Real Estate Act has loopholes that will help dodgy realtors get off lightly

The ministry uploaded the draft rules of the Act on June 24 asking people to give their comments.

Under the Act, a real estate regulator will be set up by the respective state governments to look into the allegations made by buyers. There is a provision for imposing penalty up to 10 per cent of the project cost. A builder flouting the order of the Regulatory Authority of the Appellate Tribunal may be punished with imprisonment for a term that may extended up to three years.

The Act was formulated after it was found that many buyers had been cheated by unscrupulous builders throughout the country who did not hand over flats on time causing them both financial and emotional hardship. The Bill was passed by Lok Sabha on March 15 while the Rajya Sabha had cleared it on March 10. Subsequently it received presidential assent.

Though the Act covers ongoing projects, the draft rules have glaring loopholes which would be exploited by builders to their advantage. Section IV of the Act stipulates- to apply for registration the builder will have to declare the sanctioned plan, layout plans and other specifications. 

In case of ongoing projects, there may be several such documents. For example, while selling space to proposed buyers, builders may assure certain facilities. But, later, builders could change the plan keeping buyers in the dark. Now, the draft rules do not contain any specific clause for ongoing projects where the builder will have to disclose the original sanctioned plan on the basis of which booking was taken. The builder may get away by submitting the latest plan and thus escape penalty up to 5 per cent of the project cost under Section 60.

Similarly, for registration, the Act requires a declaration under section IV stating the time period within which the builder undertakes to complete the project. Now, here again the draft rules do not have any specific clause under which the builder is under obligation to disclose the original  completion schedule as was promised at the time of booking. So, by giving a futuristic time period, the builder escapes penal provisions under Section 60.

The Act says that to cover the cost of construction and the land, 70 per cent of the amount realised from real estate projects needs to be deposited in a separate bank account. In case of ongoing projects, the builder might have already taken even up to 100 per cent of the money from the buyers in some cases and hence, the future receivables may be very small and hence it might be insufficient to cover the cost of construction. It would have been desirable had the draft rules provided for a specific clause stating that builders need to arrive at the total amount realised from the project and deposit the money in a separate bank account after deducting land cost and the cost of actual physical construction.

Similarly for all additions and alterations the Act requires the promoter to take written consent of at least two third of the allottees. However, in case of ongoing projects most of the builders have deviated from the original plan without taking any written consent. The draft rules are silent on this issue.