Regulating the unregulated: real estate at the crossroads

By Deepti Mohan, Vidhii Partners
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Following the global meltdown, the real estate sector in India has bounced back with renewed energy and vigour. There is potential for substantial growth and estimates show that the real estate sector contributes significantly to India’s GDP. However, a recent survey by KPMG shows that the real estate industry in India is perceived to be most prone to corruption. This is unsurprising as the sector is largely unregulated and unorganized and is dominated by small players and family run businesses with only a regional presence.

Need for a market regulator

Faced with problems of poor construction, delays, departure from original plans, misleading advertisements and lack of maintenance, Indian consumers have often felt short-changed. With legal recourse being costly and time-consuming, investors are often left high and dry. Thus the long felt need for a market regulator.

Deepti Mohan Partner Vidhii Partners
Deepti Mohan
Partner
Vidhii Partners

State enactments

Development and construction activities in India are governed by state and municipal laws, leading to inconsistent practices across the country. States like Maharashtra, Karnataka and West Bengal have enacted laws to regulate the construction and sale of flats by promoters and developers, namely The Maharashtra Ownership Flat (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963; The Karnataka Ownership Flat (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1972; and The West Bengal Building (Regulation of Promotion of Construction and Transfer by Promoters) Act, 1993, respectively.

These laws lay down the liabilities and responsibilities of a promoter or developer while selling or transferring a flat, the disclosures to be made before or at the time of sale, and the penalties in cases of violation. However, even under these enactments, the enforcement is left to the civil courts and no separate market regulator has been contemplated. Further, not all states have enacted similar legislation.

The Regulatory Bill

In 2009, the Ministry of Housing and Urban Poverty Alleviation proposed a Model Real Estate (Regulation of Development) Act, also known as the Real Estate Regulatory Bill. The bill provides for compulsory registration of all real estate projects and requires promoters to furnish bank guarantees along with all project-related documents and permissions. In addition, the promoter is required to upload all details of the project onto a website hosted by the regulatory authority. The bill also lays down the form of the agreement to be entered with the intending purchaser. More importantly, the bill establishes a regulatory authority and an appellate tribunal to enforce compliance and adjudicate upon any disputes to the exclusion of civil courts. The bill, when passed, would be adopted for Delhi only, while other states would have to individually adopt the act.

However, the real estate industry has been critical of the bill. They argue that it favours purchasers and fails to address key issues, for example single window approval mechanism and accountability of stakeholders such as government bodies.

Self-regulation

In the absence of a timeframe for passing the bill, the real estate industry, in a step towards self-regulation, has taken upon itself to promote best practices. In April, the Confederation of Real Estate Developers’ Associations of India (CREDAI), which represents over 5,000 developers through 20 member associations, announced it would make its Code of Conduct mandatory for all members. Any transgression of the code could result in termination of membership.

The code requires developers to start booking only after obtaining sanctioned plans and other clearances and to immediately enter into proper sale agreements on receipt of money or deposits from the purchaser. Further, the units for sale need to be offered on the basis of either carpet or saleable area and all sale agreements should contain a floor plan. The agreement must also stipulate a time frame for completion of construction and conditions for payment of compensation in cases of delay. In addition, the member associations are also required to form consumer redressal forums to address consumer grievances.

While it is yet to be seen how far the purchaser will be successful in enforcing the Code of Conduct, it sends out a message to consumers and private investors that the industry is serious about creating a transparent, accountable and conducive real estate market.

Way forward

The industry, government and consumers all agree that sound real estate practices and a strong regulatory framework would go a long way to facilitate real estate development. The establishment of a real estate regulator is long overdue and its presence will not only inspire consumer confidence, but would also lend credibility to the sector.

Deepti Mohan is a partner of Vidhii Partners and can be reached at [email protected]

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