On July 30, 2015, a Rajya Sabha Select Committee tabled its Report on the Real Estate Bill 2013. The trouble with plunging into a clause-by-clause study of a Bill is that you get so caught up in the details that you don’t see the larger picture. You do not question the objectives. Nor ask how well the Bill meets them. Nor consider whether there might be better ways of achieving the desired ends.
The opening paragraph of the Bill declares its purpose: “…for regulation and promotion of the real estate sector and…to protect the interest of consumers…” Accepting these as adequate objectives, we find the Bill is weak in satisfying either of them. There can be little doubt that if we want effective management of the real estate sector, states will have to enact their own legislation, overriding the Central Bill which would otherwise prevail.
First, on the issue of scope, the Central Bill limits itself to projects on plots exceeding 1,000 sqm in area, or with more than 12 apartments (regardless of plot size). We have no idea what fraction of the total real estate market, countrywide, falls outside the scope of the Bill. The Rajya Sabha Select Committee (RSSC) did not ask this question, only saying that the area and the number of apartments specified should be reduced.
In principle, there should be no limits: if any developer expects pre-payments, in advance of delivery of the apartment, the project must be registered and fall under the ambit of the Bill. Otherwise, the transaction is adequately covered under the Transfer of Property Act.
Every country has developers. In most countries, properties do not come on the market until they are ready for occupation. So, it is real estate agents that are regulated, not developers—because it is agents who deal with customers, and they can make misrepresentations about a property, particularly in regard to not revealing something that should be revealed.
In Ontario (Canada) and Utah (USA), where pre-paid sales are allowed, apart from the initial down payment that goes to the developer, the remaining 80 per cent goes into a Trust account, managed by a Trustee (usually a Bank or other financial institution), with the total amount payable to the developer only after construction is complete and possession and clear title deeds are handed over. Since 2006, Dubai has had similar Trust accounts, with the difference that payments are made out of the Trust account by the Trustee proportionately as construction proceeds.
This has worked well in Dubai, with one glitch: because payouts happen as construction proceeds, the developer has not much interest in earning the
final 5 per cent: once he has received 95 per cent payment, completion and the arduous work of passing on title often get delayed
We should follow the Dubai model with one important difference. The Trustee should receive 80 per cent of the total payment from the customer, following the initial 20 per cent to the developer as a down payment. Thereafter, disbursement should be made commensurate with construction up to a limit of 40 per cent of the total. The last 40 per cent should be paid only on handing over possession and transfer of clear title.
If our purpose is to protect customers, the developer must have a real incentive to finish and hand over a project. Moreover, is this also not fair enough? The cost of land is usually far more than 40 per cent of total project cost. Is it not reasonable that this amount is paid out only when title passes?
The Bill suggests that the developer keep 70 per cent of the customer’s money in a separate account, to be used only towards construction. The RSSC wants this reduced to 50 per cent. But note that it is the developer who controls the account, not an independent Trustee. Why not?
Useful suggestions
The RSSC has made a number of useful suggestions. One such is the definition of carpet area of an apartment. The Maharashtra Bill, 2012 (which the Central Bill repeals) separated apartments’ carpet area from garages and servants quarters, which it called “independent areas”. The Central Bill lumps everything, including garages and servants’ quarters, even if not attached to the building, into the total carpet area. This is absurd.
Fortunately, the RSSC has recommended that the areas of balconies, verandahs and open-to-sky terraces and garages be separately set out and not confused with the carpet area of
the apartment.
There are a number of dissenting notes attached to the report: one by Kumari Selja, Shantaram Naik and M V Rajeev Gowda urges that there should be no minimum size for a plot nor a minimum number of apartments, saying the proposed limits would exclude the bulk of urban middle and lower income classes. Surely, this needs to be accepted, or at least studied in greater depth.
We must recognise that all new legislation opens up new possibilities of rent seeking. If we want the legislation, we have no option but to accept this, but then we must at least ensure that the legislation serves the desired ends. Does it really help consumers in the way it should? And how does it promote the real estate industry?
The Bill is particularly weak in indicating how the new Real Estate Regulatory Authority will advance the development of real estate. Instead of acting as a policeman, could it not play a more active role in stimulating development? Could it not, for instance, for a fee, take on the burden of securing the approvals projects need from particular approving bodies? With the fee diminishing if assured timelines are not met?
We certainly need more imaginative legislation than the current Bill displays. Perhaps individual states can make the necessary corrections.
(The writer is Chairman Emeritus, Shirish Patel & Associates, and former member, Indian Institute for Human Settlement)