RERA and its Grey Areas

Yesterday I had a chance to attend an interactive Q&A session where IAS Officer Kapil Mohan offered clarifications on RERA. The event was organized by NAREDCO Karnataka and held at the premises of the Karnataka State Billiards Association. It was attended mostly by real estate developers but some independent home buyers like me were also present. Personally, I got to know a number of details about RERA. In this blog post, I would like to share some of the things discussed at the event. Since I’m no expert in this matter, please comment below with your own interpretations and clarifications.

The Real Estate (Regulation & Development) Act was formulated at the Center. Some states have started implementing it. In Karnataka, it was rolled out last month. The main purpose of RERA is to bring transparency and accountability for ongoing projects. This means plan deviations, constructing without clearances, selling without registering the property with RERA, construction delays, pre-launch offers, collecting huge sums from buyers even before starting construction, diverting money from one project to another… all these are now punishable under RERA. Thanks to RERA, it’s expected that the real estate market will come to the aid of a hapless buyer.

In Karnataka, about 1200 projects have already been registered under RERA. The RERA website is operational. Complaints or enquiries can be submitted online. Kapil Mohan mentioned that some projects have just been served notices for non-compliance. Thus, the regulatory aspect of RERA has already kicked in. It’s important to note that projects must be registered, not land owners or promoters.

There are three parts to RERA:

  1. The Act: Specified by the Central Government, this has the final word in case there are conflicts with Rules and Regulations.
  2. The Rules: Specified by the State Governments, these elaborate the Act for state-specific requirements.
  3. The Regulations: These are procedural in nature and describe how RERA will be implemented on the ground.

The entire Act can be studied online but it’s only lawyers who have the expertise to explain it. Advocate Arvind Raghavan spoke at length about many grey areas. Later, Kapil Mohan commented that it’s intentional not to explain everything in the Act. Otherwise, RERA would be a book as thick as the Income Tax Act. Grey areas will be addressed by the judicial courts on a case-by-case basis. In fact, law is not just an Act but also judgements that set precedence. Nonetheless, all real estate folks are interested in these grey areas for obvious reasons. Kapil Mohan and advocates on the panel discussed the following:

  1. The word “promoter” is not properly defined in the Act. While it may be common knowledge what the terms “land owner”, “builder”, “developer” and “promoter” mean, a clear definition would have been useful. I believe this point was brought out because in Bangalore many projects are Joint Development projects. In some cases, land owners may also promote the projects.
  2. Joint Development (JD) is in itself a wrong phrase. Actually, it’s nothing more than a barter: land in exchange for flats. RERA has not looked into JD in great detail but Kapil Mohan commented that a separate section will be added for JD. In particular, even the land owner can be treated as a promoter if he/she engages in acts of developing or promoting the project. If there are multiple promoters, each one will have a separate account with RERA.
  3. Sale of carpet area is one of the areas where RERA diverges from current practices. Promoters can only sell by carpet area, not super built-up area. No doubt developers will revise the sale price to include all costs. What it means for the buyer is that common areas, private balconies, private terraces and even covered car parks cannot be registered to the buyer. The only saleable area is carpet area. Common areas are conveyed to the Association. This is largely inspired by practices in Mumbai where Associations purchased land, developed it and allotted to its members. Some questions remain. When common areas are conveyed to Association, will stamp duty be charged? What happens if some flats are unsold when this happens?
  4. Following from the point on carpet area, the concept of undivided share of land is also affected. Since land is now owned by the Association, it will not be reflected in the sale deeds of individual flats. How does the buyer account for this for the purpose of taxation?
  5. A promoter can start advertising the project only after obtaining a Commencement Certificate from RERA. Kapil Mohan mentioned that in the interim period a plan sanction may be enough.
  6. A promoter cannot accept more than 10% of sale value from buyer unless a sale agreement is registered but the latter is not really a requirement under the Registration Act. In general, I’m sure there will be other points of conflict between RERA and existing Acts. It’s likely that these conflicts will be resolved in time to come. There’s a proposal to revise Karnataka Apartment Ownership Act as well in light of RERA.
  7. There was some confusion between Completion Certificate and Occupancy Certificate but this was clarified. When the construction is complete, a Completion Certificate is issued. When utilities are also provided (water, power, sewage), an Occupancy Certificate is issued. RERA applies for ongoing projects. This means that projects that have already obtained Completion Certificates before RERA kicked in, are exempted.
  8. RERA will not apply to projects that are already 60% registered and all construction is complete. Some argued that this 60% rule is in fact diluting the Act. There’s no relief for the remaining 40% of buyers whose flats have not been registered and the builder is creating trouble.
  9. A promoter is liable for defects for up to five years after handover of the project. Defects can be structural or due to workmanship. The scope of these defects is not clear but it would be interpreted on a case-by-case basis.
  10. On the topic of title insurance, it was said that this is next to impossible. No title can be traced back to the very beginning. There are bound to be some things missing. There’s no foolproof system today. This is certainly not a comforting thing for buyers. Perhaps, technology such as Blockchain can help but this is some time in the future since multiple government systems have to be integrated first.

On the whole, I believe RERA is pro-buyer and rightly so. Buyers are usually the victims and real estate developers abuse their power. In fact, many real estate developers are not experts in the business. Land owners, contractors, brokers or anyone else with powerful backing have become developers and promoters by chance. Their activities need to be regulated. This is what RERA intends to do. Developers can no longer wantonly deviate from plans under the excuse that these will be regularized when akrama-sakrama comes into effect. Private developers are covered but so are public ones such as KHB and BDA.

Given that most folks at the meeting were promoters, some aspects of RERA did not sit well with them. Why should a broker be charged a penalty of 5% if the developer stops construction or goes bankrupt? This implies that brokers should become more responsible. They have to do due diligence before marketing a project. Likewise, any voluntary consumer association can raise a complaint against a promoter even though the association has nothing to do with the particular project. I think this is important because the promoter may engage in unethical practices in multiple projects and buyers usually become aware of them when it’s too late. Someone who has had a bad experience in one project can use this section of the Act to warn prospective buyers in other ongoing projects.

Of course, complexity increases when projects are part-commercial and part-residential. Some aspects of RERA have to be updated in light of GST. For example, a model agreement is being prepared but the current drafts still refer to VAT and Service Tax. These will need to be updated. Policies are easy to make but can we implement them effectively? Procedures will need to be clear and simple. Single-window processing may help. Online submissions and tracking will help. RERA will weed out small promoters, particularly those who are cash-strapped and who engage in unethical practices.