Srishti Ojha and Nupur T Malde advise lenders about compliance obligations for real estate developers
The Real Estate (Regulation and Development) Act, 2016 (RERA), is enacted primarily to protect consumer interest and promote overall transparency within the real estate sector. RERA focuses on stimulating the sector by ensuring accountability and financial discipline by real estate developers. Lenders are important stakeholders in the real estate sector and this article provides a quick overview of RERA for lenders with a focus on documentation and diligence requirements.
While RERA does not create compliance obligations for lenders, they need to be conscious of RERA-related liability as non-compliance by borrowers (real estate developers) can jeopardize the overall financing transaction. Lenders may consider entering into financing transactions while considering the following RERA-related aspects.
Legal due diligence: RERA requires real estate developers to register each new project with the state-level real estate regulatory authority (for example, Maharashtra has the Maharashtra Real Estate Regulatory Authority). Without this, RERA developers cannot market, advertise, book or sell any new project. Developers must file specified project-related details that are uploaded to the official RERA website for public view. This declaration by the developers provides a critical preliminary review for lenders in their pre-funding legal due diligence because the public disclosures are highly material to the project as this is in effect a government-filed declaration of title, encumbrances on land and project approvals.
Representations, warranties and covenants: Post-RERA, financing documents should include certain specific representations and warranties. Real estate developers are required to maintain certain ongoing compliances. For example, RERA requires that (i) sanction and lay-out plans cannot be modified by the developer without an approval by two-thirds of the allotees/buyers; (ii) consumer complaints have to be timely addressed; (iii) developers have to adhere to timelines for completion of the project as filed with RERA; (iv) developers are required to maintain separate project accounts and 70% of funds realized from buyers are to be deposited in a separate RERA account and shall be utilized for construction and land costs; and (v) insurance is required to be maintained relating to title.
Financing documentation should have ongoing covenants requiring developers to adhere to all RERA norms and the failure to do so should trigger a cross-default mechanism. Further, financing documentation should include lender rights to be promptly informed of a RERA violation, as well of any communications with RERA including receipt of customer complaints. The authorities can act on consumer complaints and after due process pass orders against developers.
Escrow management: Until the occupation certificate or completion certificate of all buildings/wings as per sanctioned plan of an ongoing real estate project is received. Rules framed by the Maharashtra RERA authority state that principal and interest to lenders shall only be made from the RERA account. Lenders should ensure that this separate RERA account has been formed prior to the funding and that this account will be utilized to make payments and repayments to the lender. Lenders should work closely with developers and escrow agents to put appropriate covenants and mechanisms in place.
Affirmative rights: Financing documents should strictly stipulate that in case of enforcement of security relating to the project, no consent of the allotees/buyers is required after a notification by Maharashtra Real Estate Regulatory Authority dated 8 November 2017. RERA still requires consent of two-thirds of allotees/buyers for transfer of promoter rights and amalgamation, merger or demerger in the project and therefore the financing documents should ensure that lender’s consent is obtained prior to the developer seeking consent of the buyers/allotees.
The lender under RERA has no clear statutory right of consent for such corporate actions (unlike buyers/allottees) and so requires specific consent rights in the financing documentation.
RERA has changed the legal landscape of the industry from fairly free play to highly consumer-centric. Lenders should ensure solid documentation to reap benefits from RERA and also ensure that this new regime does not inadvertently compromise their rights.