Crisis in real estate sector: Challenges and changes required

Published: May 28, 2019 1:24:13 PM

Here is a look at the changes the new government should make in the law in view of the issues that the real estate sector is facing due to insolvency.

real estate, Crisis in real estate sector, insolvency, Challenges, changes, RERA, IBC, homebuyers, developersThe amendment in IBC provides no clarification on the status of homebuyers being secured or unsecured creditor.

The real estate sector at present is mired in a chronic cycle of low growth fueled by the paucity of liquidity in the market. This has inevitably resulted in falling prices, sluggish growth, stalled projects and real estate developers going belly up. Homebuyers have inevitably borne the brunt of this fallout, with the hard-earned lifetime savings of many families at stake.

By way of the Real Estate (Regulation and Development) Act, 2016, the Central Government has attempted to protect the interests of homebuyers vis a vis developers. In furtherance of this policy, the Parliament had introduced the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (IBC), by way of which, homebuyers were accorded the status of financial creditors. This is undoubtedly good news for homebuyers, who shall now be entitled to invoke corporate insolvency resolution process under Section 7 of the Insolvency and Bankruptcy Code, 2016, against defaulting real estate developers. Further, they shall have representation in the committee of creditors through a resolution professional acting as their authorized representative.

While this is a welcome step, a number of questions remain unanswered. The amendment makes it all too easy for frivolous or even mala fide action to be initiated against real estate developers. Homebuyers may invoke insolvency against real estate developers as a pressure tactic or as a counter-measure to wriggle out of their payment liabilities. This could be prevented by introducing a statutory threshold for filing of Section 7 applications. Only those applications against a real estate developer could be entertained which have been jointly made by a minimum number of homebuyers, and of a monetary value exceeding a certain amount. This would ensure that only genuine applications are taken cognizance of.

Further, a bar on multiplicity of proceedings should be considered. Currently, aggrieved homebuyers often simultaneously approach the RERA, the National Company Law Tribunal (on the grounds of insolvency) as well as various consumer forums for relief against the same real estate developer for the same default. This may not necessarily be beneficial for the homebuyer, as it could lead to complications, delays and turf wars between the various fora. Further, the homebuyers may be viewed as indulging in forum shopping which might lead to weakening of the legal standing of the homebuyers.

Notably, the amendment in IBC provides no clarification on the status of homebuyers being secured or unsecured creditor. This is crucial as it determines the priority of payments upon liquidation. In the absence of any statutory clarification on the same, the parties will have to fall back on the contract with the real estate developer to determine whether the homebuyer is a secured or an unsecured creditor. Necessary clarification in this regard needs to be provided by way of additional rules or further amendments to the IBC.

Reforms at a more basic level will also go a long way in improving the viability of real estate projects and reducing the risk of eventual insolvency faced by the real estate developers. Even after seven decades of independence, there is still no conclusive proof of land ownership in India. A lot of time, money and effort go into clearing title related issues and this often adversely impacts projects. The National Land Records Modernization Programme (DILRMP) and proposed Land Certification of Title by certain States are steps in the right direction, although it is yet to be implemented pan-India. Carrying out land titling and digitalization of revenue records may be massive projects and will require coordinated and sustained efforts from the Centre and the States, but this is the need of the hour and should be initiated expeditiously.

Single window clearance for construction related approvals will also greatly help in expediting construction and avoiding delays and uncertainties. Streamlining of approvals on the basis of central and state regulations, as well as according to various departments and ministries would certainly help in consolidating and systemizing the real estate sector of India.

(By Abhilash Pillai, Partner, and Varun Mehta, Associate, Cyril Amarchand Mangaldas)

(Disclaimer: These are the personal views of the authors)

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