Karnataka realty law ill-conceived, impractical, disruptive

With great reluctance, the Karna­taka government finally notified the Karnataka Real Estate Act (KREA) on July 10, 2017. This follows the central Act which was passed in May 2016, to be implemented by all the states by July 2017, as land use comes under the states' domain.

The Karnataka government, on account of the powerful builders’ lobby, had given an inkling to exempt the ongoing residential, commercial and plotted development projects which have proper commencement certificates from the ambit of Real Estate (Development and Regulation) Act (Rera).

However, the notification on KREA has virtually stumped everyone as the government has brought “all projects which are under construction” and which have not received the completion certificates under the Act. 

Projects with land size of 500 sq m (5,382 sq ft) or eight apartments come under Rera, need to be compulsorily registered with the State Regulatory Authority (SRA). The rules have come into force from the date of publication in the gazette.

There are a few exceptions. Development works completed as per the approved plan or Rera and duly certified by the competent agency and sale/lease deeds of 60% of the apartments/houses/plots which have been duly registered at the sub-registrar’s office and transactions reflected in the encumbrance certificates (EC) are excluded. 

All development works completed as per the Act and certified by the competent authority, and applications sought for issuance of completion certificate/occupancy certificate with the government are out of Rera.

Apartments where common areas and facilities have been handed over to the ‘registered associations’ consisting of majority of the allottees and layouts under plotted development wherein civic amenities sites, streets and other services have been handed over to the local/planning authority for maintenance, are also exempt from Rera.

The KREA appears to have been cleared by the government in a great hurry to comply with the deadline of July 31. The rules are ill-conceived, impractical and the entire real estate industry will get disrupted. Construction activity will slow down the real estate industry which is yet to recover from the “demonetisation dents.” The serious lacunae in the Act affect the 3 Bs – builders, bankers and buyers. Here is how:

1) The Act envisages 70% of the receipt of sale proceeds from the buyers to be deposited in a designated Rera bank escrow account to be utilised only for the designated project; it allows the balance 30% for the use of the builder.

Though the intent is good, the Act has overlooked the interests of the bankers and the housing finance companies which have lent huge amounts for ongoing projects insisting a “must” condition of an escrow for routing all the builder sale receipts with a ‘sharing arrangement.’

With Rera, the state escrow gets precedence over lenders’ escrow, thus putting bankers in jeopardy. The process of the builder approaching the SRA with a chartered accountant’s certificate regarding utilisation of funds, engineer and architect’s certificate for release of money from Rera escrow to bankers escrow, is time consuming and leads to harassment.

Instead, for the bank-funded Rera projects, the responsibility should have been fixed on the lenders to ensure Rera compliances with a ‘fund utilisation’ certificate  or a pari passu agreement among the bankers, builder and the SRA.

This would have ensured speedy process, protection of interests of buyers and reduced the humongous load on the SRA which has to now monitor nearly 3,000 projects across Karnataka, out of which 2,000 are in Bengaluru itself. The bankers and housing finance companies (HFCs) have already developed cold feet and become jittery, as lent money will now be received with the ‘blessings’ of SRA, in the new dispensation.

2) In the purchase of apartments/sites/ complexes, the central Act stipulates execu­tion of registered agreement to sale (ATS) in respect of units booked wherein more th­an 10% of sale consideration is received and where there is no subsequent creation of lien/bank mortgage over such booked units.
This is terrible and has triple whammy effect. The builder cannot raise loans once ATS is executed for just 10% receipt of money; banks lending to the core sector gets impacted; and, the fate of the builder/ banker is in suspended animation in the scenario of the ‘10% buyer’ absconds or stops paying balance amounts.

Lurking fear

The KREA has not explicitly dealt on key rules pertaining to ATS. There is a lurking fear that the “clauses” pertaining to compensation to be paid to purchasers for delay, defects and defaults by the builders in handing over of possession of flats/projects has got diluted in the new avatar of state Rera.

3) The bankers and HFCs are burning midnight oil to salvage themselves from the credit and asset risks that they are suddenly exposed to. The bankers who are already saddled with serious non-performing asset or bad loan issues to the tune of Rs 12 lakh crore, have pressed the panic button.

They are approaching their builder clients demanding additional collaterals like residential bungalows, immovable assets, escrowing of other receivables which are not coming under Rera. In the worst scenario, bankers are contemplating to even recall the loans which can lead to chaos.

4) The builders are stuck between the devil and the deep sea. Developers will face liquidity crunch, huge compliance stipulations of SRA from uploading the project approvals with deadline of handing over of finished flats on  Rera website with penal provision up to 10% of the estimated/apartment cost to compound the punishment of imprisonment for violations.

5) It is unfortunate that the Act excludes government authorities (by painting all builders as bad) who are the sanctioning authority building plans, title clearances, change of land use from agriculture to residential/commercial and various  licences.

(The writer is a Bengaluru-based economist and banker)