1. RERA: Homebuyers to get 10% penalty for delay in projects, but is that enough?

RERA: Homebuyers to get 10% penalty for delay in projects, but is that enough?

In a bid to protect the interest of homebuyers as well as weed out non-serious and unscrupulous players from the market, the Real Estate (Regulation and Development) Act, 2016 (RERA) has proposed heavy penalties on builders who will henceforth either delay their projects or won't comply with RERA norms.

By: | Published: May 8, 2017 2:59 PM
There are a number of clauses in the Act that aims toward protecting the buyer’s interest and envisage a transparent system in the real estate sector.

In a bid to protect the interest of homebuyers as well as weed out non-serious and unscrupulous players from the market, the Real Estate (Regulation and Development) Act, 2016 (RERA) has proposed heavy penalties on builders who will henceforth either delay their projects or won’t comply with RERA norms.

For instance, RERA recommends imprisonment for a term which may extend up to three years, or fine which may extend up to 10% of the estimated cost of the real estate project, or both, in case of non-compliance with the Act. Moreover, in case of any structural defects arising within five years of handing over the possession of project to buyers, developers will be liable to rectify such defects without further charge.

If a project is delayed, which has become the sector norm today, developers are required to pay 10% interest to the buyers on the invested amount as against the Rs 5 to Rs 10 per sq feet penalty contracted in the sales agreement. It may be noted that a majority of developers are currently charging 12% to 18% – going up to 36% in some cases – interest from buyers for any delay in payment, while they themselves usually pay in the range of Rs 5 to Rs 10 per sq ft even in case of a luxurious project, which is not a fair deal to buyers.

However, after coming into force, RERA has raised the expectations of buyers multifold. In fact, the buyers who suffered from the delay in delivery of the projects or the delivered product not being as promised at the time of booking in terms of quality, specification, and carpet area etc. are looking towards this Act with high hopes.

“There are a number of clauses in the Act that aims toward protecting the buyer’s interest and envisage a transparent system in the real estate sector. For instance, at least 70% of the amount realized from the buyers needs to be maintained in the particular project account. There is also requirement to establish real estate appellate tribunals that need to fast track dispute resolution, as there is a provision that Appellate Tribunals be required to adjudicate cases in 60 days. Even the buyers can approach consumer courts available at the district level,” says Surabhi Arora, Senior Associate Director, Research, Colliers International India.

So far as project delays are concerned, they have been one of the biggest problems plaguing the realty sector. Experts say that delays faced by buyers, when it comes to getting possession of property, have gradually eroded the trust factor between them and developers. However, now this trust is likely to be restored with the help of RERA.

“In the pre-RERA era, developers could get away with delays in giving possession, which sometimes spanned over many years. But RERA will put a stop to this. RERA means that heavy penalties will now be imposed on the builders who delay their projects. They will have to pay the same interest as the EMI being paid by buyers. What this means is that unfair practices by some developers will be a thing of the past. Only genuine and reputed builders will stay in the sector. Thus, RERA will go a long way in restoring buyer confidence in the real estate sector,” says Pankaj Bansal, Director, M3M Group.

Ssumit Berry, MD, BDI Group, says, “The levying of 10% interest as penalty for delay in projects may sound a harsh move, but in reality, it will expedite the delivery of projects. Over the past few years, real estate sector has been marred by delay in delivery of projects. The move is expected to overcome this hindrance.”

Some industry experts say that a penalty in the form of per sq ft – as is currently the norm – is not a fair way of assessing opportunity lost as in this way all the projects are valued at the same rate of Rs 5 to 10 per sq ft. Therefore, a percentage return – as proposed by RERA – is definitely better for homebuyers and a fair way of calculating the penalty.

However, “end-users and buyers generally look for the completion of the project rather than taking penalty. Recently, the Supreme Court directed a few developers to deposit a certain amount as they had failed to hand over apartments that were originally scheduled to be delivered years ago. Similarly, The National Consumer Disputes Redressal Commission (NCDRC) has also asked developers to refund money with interest to buyers who had filed a case against developers. However, the problem will arise where despite the legal obligation, several developers expressed their inability to refund money to the homebuyers,” Arora.

According to her, specifics are lacking regarding which government authority will undertake the remaining and what will happen to the rights of banks, NBFCs or private equity funds that may have funded the project. The options available in case of revocation of licence are the development of the remaining project by buyers’ associations; bidding out completion of the remaining project to a competent agency (private or government) in lieu of remaining payment; or completion of the project by a competent government authority. On revocation of the registration, if the project needs to be developed by the authority, that itself raises a question whether the authority has capability to safeguard interests of the buyer in terms of timelines and quality of construction.

“In the international context, for example, Australia has set a clear mandate to combat such a situation through its ‘Sunset Clause.’ The sunset clause dictates that when buyers opt for properties that have not been built yet, either the buyer or the seller is allowed to rescind the sale if the property is not completed at a stipulated time. Developers have to express the same in writing 28 days prior to the sunset date and specify detailed reasons regarding the cause of delay and the reason they wish to rescind. If the buyer is not in agreement with the rescission, the matter is resolved via court order,” says Arora.

Some developers also say that RERA will definitely lead to positive sentiments in buyers, but as far as penalties are concerned, they have to be balanced for both buyers and developers. “Also, there should be a mechanism to analyse the cause of delay – whether it’s solely the developer or various external factors which are beyond the control of developers,” says Anupam Varshney, Head-Sales and Marketing, Vatika Ltd.

Thus, although the Act is likely to change the way the real estate sector operates and there will be definite improvement in terms of accountability, disclosure norms, investor protection, and e-governance, however, there are some issues which need to be resolved. Also, it will take some time for the real estate players to implement and follow the new norms set up the state government. Experts say that while it is important that developers should abide by all the rules and regulation of RERA, it is the also buyers’ responsibility to opt for RERA-compliant projects and agents.

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