orders have asked registration departments not to register sales. This might help address some of these issues, but this issue is a subject of considerable debate at present.

Related to this is the question of choice of forum, and accessibility of different legal options. RERA covers a subject matter that was previously covered by various other agencies: parties aggrieved of breach of contract, cheating, misselling could approach the regular law courts, and they could have also approached the Consumer Courts or Competition Commission of India. Promoter companies are also sometimes the subject of insolvency proceedings, where buyers are recognized as creditors. For an individual home buyer, it might be difficult to know where to go. And moreover, the costs of pursuing a claim through RERA could be quite high.

There is also a broader question about whether regulation can, or needs to respond to the external environment. Projects might be delayed because of delays in approvals to be given by other agencies. They might also be delayed because of external market conditions that were unexpected, but do not fit the definition of a force majeure event. To what extent are these factors reflected in the everyday work, and in norms and practices developed by the RERAs?


[1] ‘Establishing Regulatory Capacity for the Real Estate Sector: The MahaRERA Experience’, Talk organised by the State Capacity Initiative on 31 Dec 2019, Centre for Policy Research. Available at: https://www.cprindia.org/news/establishing-regulatory-capacity-real-estate-sector-maharera-experience

 

The views shared belong to individual faculty and researchers and do not represent an institutional stance on the issue.