Real estate makes for booming business in Chennai as well as the rest of India despite recent setbacks. Many people want to own a house or buy one for tax-saving reasons. Chennai being a metropolis currently witnesses fewer individual houses being constructed and more transactions of apartments or similar buildings. This means that it is not only enough to verify the land registration and encumbrance certificates, but also a host of other required certificates from the town planning authority, CMDA, and others.

How do builders fare in this? Not very well if court cases are an indication. The Madras High Court recently heard that 90% of projects in Tamil Nadu lack some approval or the other, and on September 8, 2016, the court banned registration of plots and flats without land conversion approval.

We also know of the back and forth between the state government and the High Court over the existing buildings for which final approvals were given despite the fact that they failed to meet some regulatory requirement, and the difference in stance over whether to demolish them or ‘regularise’ them upon payment of fines by the violators.

Another grave issue is that of delay in completion. Buyers typically pay an advance in instalments to the builder, who then uses that money for the project. This is typically a loan taken by the buyer and the interest on it continues to accumulate, even without possession of the house if the builder is unable to hand-over the flat on stipulated time. Industry reports say that only 37% projects are completed on time and 24% are delayed by more than a year.

In many cases, buyers have also reported non-deliverance of advertised features.

In the case of Chennai, in particular, the city has also been chosen to be a part of the Indian government’s smart city plan, envisioning a spend of Rs 1300 crore. The Prime Minister Awas Yojna (PMAY, a scheme meant to provide housing for the urban poor) envisions housing for all by 2022 and most of the work is set to be done via private and Public Private Partnership mode. The plan has a budget of Rupees 23 thousand crore, including capital spending and interest waiver for private loans of less than six lakh rupees.

The 2016 budget also announced 100% tax holiday for ‘affordable housing,’ defined as any project containing flats less than 30 sq. metre in size, where only one flat is allotted per family.

For the above plans to work, and for welfare of house buyers in general, it is essential that builders are held to higher standards than what we have seen in the past. Until now, the only way buyers could deal with breach of trust and other compliance issues was through consumer forums and courts. Though there have been isolated wins through that route, it is a cumbersome process.

Unlike other consumer products, houses are costlier, immovable, illiquid and require much more care and verification of documents. It is essential that builders are scrutinised properly and buyers are given the opportunity to view details about builders and proposed plans and a mechanism to keep the builders accountable. This needs a dedicated grievance redressal body separate from consumer forum.

It is with this view that the union government has brought in the Real Estate (Regulation and Development) Act which envisions regulatory bodies (called Real Estate Regulatory Authority – RERA) at the state level that would be a single point of access for buyers for information as well as grievance redressal.

RERA: An overview

Builders and agents have to register themselves and their projects with RERA, giving copies of all the necessary approvals, plans, certificates, and timeline which will be displayed on the state RERA website. This would enable buyers to verify a project’s legality easily and would serve as a record of the facilities and timeline committed to by the builder. They can also view past projects and legal actions taken against a particular builder.

Any deficiencies and false information on this site can be punished by RERA with fines (up to 10% of project value) and buyers can demand their money back with interest if the project is deficient or not completed on time. Any changes to the plan can be done only with the consent of buyer. The carpet area on which cost of the flats would be calculated has been clearly defined in the law, standardising this widely varying measure.

There is also an appellate tribunal, a quasi-judicial body with judicial members from High Courts, to serve as the first appeals body. This body has powers to punish anyone not following its orders with a prison term of up to 3 years and more fines.

However, real estate being a concurrent subject, it is up to the states to formulate the rules of operations of RERA and the Tamil Nadu government has sought comments on its draft rules released this February. A study of these shows that some of the provisions originally envisaged by the law have been diluted in spirit as well as substance by the state government in its proposed rules.

Compounding of offences and acquittal

The draft rules by the state government seek to add compounding and hence commutation of the jail term referred to above. The rules provide that the builder may pay a fine of 10% instead of serving jail time. Given that imprisonment as penalty was not for delay or deficiency, but for wilful disobedience of the appellate tribunal, this is a bad idea. Non-compliance with orders of the appellate tribunal, which is a quasi-judicial body, is a serious offence and must be treated as such.

Furthermore, this also defeats the intent of the law in the first place. The draft rules state that such a compounding will result in acquittal. The Act envisages that allottees will choose promoters and/or agents based on their past records, including convictions as mentioned on the RERA website. An acquittal would free the offending builder from the obligation to mention it on the website. Even if compounding does remain in the rules, fines must mean a conviction for purposes of disclosure.

Rules also give the builder 30 days’ time after acquittal to comply with the directions, which he had earlier disobeyed. Acquitting someone of regulatory lapse even before compliance is a mockery of the rule of law.

Other dilutions

Rules also envision advertisements by builders on the RERA website, which clearly is a conflict of interest for an authority which is supposed to regulate the advertisers, i.e. the builders in this case.

Further, the rules mandate the use of Aadhaar numbers on sale registration, which contravenes the Supreme Court’s orders not to mandate Aadhaar for any scheme without their approval.

Rules also mandate that the interest rate for returning money will be 2% above the repo rate. This rate may be less than the rate of interest on the home loan obtained by the buyer which would result in a loss for the buyer.

Rules mandate wide disclosure from builders and agents, even going so far as requiring agents to publicly declare their personal income tax returns on the RERA website. Such transparency, however, is missing from the government and should also be insisted upon.

For example, rules should mandate that procedures concerning RERA, especially the selection of the chairperson and members of RERA be transparent. The Act and the draft rules entrust department secretaries, ministers and the Chief Justice of the High Court with the task of appointing members to RERA as well as the appellate tribunal. For this process to be unvitiated, it is essential that proceedings and methods of choosing the chairperson and members of RERA be made a public record.

The new law establishing RERA is a welcome move and will help in bringing accountability to a business that needs it the most. But some of the state level rules proposed by the Tamil Nadu government must be reconsidered to enable the new bodies to function properly and ensure enforcement of the law, both in letter and spirit.