On May 1, 2017, all 92 provisions of the Real Estate (Regulation & Development) Act, 2016 (Act) were brought into force. The Act has introduced new obligations on real estate developers and, in case of default, prescribes penal liabilities. Significantly, the Act applies not only to future projects but also to ongoing projects, where construction began prior to May 1, 2017. Therefore, the issue is whether this retrospective application of the Act stand the test of constitutionality. The Act applies to all such projects, where completion certificates have not been obtained, irrespective of whether construction began prior to May 1, 2017. For instance, Section 3(1) of the Act restrains a developer from advertising and selling any space in a project without registering the project with the Real Estate Regulatory Authority (Authority). For ongoing projects for which completion certificates have not been issued, this registration is to be obtained mandatorily within three months from May 1, 2017. Any violation of Section 3 could result in a penalty of up to 10% of the estimated cost of the project. In cases of continuing defaults, imprisonment is also prescribed. The Act also provides for penal consequences in cases of breaches of obligations committed during registration.
It cannot be denied that where developers commenced construction prior to May 1, 2017, they had no knowledge of the provisions of the Act, much less the penalties thereunder. Therefore, bringing these projects now within the purview of the Act may amount to punishing the developers for delays or other irregularities which occurred during a period when the law was not in force.
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Grounds for prospective applicability
(i) As a general principle, laws are to be applied prospectively. The Supreme Court of India, in CIT v Vatika Township (P) Ltd. (2015), held that a new legislation ought not to change the character of past transactions carried out upon the faith of the then existing law. The Act is neither clarificatory nor declaratory of the existing law, but is rather substantive, creating rights and liabilities and therefore, even more reason for its prospective application. The Act has also made certain validly executed agreements void, thereby taking away vested rights that have already accrued to parties.
(ii) The Act provides for penal consequences in cases of default. Article 20(1) of the Constitution provides that no person shall be convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence. Prior to May 1, 2017, contractual terms governed the relationship between a developer and a purchaser. However, the Act, in its sweeping manner, provides for penal provisions against a developer, even for acts that were not punishable when committed like delay in possession, modification of specifications, alteration in super area, minor structural changes, etc.
(iii) There is no saving clause under the Act, which protects developers for acts which were earlier permitted or for which the parties, by agreement, had fixed damages as a relief. The accrued rights of such developers will be abated if ongoing projects where such. agreements have already been executed are brought within the purview of the Act
(iv) Another possibility is that of the possible delay of a project that is on the verge of completion. Under contractual terms, it is possible that a developer may have contractually agreed to hand over possession of flats/apartments in a real estate project before May 1, 2017. However, for reasons beyond developer’s control, the handing over of the property may have been delayed. Under the existing contract, the developer may have had to compensate the buyer for such delay on a fixed-sum basis. However, under the Act, the developer is now obligated to refund the entire investment made by the buyer, along with interest and compensation. Further for an alleged delay, which is to be treated as a violation of the Act, the developer is also liable to pay a penalty. Delay can also give a right to a buyer to apply to the Authority for the revocation of registration, which will impact the developer’s right to carry on trade.
From a constitutional standpoint, the Act, not just erodes accrued rights, but also tampers with the justified expectations of persons who, in acting reasonably, believed that the legal consequences of their actions will be determined by the known state of the law established at the time of their actions. While the Act attempts to ensure fairness and transparency for consumers, this cannot be permitted to play out in a manner that imposes such unfair and inequitable considerations for developers.
While some states, like Uttar Pradesh and Andhra Pradesh, in their Rules, seem to have carved exceptions for ongoing projects, others, like Rajasthan, Madhya Pradesh and Odisha, and the Union Territory of Delhi, have retained the language of the Act. However, the state Rules, being delegated legislation, will not prevail over the Central Act. Constitutionality is the touchstone of all legislations. It remains for the Courts to answer, if approached, whether the Act will withstand the challenge of constitutionality.
Abhijeet Swaroop & Ankur Khandelwal
Swaroop is principal associate and Khandelwal is senior associate at Khaitan & Co (Delhi).
Views are personal