Realty bill needs reality check

Realty bill needs reality check

Realty bill needs reality check

The Real Estate Bill, 2013, was in the Rajya Sabha just months ahead of the 2014 Lok Sabha elections, which led to a change in the government.

The new NDA government has suggested several amendments and re-introduced the Bill in the Rajya Sabha.  The changes seem significant enough that the Bill will require fresh Lok Sabha approval. Whether it does or not, let us look at the original Bill as well as the suggested changes and see what they portend.

Real estate is an industry like any other, but so far, it has been without regulation.
No industry likes regulation, least of all one that has grown so massively without it. So, we should expect that the industry will try to influence the construction of the regulatory framework in a way that favours itself. That is natural. But we should also expect that the regulation serves the ostensible purpose for which it is set up, that is, to protect customers and their interests while not over-shackling the industry or constraining its energy.
It may be worthwhile to start off by asking how other countries do this, and quite possibly what we could learn from them as we draft our own legislation.

Most countries regulate real estate agents and the transparency of their activities. Misrepresentation is punished. They do not regulate developers, because the practice in those countries is that a property comes on the market only when it is finished and ready for occupation. The marketing and sales are then done through agents and brokers (or the property developer’s own in-house team, which then must go through the real estate agent registration process).

In India, the practice has been different. We buy what we might call “pre-paid units”, that is, our payments are made before the product is ready. Dubai has a similar practice, and calls these “off-plan units”. Dubai’s 2007 legislation requires registration of both developers and real estate agents. For each developer project it requires the appointment of a trustee, normally a Bank or other financial institution. The developer takes a down payment from the buyer, normally about 20 per cent, but all payments thereafter are made into the Trust account, from which the trustee disburses to the developer as construction proceeds, with the trustee verifying progress. They have found that this works well, except that because the last installment of payment is so small, many developers delay the final handing over of a project. Ontario (Canada) and Utah (USA) have similar Trust accounts, where the buyer’s funding accumulates and is handed over by the trustee only on handing over possession with clear title documents.
We could have something similar to Dubai, except that payments could be made by the trustee as construction proceeds, with a good chunk (say 40 per cent) held over until possession is handed over and transfer of title formalities are completed. Since construction costs are normally much less than half of the total price, this would mean that some fraction of the land cost in the deal is not paid until the transfer of title. This seems reasonable enough.
Instead of such a foolproof arrangement, what the earlier Bill proposed was that all payments would be made to the developer, but he would be required to put 70 per cent of the amount received by him into a separate account with disbursements to be made by him from that account only towards construction costs on the project.

This was absurd, because in most projects, construction cost is far less than 70 per cent of the price. The latest amendment reduces this figure to 50 per cent, but it still leaves control of the account with the developer, not with a trustee, who would independently verify the progress and authorise the payment. And of course, it means that the other 50 per cent, which the developer does not have to put into a separate account, is with him to spend as he likes, independently of the progress on the project.

Other suggested changes also do not promise much by way of protecting the customer’s interests. The assumption seems to be that by requiring registration of projects and putting everything on a website all problems will be somehow automatically resolved. Customers will be impressed by the provisions for imprisonment of builders, but another way of looking at this is that imprisonment is hardly ever likely, and it does enormously broaden the scope for corruption while leaving the fundamental problems untouched.

Carpet area issue

One such problem in the earlier bill was the definition of carpet area of an apartment. The Maharashtra Bill, 2012 (which this 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. Such obfuscation can surely not help customers.

Registration is not required for projects smaller than 1,000 sqm, or 12 apartments (flats). The Standing Committee of Parliament recommended that this would leave out a large number of projects, and suggested reducing it to 100 sqm and 3 apartments(flats). This has been ignored.

Wherever the earlier Bill had spoken of compensation, this was assumed to be from developers, in addition to interest payments. One of the significant suggested new changes is that compensation can be recovered from buyers, in addition to interest payments. How buyers would be liable to pay compensation is not clear, but the suggested changes now open up this possibility.

One of the worst new changes is that where the earlier Bill had suggested that the chairman and members of the Real Estate Regulatory Authority would be appointed by the government on the recommendations of a selection committee “consisting of such persons and in such manner as may be prescribed…”, the change is that the selection committee “consisting of the Chief Justice of the High Court or his nominee, the Secretary of the Department handling housing and the Law Secretary…”. This ropes in the judiciary into executive actions, and presumably makes such actions no longer judicially challengeable. One wonders whether this kind of amendment will really go through and be accepted by our courts.

All in all, while some of NDA’s changes are practical and sensible, it leans as much if not more towards developers as the earlier draft. But neither draft seriously addresses the needs of customers in the way it should, and in the way other countries do it.

(The writer is Chairman Emeritus, Shirish Patel & Associates, and former member,
Indian Institute for Human Settlements)

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