Tide is turning

Home-buyers seem to have found their voice, finally. In the backdrop of recent news-flow about builders getting arrested and courts offering no sympathy while delivering verdicts, home-buyers have gained the confidence to fight back.

It’s a welcome change from we have been witnessing over the years. And this will continue to gather strength as more troubled and misled consumers come forward to raise their voice.

We can experience the change clearly as home-buyers, who had no courage to step forward against the malpractices of builders, are now filing cases against them with police and taking help of judicial system. Courts across the country are also ruling in their favour and this has revived their faith in the system too.

At policy level too, the support has never been so good. The government is also moving swiftly to make policies that would support transparency and clarity in the real estate sector, known for its opaque nature thus far.

ReaI Estate Regulatory Act or RERA is one such key step in right direction. It paves way for setting up a regulator to offer buyers protection from unscrupulous activities. Tussles over project delays are likely to come down as 70% of the amount collected from home buyers will need to be deposited in an escrow account to be used only for that specific project.

RERA envisages the formulation of a regulator for the sector to promote fair play in transactions, ensure timely execution of projects and protect the interest of consumers. It mandates the registration of real estate projects and directs developers to outline duties and role of promoters and also stipulates penalties for non-compliance.

The developer cannot make any changes to the plan that has been approved and disclosed to buyers without the written consent of two-thirds of the buyers of the project. Development firms will have to pay interest for any default or delays at the same rate that home buyers are charged.

While there are few things that still need clarity including the threshold date for existing projects to come under RERA, it is moving in right direction making home-buyers confident and raise voice against the mighty that refused to bow down earlier. The tide is certainly turning!

Source from: realty.economictimes.indiatimes.com/realty-check/tide-is-turning/1810

RERA Fears make PE firms and Tactical Investors Tweak Real Estate contracts

Number of private equity as well as strategic investors who have invested in realty sector, mainly at project level, are renegotiating their contracts with the developer fearing litigation and fines once the new real estate regulations come into force. The fear is that under the Real Estate (Regulation and Development) Act (RERA), they can be labeled as promoters and may have to face firm penalties for any violation of rules by the projects they fund. The responsibility of obedience under the RERA is on the promoter. And the term has a wide definition to cover not only the developer, but also a land owner and private equity or strategic sponsor, if they actively participate in the project.

The fright is that under the Real Estate Act or RERA, they can be certified as developer and may have to face harsh penalties for any disobedience of rules by the projects they finance. The accountability of fulfilment under the RERA is on the promoter. And the term has a wide meaning to cover not only the developer, but also a property-owner and confidential equity or strategic investor, if they energetically participate in the project. There is a fret on the part of many investors – tactical as well as private equity – that they could be distinct as developers and have to share compulsion under RERA if things don’t go well. Many investors are discover to dilute their roles or alteration some of the past contracts under which, if there is a lawsuit or a penalty, the developer will have to take care of that or at least contractually the compulsion can be transferred to the promoters. Industry trackers said the renegotiation between the promoters and investors have previously begun.

The promoters are either searching at diluting their stake or inserting clauses in contract whereby their accountability would reduce. These commercial contracts between an investor and the developer may not have permissible protection from RERA. The clauses that investors want to insert include shifting the monitory responsibility to pay fines from shareholder to the developer. So in case of a fine, the developer would be compulsory to pay the fine directly, without involving the investor. Many investors, including PE firms, were enthusiastically involved in design, development and promotion strategies for projects. These investors would now fall under the description of promoters and will be grateful to comply with RERA. In many cases, particularly where a foreign PE fund has invested in a project, dilute stake is also being measured. Some investors are searching to completely exit such projects or diminish their stake and thereby decrease the control. However, this may not be that effortless. Some investors are also searching at dilute their stake in the real estate SPVs but that may not be an option for all as they may not get a gainful exit.

RERA will also collision those PE firms that have taken control of some of the realty project because the developer was unable to complete it. The parameter is aimed at keeping irregularity in the sector under manage. RERA is set to offer an impetus to the generally real estate funding environment. The promoters would be required to take a disciplined move toward for project implementation and the same should reproduce in the asset agreement by any private equity shareholder. RERA implementation is probable to collision business plan projections and hence the safety structure and investment provisos need to align with the altering realities of project timelines and economics. RERA stipulate rigorous compliance, which in the attention of a successful project implementation would demand deeper engagement of the investor with the promoter for project monitoring. Further, our investment agreements are planned to ensure defence of money at all times, and the RERA norms can be a step forward to have a legal stamp on the same.

Real estate law: Renewing Hope

RERA will lead to a big shift in the coming yearsbut a lot more needs to be done

The green shoots of recovery are visible in the Indian economy. Policymakers have been pro-active in initiating reforms to strengthen the various sectors to augment gross domestic product, or GDP, growth. The initiatives of the Central government have helped the Indian economy get global attention, bringing optimism to various sectors, including real estate.

This has led to lot of investor activity since last year. The first half of 2016 saw private-equity investments of $2.86 billion, a rise of 55 per cent over the same period last year.The government’s initiative to regulate the unorganised housing sector through the Real Estate Regulatory Authority (RERA) Act, earlier this year, was a watershed event for the sector. While the Act would go a long way in safeguarding home-buyers’ interest and ensuring transparency, the sector is likely to see a marked shift brought about by consolidation in the coming years. Fly-by-night developers or those with low repute would find it difficult to sustain as they would be under increased scrutiny, not just by regulators, but also home buyers.

Rise in joint development agreements and mergers & acquisitions would ease the stress in finances of companies by giving an impetus to investors to plough in funds into a more structured/organised sector. Better regulation, transparency and organisation due to the new law could provide investors more opportunities. For example, the provision for depositing 70 per cent sales proceeds into an escrow account, while ensuring timely construction, will limit debt and diversion of funds for other projects. However, developers which rotate funds received from one project to another could face difficulties in acquiring additional land and execute new projects if their capital is locked up in a single project, leading to short-term liquidity constraints.

RERA has the ability to bring about a change in the sales model in the residential sector. At present, developers are dependent on funds from home buyers at the pre-launch/launch stage. However, over a period, funding from private-equity channels, banks or partnerships could steer development of projects. As the industry matures, developers will do substantial construction before they expect majority of sales to come through.

The RERA Act would lead to a paradigm shift in the coming years. However, implementation is the key, and the government needs to ensure that approval hurdles are minimised. Certain provisions such as single-window clearance and time-bound approvals at the local level are a must to increase the ease of doing business for developers. Besides RERA, a slew of reforms will make the outlook of the sectors stakeholders more optimistic. For example, listing of real estate investment trusts will allow increased ownership of commercial projects by organised landlords, resulting in more transparent business practices, benefitting occupiers immensely. Implementation of the Goods and Services Tax and relaxation of foreign direct investment norms will have a trickle-down effect, ensuring greater accountability.

The future of the real estate industry on a whole will depend on faster implementation of projects and delivery as per schedule, while enabling momentum in demand. While the macro-economic indicators are in favour of revival in demand, it is equally important to increase the ability of people to buy real estate through measures such as lower interest rates for mortgages and reduced taxes on purchase.

Source : http://www.businesstoday.in/magazine/money-today/expert-speak/real-estate-law-renewing-hope/story/236931.html

Two-third consent of buyers must for any changes in sanctioned building plan under RERA

By issuing an advertisement/notification in the newspaper (when possession has not yet been handed over), a city authority has tried to get into the shoes of the builder (by issuing a notification on the builder’s behalf) which is contrary to the law under Section 4 (4).

Even if the authority wants to get such a notification published, it can do so before the amended plan has been granted before starting construction and not after construction has been completed. By issuing a notification after people have moved into the housing complex, it is actually disallowing owners from having any control over the changes that the developer has already made in the said property, legal experts opine.

The Real Estate (Regulation and Development) Act 2016 (RERA) too calls for getting the consent of at least two-thirds allottees. It says any alterations or additions in sanctioned or layout plans and specifications of buildings or the common areas within the project cannot be done without the previous written consent of at least two-thirds of the allottees, other than the promoter.

Section 5 (3) of the UP Apartment Act 2010 also has an embedded protection for the homebuyers. It talks about the undivided right of the owner over land and common amenities that cannot be changed without their consent. Any changes made in the original plans are also contrary to the provision of the Transfer of Property Act and the Contract Act.
Of late, there have been media reports that have suggested that the UP government had decided to amend some of the provisions in the UP Apartment Act 2010 and had decided to do away with the provision of seeking consent of the homebuyers altogether. But officials in the UP government privy to the amendments made by the cabinet confirm that “rights of buyers will not be diluted in case changes are made to a project and their consent will be sought. The intention has been to align RERA norms to the UP Apartment Act 2010,” they say.

Source from: http://www.hindustantimes.com/real-estate/two-third-consent-of-buyers-must-for-any-changes-in-sanctioned-building-plan-under-rera/story-3tsKeyoGBq01oiWw5Xod8L.html

More power to the home buyer

Think of an ordinary home buyer and it conjures up the image of a harried and hassled man running from pillar to post.

The exercise starts with the person doing multiple rounds of several properties and finally zeroing in on one. But the end of house hunting does not always mean the end of his troubles. In fact, in many unfortunate cases, it is just the start of many more — delays in construction and flat possession, not being provided adequate information, violation of the building plan and so on.

All this is, however, set for an overhaul, once the Real Estate (Regulation and Development) Act, 2016 is implemented by the States. The Bill was passed by Parliament in March and the Act came into force on May 1, 2016, after being notified by the government.

The States, however, have time until April 30, 2017, to set up the regulatory bodies — the Real Estate Regulatory Authority (RERA) and the Real Estate Appellate Tribunal — to kick-start the implementation of the Act.

Better days ahead
Once that happens, home buyers can hope to see an end to many of their woes. But only new projects, and under-construction projects which had not received a completion certificate prior to May 1, 2016, will be covered under the Act.

Here we take a look at how the various provisions of the Act will address the challenges that home buyers grapple with, head-on.

First and foremost, in a break from the past, a property developer will now have to register every real estate project with the RERA even before he can advertise, let alone make bookings and sales. Failure to do so can lead to the developer being penalised for an amount of up to 10 per cent of the estimated project cost. Further, failure to comply with the penalty or repeat violations can even land the developer in jail for up to three years. “The Act, for the first time makes violations not only a financial but also a criminal offence, which is not the case currently,” says Ashutosh Limaye, National Director – Research, JLL India, a real estate services firm.

Only new projects with an area of up to 500 square metres or those with only up to eight apartments and existing projects undergoing renovation (with no new allotments) will be exempt from registration.

Today, aggrieved home buyers have to knock on the doors of consumer courts that are already overburdened with all kinds of cases. Once RERAs are set up, buyers can expect faster redress of their complaints as these authorities will handle only real estate-related matters. Further, buyers can also appeal to the Appellate Tribunal against the decisions of RERA.

Getting your money’s worth
Among the foremost problems that buyers have to deal with are delays in construction and handing over of flat possession. The Act comes packed with many provisions that will act as a check on these. Property developers have to create a separate escrow account to hold 70 per cent of the amount collected from the allottees of a project. The money has to be used by the developer only for that particular project. Also, the account has to be audited every six months to certify that the money has been used only for the intended purpose. This will keep a check on the diversion of funds to the builder’s other projects, a common reason for many project delays.

The Act provides yet another safeguard to buyers. Property developers have been forbidden from accepting more than 10 per cent of the apartment cost as advance (or application fee) without first entering into a written sale agreement with the buyer and registering it.

Apart from that, if the developer provides incorrect project information and makes false declarations — that he holds the legal title to the land and that it is free from any legal and financial liabilities — he can be penalised by RERA for an amount of up to 5 per cent of the estimated project cost. In fact, the violation of any provision of the Act will attract the same fine (except for failing to register, for which the penalty is even higher).

Promises can’t be broken
The Act also seeks to take to task builders who short-change buyers by delivering to them flats that do not adhere to the original construction plan. Builders can no longer undertake unilateral changes without keeping the flat owners in the know. The consent of at least two-thirds of the allottees (other than the promoter) has to be sought before any major alterations can be made to the approved plans, structural design and specifications of the building and common areas within the project.

Also, structural defects or any other defect in quality or provision of services, if brought to the notice of the promoter by the allottee within five years from handing over possession, will have to be rectified within 30 days without further charge.

If a builder fails to do so, RERA can impose on the builder a fine of up to 5 per cent of the estimated project cost. Non-compliance with the RERA order invites additional penalties.

All for transparency
Today, one of the biggest challenges that flat buyers face, when a builder fails to deliver as promised, is the lack of information on where the project is headed. The Act mandates builders to provide quarterly updates on the progress of the project on the RERA website for public viewing. The builder has to also upload on the website, information such as the basic details of the project, a copy of the approvals received for it, the sanctioned building plan, number and the carpet area of the apartments and details of the projects launched in the last five years — submitted at the time of registration. Failure to do so can result in penalties as prescribed under the Act.

Apart from that, property developers will now have to sell flats based only on carpet area (net usable floor area of a flat). Currently, flats are sold based on the super built-up area (which includes the area covered by the walls of the house and also a mark-up for the common spaces in the building). If the mark-up is substantial, then the buyer is misled into believing that he is getting a large flat, when it actually could be much smaller.

More protection
The Act has many other safeguards. For instance, a builder is forbidden from mortgaging an apartment (plot or the building) after the agreement for sale for any apartment has been executed with the buyer.

Real estate agents too have been brought under the ambit of the Act and have to get themselves registered. They are also forbidden from facilitating the sale or purchase of any apartment or building of an unregistered developer.

Lack of clarity
But while the Act has several provisions to ensure accountability of the builder, as pointed out in a JLL India and Khaitan & Co report, it does not elaborate on how government agencies will be held accountable. As Chintan Sheth, Director, Sheth Corp, a real estate developer, points out, the Act has to also take into account the delays in clearing plans and getting statutory permissions.

That apart, as Ashutosh Limaye says, “The difficult area of implementation will be tackling the ongoing under-construction projects where the developer has already collected some money.” According to Manju Yagnik, Vice Chairperson, Nahar Group, a real estate developer,there is apprehension that the registration of such projects could involve delays.

Source from: http://www.thehindubusinessline.com/portfolio/more-power-to-home-buyers/article9072494.ece

It is crucial to pay close attention to the construction agreement

While the Real Estate Regulatory Act (RERA) is expected to provide more clarity to apartment buyers, it is important that you be wary of the following clauses in a construction agreement:

Penalty clauses

In case of any payment defaults by the buyer, the agreement usually states a penalty between 18 and 24 per cent per annum. However, should there be a delay from the builder’s side, the liability would be mentioned only as 2 per cent per annum.

In certain agreements, the non-availability of raw materials like cement, steel etc., also get included as a force majeure clause (an ‘act of God’). This should not be accepted. Also, ensure that payments made to the builder are always linked to the construction work in progress.

Terrace rights

The right to the terrace of the building always vests with the buyer and the common resident association. Any clauses to then contrary should be avoided in the construction agreement.

Club house membership

In certain multi-storied buildings, club house facilities are provided by the builder and a fixed sum for access to this gets in the Agreement. This agreement, however, usually remains ambiguous about annual usage fees and other miscellaneous charges to the club.

It also sometimes does not mention details regarding refunds in case someone wishes to surrender their membership rights. Transfer of life membership rights to a new buyer at a later date might also not be highlighted.

Annual maintenance

Many builders ensure that they maintain the constructed building for the first few years. They also ensure that the annual maintenance fees for 1-3 years (depending upon their maintenance period) get paid in full before the handing over of the unit. However, it should be clearly mentioned in the Agreement that the builder should produce the books of accounts to the apartment residents association as and when demanded, and should also transfer all the excess amount (after meeting out all the expenses) to the association formed at the end of the maintenance period.

Undivided share of land

The Undivided Share (UDS) of land in any project should be conveyed in full to all the buyers in proportion to their extent of their apartment. This should be clearly mentioned in the agreement. Certain builders, however, claim that UDS is only the foot rest of the building/tower constructed. This is a wrong method of conveying UDS and many buyers and bankers are ignorant about the calculation method.

Tamil Nadu, Gujarat ,and Maharashtra follow the concept of Floor Space index (FSI) and many other States follow the concept of Floor Area Ratio (FAR) for building construction. The normal permitted FSI in Tamil Nadu for buildings is 1.5. This means that for every 2,400 sq.ft. of land area, up to 3,600 sq.ft. of plinth area can be constructed (car parking area is separate).

The approved building plan drawings (with seal) will clearly reflect the extent of permitted FSI for that property. If a builder intends to construct 1,000 sq.ft. of plinth area of an apartment with an FSI of say 1.4, then the proportionate UDS to be conveyed shall be 1000/1.4 which is equal to 714 sq.ft. of UDS. For a premium FSI building, special building, and multi-storey building, the extent of UDS would vary depending upon the extent of FSI achieved.

Source From: http://m.thehindu.com/features/homes-and-gardens/it-is-crucial-to-pay-close-attention-to-the-construction-agreement/article9036079.ece