The Real Estate (Regulation and Development) Act, 2016 (RERA) received Presidential assent on March 25, 2016 and intends to bring transparency and safety in the market for consumers of residential and commercial projects by introducing a sectoral regulatory mechanism. The provisions of RERA are in addition to the requirement under other laws and Section 89 specifically gives it an overriding effect in case of any inconsistency. The real estate projects are currently regulated by state governments under their respective state town and country planning or apartment ownership legislations and a majority of RERA provisions have been in force since May 1, 2016.
In light of the above background, we have briefly discussed below the constitutional validity of RERA, compared certain provisions of RERA vis-à-vis state legislations and also highlighted certain shortcomings of this new legislation.
The RERA, even in its form of a Bill (prior to being passed by Parliament) was an eagerly awaited and hotly contested legislation. Some believe that this Act was legislative overreach by the centre in the states’ domain. While addressing this issue, it is important to note, that, Entry 18 of List II of the Seventh Schedule of the Constitution of India (Constitution) gives the states the right to legislate over inter alia, land, rights in or over land and colonisation.
The RERA however, has been enacted by the Centre by the power vested in it by virtue of Entries 6 and 7 in List III (Concurrent List) of the Seventh Schedule of the Constitution dealing with contracts and the transfer of property. Both Central government and state governments can legislate on matters under the concurrent list, and Article 254 of the Constitution specifically provides that central laws will prevail over state laws on matter in the concurrent list. Accordingly, RERA has an over-riding effect on conflicting state laws. Interestingly, the RERA also repeals the Maharashtra Housing (Regulation and Development) Act (MHRDA) as defined below, despite the MHRDA having received Presidential assent instead of the assent of the Governor. Article 254 (2) of the Constitution mentions that state laws under the concurrent list which have received Presidential assent shall prevail in the state; however, the proviso to this Article gives plenary powers to the Centre to amend, vary or repeal the particular state law.
Comparison with state legislations
The RERA has been lauded as a progressive legislation and addresses concerns such as inter alia penalties to be imposed on the promoters, maintenance of licences, inspection rights, disclosures and an agreement to sell. That said, certain state laws are wider in ambit.
Real estate projects above 500 sq. metres or 8 apartments are covered under RERA, whereas the Maharashtra Housing (Regulation and Development) Act, 2012 (MHRDA, presently repealed) covered real estate above 250 sq. metres or 5 apartments, and had greater outreach. Similarly, the West Bengal legislation covered all real estate projects. While RERA gives respective state governments the power to reduce the above mentioned thresholds, however, the central legislation could have provided for coverage of all kind of real estate with the power to state government to adjust it based on their state specific market reality and needs.
RERA requires that 70% of the amount received must be kept in a separate escrow account and drawdowns from this amount are linked to completion of construction (only for land and construction costs). On the other hand, MHRDA provided that all amounts received towards the project must be kept in a separate account and the promoter is required to make full disclosures on all transactions from that account. The state governments do not have the liberty to amend this requirement, and in our view some flexibility should have been given to state governments to amend this requirement based on the need to give the necessary thrust to the real estate market in their respective states.
The Act is a standard-setting instrument for the real estate sector and performs the critical task of identifying and allocating risks associated with construction and development projects. The current approach of the Act is to uniformly regulate different types and sizes of projects and its implementation will require significant capacity building at the state-level. The Act disrupts existing sector practices to raise efficiency of the real estate market and is likely to benefit all stakeholders by imposing financial and operational discipline, accountability and diligence.
The author is a partner at Trilegal, a law firm representing leading domestic and multinational companies for complex and high value transactions in India.