The draft Model Real Estate Act, while a good idea in principle, has missed the mark on many important practical points and needs work before becoming law, argues bank in-house lawyer Sapan Gupta.
The debacle of economies around the world triggered by irresponsible, uncontrolled investment in the global real-estate market has made India aware of its need to regulate the sector, despite coming out of the crisis relatively unscathed.
The Model Real Estate Act by the Ministry of Housing & Urban Poverty Alleviation (MHUPA) is a step in the right direction. But as it stands today, the act overlooks some practical hurdles in the way of addressing several of its objectives to protect individuals from defaults.
Far from complete
First and foremost, buyers want to own or complete a property.
However, with no provision to encourage mediation and conciliation in disputes between the builder and the buyer the Act seems to overlook this prime objective.
It provides for events of cancellation of the registration, imprisonment of the promoter or enforcement of just a 5 per cent guarantee, none of which actually achieve the initial intent of owning the property.
No clear roadmap for completion of the project is provided. In some cases, the buyer may even need to pay more if the project is to be completed. Ironically, the Act adequately provisions for escalation of costs if a new contractor is handed over an unfinished project.
The 5 per cent guarantee derives from a mandatory 5 per cent development costs deposit by the builder to the regulator, which is used as a bank guarantee. If invoked this will increase the project cost for the developer but it will only ensure cover of 1 to 2 per cent of the project cost, since land costs are not included in evaluating.
Ideally, cost of development work should be defined to include land cost and development, which should include ready-to-use property. This would simplify bifurcating between land, structural development and other developments.
The 5 per cent guarantee therefore seems to be the only reassurance but it is also otherwise incomplete.
Promoting housebuilding
However, the conditions here should be expanded to specify that none of the promoters or directors in the list of intentional defaulters published by RBI are debarred from accessing the capital markets.
It should also specify eligibility conditions like minimum net worth and past track record. Further, the promoter should be able to contribute at least 15 per cent of the total cost of the project.
MHUPA proposes that the regulator takes over disputed projects. As such, the regulator will soon become a big promoter itself with hundreds of semi-constructed properties and capability to claim more money from original buyers.
Penalising parties
On the other hand, the Act tries to minimise discretion of parties by fixing certain penalties.
However, this neglects market volatility and economic disparity in India that will lead to variance in severity of the penalty. For instance, it allows the builder to refund the amount with interest plus some penalty that may be imposed by the regulator.
However, it discounts a possible rise property prices exceeding the fixed amount in the interim. The Act should prohibit reselling of this land for a certain period and specify a profit share in case of a second sale with original investors.
Similarly, the Act proposes to fix the penalty on non-payment by the buyer.
Against the backdrop of geographical disparity in India within a particular state, it is very likely this penalty may seem too little for some people while being too much for others.
The penalty should instead be left open to be defined by the two parties at the time of the transaction or at least be defined as a percentage of the transaction rather than a fixed monetary value.
Registered concerns
MHUPA bars promoters from accepting an advance before a registered agreement to sell.
This is highly impractical.
Until the agreement is registered, both parties are unsure whether the commitment has been made. The regulator would do well to cap advance amounts to a percentage of total cost and set a deadline to register the transaction with the sub-registrar.
It also bars any changes in the plan without approval from the Regulatory Authority, which would cause delay to the project and increase the cost. The Act should build a provision where non-material changes can be implemented with certification from the project architect and structural engineers.
The proposed legislation extends onus to architect, engineer, estate agent and contractor, which deviates from its purpose of governing the buyer and promoter equation.
Accountability of remaining parties should be left to the promoter as part of routine contracts. The buyer need have no rights against them unless (s)he contracts these parties in an independent agreement.
Furthermore, the document omits differentiation between the promoter and project, which raises several questions.
For example does the registration validity of three years, proposed in the paper, hold for a promoter, or merely the project? Could the promoter continue other projects if one is already in default?
In case a builder is developing on someone else’s land, MHUPA requires strengthening of mandatory documentation to include a builder’s right to sell. At present, the consent of the land owner to build is insufficient.
Fortunately, the Government has sought comments on the Act. I would hope that the Act will undergo changes before it is final.
Sapan Gupta is head-legal, debt capital markets of Standard Chartered Bank, India.
The views and opinions expressed in this article are his own and are not those of his employer. Nothing contained in this article should be construed as legal advice.
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I fully endorsed the views expressed by our learned friend Sapna Gupta .
Having said that in my humble opinion the following points should please be considered and incorporated whether in the proposed bill or in the practice of the property Law for the benefit of the buyer , the developer/builders, the loan provider and also for the benefit of all subsequent buyers of the property.
1 As soon as the piece of land is identified and acquired or is in the process of acuqiring by the developer , it should please be registered in the Local land registry office with accurate plans.
2 All necessary planning permission required and obtained by the developer including also the lay out or proposed layout of the utility and other servicies should also be made available for inspection by the buyers and others ideally at the land registry
3 Survey report of the land including also the environmental survey
contamination or flood risks should please be disclosed so that the buyer could make an informed decision .
4 The buyer should be required to pay say 5 or 10 percent of the purchase price which said deposit to be held in the reputable bank in the joint names of the buyer and the developer in the escrow account thus avoiding any risks of the buyer lossing his funds if the developer was to become bankrupt The balance purchase price to be paid on completion by the buyer to the developer and if the buyer fail to complete the purchase on the agreed date then the deposit paid could be forfieted in the favour of the developer/builder
5 The developer to enter in to contract in a standard construction contract form with every buyer thus ensuring consistancy with every buyers on the whole estate or locality
6 The builder /developer to give warranty to the buyer that the property will be constructed from the very good building materials in a good workman llike manner The Builder/developer also to warrant that it will make good any defects in the property if it becomes apparent within the first 10 years from the date of the construction of the property
7 The builder /developer should procure a bond given either by the bank or by other surities of repute that in the event of default by the developer/builder they will procure the completion of the work . This will give the confidence to the buyers and or the investers and this will also generate funds for the developer enabling him to complete the projects speedily
8 Having already registered the title of the whole area of the land being developed by the builder/developer at the beginning , it will be simpler cost effective and efficient for the buyer of the house/flat to register their title at the land registry office without
trouble . This will also fecilitate subsequent purchase from the original buyer
8 The proposed Bill should also take the opportunity to repeal and
or amend certain provision in the Transfer of Property Act which is now almost ancient in many respects
9 I dare say certain provisions the said TPA could hardly be said to be consistent when it comes to the sucession and also the other concept of the Hindu Law Jurisprudence . This needs to be removed and where appropriate the property law should be consolidated thus the whole concept of buying and or selling the property/real estate will be much simpler, easier, transparent revenue efficient and user friendly .
10 Although some people may take the view that this may create unnecessary burden on the builder /developer in the long term this may prove beneficial for all because the new methodology will create confidence among the buyers and also more importantly among the investers in the real estate which will bring much needed investment funds in this sector .
11 Identical methodology could also be used for the development of the commercial property .
Kind Regards and Best Wishes
Yours faithfully
Bhupendra K Vyas
Solicitor of the Supreme Court
[ The views expressed herein are of the writer Mr Bhupendra K Vyas who is a senior Lawyer in the London Offices of Singhania and co and not of his firm ]
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