A new act passed by Government of India, which enacted the Real Estate (Regulation and Growth) Act 2016 on 26th March 2017 with the intent to protect the interest of the home buyers as well as enhance the transparency in the real estate sector. All its provision came in effect, from May 1, 2017, but to examine, the effect of this act on various stakeholders including home buyers and builders, to brokers has become necessary with all its provisions and penalties prescribes under the act.
The ultimatum was given to developers by the end of July 2017, to register their projects under RERA. There were many real estate agents who were registering themselves till the last date plus many stated was still in need to notify the rules under the Act and most importantly to buyers, developers/promoters who were asked to register themselves under RERA.
What is actually RERA?
The Act was passed in order to create and bring transparency and makes the Real Estate sector more customers friendly. States are to follow suit by notifying their rules based on the central act and many states have already issued notifications. States are setting up the authorities to enforce these rules. Cost associated factor was not widely known to people when RERA was improving the transaction transparency and was building customer confidence.
Developers were liable to price in the cost of capital which they were forced to block escrow account – 70% of cash inflows goes exclusively into this account and interest on the land and other cost incurred by the developer prior to the project, the launch will have to bear for the longer period by the developer. They were authorized to estimate the cost of the project at the time of possession before its starts on which they had low visibility at the beginning of a project.
With the introduction of RERA Act, it was hoped, will bring real estate purchases uncomplicated and simpler by bringing in better responsibility, liability, and clarity, provided that states do not mix the provisions and the spirit of the central act.
1. The fact RERA clarifies is that the developer is liable to repair and responsible for any structural defects for next five years from the date of handover. However, there needs to be more clarity on specific defects which may come as RERA gets more mature.
2. Till date, civil Contractors normally has to provide 12 months defect liability warranty; however, now developers need to pass on the 5 years liability towards the contractor. In this scenario there are points that may happen:
i. Oblivious, contractors will be charged with an extra premium for an extra period of liability but the premium can be negotiated in specific terms.
ii. With the implementation of RERA, It was foreseen that small developers may face liquidity issues and there will eventually lead to more competitive binding by all contractors at lesser premiums.
3. The tendency to load the risk component of project encumbrance factors such as sanctions, land litigations etc. by earlier contractors was very common. With this RERA scenario, the component had drastically reduced as all relevant sanctions would be in place before the projects start.
4. The burden project will be crucial and the developer may transfer their risk to contractors. Hence, the liquidated damage clause would become more effective. the cost towards the risk of non- completion in time may be an add-on.