11 April, 2018
The Real Estate (Regulation and Development) Act, 2016 (the “Act ”), which was enacted with the intent and objective to regulate the promotion, development, sale and transfer of real estate projects in an efficient and transparent manner by making promoters and real estate agents accountable to customers, came into force on May 1, 2016. Pursuant to coming into force of the Act, the Government of Maharashtra constituted the Maharashtra Real Estate Regulatory Authority (“MahaRERA ”) by way of Notification No. 23 dated March 8, 2017, for the regulation and promotion of the real estate sector in the State of Maharashtra.
Since the enactment of the Act, MahaRERA has, from time to time, issued certain circulars and orders for better application of various sections of the Act inter alia relating to registration of projects, advertising of projects and transfer of rights of a promoter. We set out here, some of the key provisions under the Act specifically addressed by MahaRERA through its circulars and orders and the implications thereof.
Circulars
Land Owners/ Investors as “Promoters”
MahaRERA , by way of its office order dated May 11, 20171 (‘Co-Promoter Order ’), had sought, inter alia , to introduce a new definition, viz. “Co-Promoter” to bring within the ambit of the Act, individuals/ organizations with whom a promoter had entered into an arrangement, whereunder such individuals/ organizations (co-promoters) would be entitled to: (i) a share of the total revenue generated from the sale of apartments; and/ or (ii) a share of the total area developed by the promoter. The Co-Promoter Order also sought to clarify that the liabilities and responsibilities of all such co-promoters will be governed by the inter se agreement between the promoter and the co promoter.
The validity of the Co-Promoter Order was subsequently challenged in a writ petition2 filed before the High Court of Bombay (‘Bombay HC ’), inter alia , on the ground that MahaRERA was not empowered under the regulations framed for the State of Maharashtra to introduce a new definition and notify the same in the absence of statutory provisions under the Act authorizing the same. MahaRERA , in its response to such writ petition, sought to withdraw the Co-Promoter Order and replace the same appropriately with a circular (‘Circular ’)3 which effectively provided that individuals/ organisations who are entitled to revenue share from the sale of apartments, and/or area share from the total area developed by a promoter on account of being land-owners / investors (‘Land-Owners/ Investors ’) fall within the definition of the term “promoter” as defined under the Act. This would essentially ensure that the entities that were sought to be captured within the concept of a “co-promoter” under the Co-Promoter Order are now also categorized as “promoters”. The Circular was sought to be made effective retrospectively from May 11, 2017, i.e., the date of the Co-Promoter Order. The Circular further clarified that the liabilities of the Land-Owners/ Investors will be co-terminus with the written arrangement entered into with the promoter who is actually carrying out the construction and that a copy of such agreement is also to be uploaded on the website of MahaRERA . Further, the obligations and liabilities of the Land-Owners / Investors, for the purpose of withdrawal of amounts from the designated bank account, will be at par with the promoter actually carrying out the construction and, in case of area sharing, the Land–Owners / Investors must open a separate bank account for deposit of 70% of the sale proceeds realized from the sale of such area.
Thus, pursuant to the above, the Land-Owners / Investors are now captured within the definition of a “promoter” under the Act, and with this we could see a shift in the nature of investments that the Land-owners/ Investors could consider in order to avoid being subject to liabilities under the Act.
Transfer of Promoters Interest
On November 8, 2017, MahaRERA issued a Circular4 (the ‘Section 15 Circular ’) providing much needed clarity on the implication of Section 15 of the Act which requires the promoter to obtain written consent of two-thirds of the allottees (other than the promoter) as well as consent from MahaRERA in case of transfer or assignment of the promoter’s majority rights and liabilities in respect of a real estate project.
The Section 15 Circular clarifies that no consent of two-thirds of the allottees or MahaRERA is required in the following scenarios:
i. Changes in internal shareholding or constituents of the promoter’s organisation, which do not affect the obligations and liabilities of the promoter with respect to the allottees and the rights and liabilities of the promoter’s organisation;
ii. Conversion of the promoter entity from a partnership firm into a limited liability partnership (‘LLP ’) or a private limited company;
iii. Conversion of the promoter entity from a private limited company or an unlisted company into an LLP or otherwise; and
iv. Proprietorship change by succession to legal heirs.
The Section 15 Circular further specifies the following scenarios where consent of twothirds of the allottees and MahaRERA is required, as well as the process and procedure to be followed in each such scenario:
Amalgamation / Merger
Amalgamation or merger of companies which is voluntarily initiated by the promoter, in which the amalgamating company has one or more projects registered under the Act is to be regarded as a transfer initiated by the promoter and would require the promoter to obtain consent from two-thirds of the allottees for the transfer. However, if the aforementioned amalgamation/demerger/merger of companies is not regarded as a transfer under Section 47 of the Income Tax Act, 1961, or where 75% of the shareholders in the resultant company are the same, the approval of allottees under Section 15 of the Act will not be required.
Additionally, in such case, the approval of MahaRERA would also be required to be obtained. Upon obtaining the approval of MahaRERA and within seven days of the transfer taking place, the new promoter is required to make an online application for corrections in the existing registration details, along with supporting documentation.
Transfer Initiated by a Third Party
In case where a transfer is initiated by a creditor or a financial institution by way of operation of law or by way of enforcement of a security or mortgage, then the original promoter is required to intimate MahaRERA and every allottee of the project, within seven days of becoming aware of the impending transfer. Thereafter, within seven days of the transfer having been effected by the financial institution or creditor, such institution or creditor will also inform the Secretary of MahaRERA and each of the allottees of the same. The financial institution or creditor may decide to act as the promoter or appoint a person to act as the promoter and in either case, the new promoter must make an online application for necessary corrections in the existing registration details, along with supporting documents in its name.
In both the aforementioned cases, the new promoter is required to submit a registered undertaking stating that it has assumed and will comply with all the obligations of the erstwhile promoter under the Act.
The Circular thus has provided much needed clarity to lenders in relation to the consequences of a default by a promoter.
Establishment of Appellate Tribunal under the Act
The Government of Maharashtra by way of a notification dated December 28, 20175 designated the Maharashtra Revenue Tribunal constituted under the Maharashtra Land Revenue Code, 1966 to be the ‘Appellate Tribunal’ under the Act to hear appeals under the Act until establishment of the Maharashtra Real Estate Appellate Tribunal as contemplated under Section 43 ofthe Act.
Circulars v. Provisions of the Act
It is pertinent to note that whilst MahaRERA has by way of its circulars sought to clarify certain provisions as stipulated under the Act, the provisions of the Act itself remain the same and have not been formally amended. For instance, the definition of “promoter” under the Act does not in any manner bring in Land-Owners / Investors within its ambit as contemplated under the Co-Promoter Order. Similarly, Section 15 of the Act, if read by itself implies that approval of MahaRERA and the allottees is required for any transfer of the project.
In the above context, it may be further noted that the validity of the aforementioned circulars and orders, if ever challenged is questionable, as the same cannot contravene the provisions of the Act (in the absence of amendments to the Act to effect the clarifications provided under the circulars), but the law as it stands today in Maharashtra is contained under these circulars.
Constitution of MahaRERA Conciliation and Dispute Resolution Forum
The MahaRERA with the objective of facilitating amicable resolution of disputes between promoters and allottees through dispute settlement forums has by way of a circular dated January 29, 2018 constituted the “MahaRERA Conciliation and Dispute Resolution Forum” (‘Forum ’).
The Forum shall be entitled to entertain only disputes arising between the promoters and allottees which fall under the purview of RERA and the rules made thereunder. The circular further lays down the procedure of the conciliation process which has commenced from February 1, 2018.
The Forum consists of representatives of Mumbai Grahak Panchayat and representatives of promoter associations such as CREDAI , MCHI , CREDAI – Pune Metro and NAREDCO.
In addition, a core committee comprising of the MahaRERA Secretary and two representatives each of the promoter associations and the Mumbai Grahak Panchayat is established to monitor the functioning of such Forum.
It is pertinent to note that the Forum has been established to primarily facilitate settlements between the disputing promoters and allottees to save on cost of litigation and the time involved. In the event that the parties fail to arrive at any settlement through the above prescribed conciliation process or fail to comply with the agreed settlement, then the parties are at liberty to initiate proceedings before the MahaRERA Dispute Redressal mechanism.
Judgments
Bombay HC upholds the Constitutional Validity of the Act
Subsequent to the enactment of the Act, promoters of real estate projects across various States in India had filed writ petitions challenging the constitutional validity of various provisions of the Act. The Union of India had filed a transfer petition before the Supreme Court seeking transfer of all such petitions to either the Supreme Court or to one of the High Courts. The Supreme Court, by its order dated September 4, 2017, directed the Bombay HC to decide on all such petitions seeking to challenge various provisions of the Act, and stayed proceedings in all other High Courts pending such disposal. A Division Bench of the Bombay HC heard all such petitions and passed an order on December 6, 2017.
Some of the key highlights of such order are set out below:
Retrospective Applicability of the Act
On the various contentions raised by the petitioners regarding retrospective effect of the provisions of the Ac, the Bombay HC held:
i. The provisions of the Act are not retrospective in nature, although some provisions may have retroactive or quasi-retroactive effect and, in any event, the Parliament is competent to enact retrospective statutes. However, in determining the constitutional validity of retrospective statutes, public interest at large is a relevant consideration and only if the retrospectivity is excessive or harsh, would a question of unconstitutionality arise. The Bombay HC also observed that the application of the Act to ongoing projects is justified since in a large number of projects all across the country, the allottees do not get possession for years together and huge sums of hard earned money get locked in;
ii. As far as Section 3 of the Act is concerned, which the petitioners contended, is unreasonable since it compels promoters of ongoing projects to register their projects under RERA retrospectively, the Bombay HC held that the projects that are already completed are not in any way affected by the said provision. The Act will apply to only such projects which get registered and therefore the application of the Act is prospective in nature; and
iii. On the contention of some of the provisions of the Act being in violation of Articles 14 and 20 of the Constitution of India (equality before law and protection in respect of conviction for offences, respectively), the Bombay HC held that what is registered under the provisions of the Act and what the Act seeks to regulate is a real estate project in order to simply ensure timely completion of the project and the same is a limited restriction imposed on the promoters without divesting their right to property and their status as promoters, and is, therefore, not in violation of the fundamental rights of the promoters guaranteed under the Constitution of India.
Refund on Account of Failure to Deliver Possession
Additionally, the petitioners also challenged Section 18 of the Act on the ground that it was unreasonable and in violation of Article 19(1)(g) of the Constitution of India as it stipulated return
of money to the allottees if the promoter is unable to deliver the possession of flats in accordance with the agreement for sale along with interest.
The Bombay HC held that under the Act, the promoter is given an opportunity to revise the date of completion (as per Section 8 of the Act), and, therefore, has an opportunity to make a fair assessment of the time needed for completion of a project. Despite this, if the promoter defaults, it will be unjust enrichment of the promoter and will afford him a chance to escape liability as prescribed under the Act, especially considering that huge sums of money collected from the allottees were not utilized fully for the project or diverted to sectors other than the concerned project. Further, the Bombay HC held that:
i. The Act even mandates allottees to make necessary payments in stipulated time as specified in the agreement for sale, failing which an interest is levied and thus a balance has been struck by Section 18 of the Act;
ii. The payment of interest under Section 18 is compensatory in nature and not penal and thus, there is no constitutional impropriety or legal infirmity or unreasonableness; and
iii. The Act is not to be considered as anti-promoter, since under the scheme of the Act, the promoter’s interests are also safeguarded and there is a reason for the same, i.e., unless a professional promoter making genuine efforts is protected, the very purpose of the Act to develop the real estate sector would be defeated.
Thus, the above order of the Bombay HC puts to rest the challenge to the Act made by the promoters of ongoing projects. It also reiterates the rights of the allottees in case of delay by the promoter to hand over possession and emphasizes the need for promoters to be in compliance with the Act to ensure an efficient and transparent implementation of real estate projects. MahaRERA to have jurisdiction despite existence of an Arbitration Agreement MahaRERA , in the case of Ganesh Lonkar v. D.S. Kulkarni Developers Private Limited ,6 held hat existence of an arbitration clause/agreement in an agreement between a developer/promoter and a customer does not oust the jurisdiction of MahaRERA to adjudicate upon any dispute arising out of such agreement. This is inter alia due to the fact that Section 89 of the Act provides that the provisions of the Act (which accords MahaRERA its authority and jurisdiction) are to have effect notwithstanding anything contained in other law for the time being in force, which includes the Arbitration and Conciliation Act, 1996.
Applicability of RERA to “Lease Transactions”
MahaRERA , in the case of Jitendra Tulsiani v. Lavasa Corporation Limited7 held that the provisions of the Act pertain to sale of an apartment and that the same is not applicable to a lease transaction. This is inter alia due to the fact that: (i) the agreement executed between the complainant and the respondent is an agreement to lease and the definition of “allottees” under the Act excludes a person to whom any property is given on rent, thereby excluding lease transactions from the purview of the Act; (ii) the definition of “promoter” under the Act refers to a person who constructs a building or converts an existing building or develops land for the purposes of selling the apartment ; and (iii) the Act specifically provides for registration of projects which are to be sold wholly or partly . The complaint was accordingly dismissed for want of jurisdiction and no relief was granted to the complainant.
It may also be noted that although the definition of an “allottee” under the Act makes a reference to leasehold property and includes property which is “transferred” by a promoter (which would include transfer of leasehold rights), the definition specifically excludes an allottee to whom any premises are being given on ‘rent’.
Further, there is ambiguity under certain frequently asked questions (FAQ s) available on the website of the MahaRERA , with some of the FAQ s indicating that the “Act does not include rental projects, lease / leave and license deals” and subsequent FAQ s clarifying that long term leases fall within the ambit of the Act and that premises given on leave and license basis or on short term lease not exceeding five years are not covered under the Act.
The FAQ s seem to clearly be in conflict with the provisions of the Act described above,which exempt rental arrangements. There are several other provisions under the Act (including its Objects Clause and numerous other provisions), which confirm that the registration requirement applies to premises that are offered for ‘sale’.
Therefore, bona fide leave and license and lease transactions (having all the ingredients of a pure lease) should fall outside the purview of the Act for the reasons set out above.
However, a long term lease, if in substance is a transaction having all the ingredients of a sale transaction thereby constituting “deemed sale” should be treated as a sale in its intent and purpose and therefore, should ideally come within the purview of the Act.
The complainant in the above matter is contemplating challenging the above Order on the grounds that the lease given is in its substance a transaction of deemed sale and therefore should come within the ambit of the Act. However, the law as it stands today in Maharashtra is as per the above Order.
1 Maha RERA/LA/32/2012.
2 L) No. 2023 of 2017.
3 MahaRERA/Secy./File No.27/538/2017, dated December 4, 2017.
4 No. 11 / 2017.
5 Rera. 2017/C.R. 116/DVP-2.
6 Complaint no. CC005000000000317 before the Maharashtra Real Estate Regulatory Authority.
7 Complaint no. CC005000000010434 before the Maharashtra Real Estate Regulatory Authority.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
