The mysterious bill for a real estate regulator, which is not in the public domain is a big move forward in protecting buyers, but will require some debugging. One of the area of confusion would be the definition of promoter which includes bulk buyers who will also be allottees, says realty expert Pranay Vakil

Investors or bulk buyers of property, who have always anchored large property deals, will have to be very careful about the implications of the new regulations proposed under the draft bill for a realty regulator, says Pranay Vakil, founder-chairman of Praron Consultancy. Mr Vakil was addressing a packed audicence at the seminar “Decode the Realty Regulator” organised by Moneylife Foundation in Mumbai on 13^th June.
 

Interestingly, the Real Estate (Regulation and Development) Bill 2013 that actually received Cabinet clearance is not in the public domain, nor is a draft that was circulated to industry associations in 2012 (Click here for draft bill obtained by Moneylife). Mr Vakil, who is also the former chairman of Kinght Frank India further said, “Even a buyer who is purchasing in bulk for resale is a promoter, my question is, is he the one who is paying for the land or engaging the contractors? No, all that he is doing is a simple purchase”. This could cause some confusion until the implications are clearly sorted out. The bill defines developers as promoters.


 

“One will have to be extremely cautious henceforth in doing such a stock purchase if he/she is going to be clubbed with the definition of a promoter, as the promoter has a huge number of responsibilities under the proposed bill, as the promoter as we understand is the developer”, warns Mr Vakil.
 

Further complications are the fact that an ‘allottee’ as defined by the bill does not merely include the first buyer but may also include subsequent ones. Further, even an individual who receives a flat as a gift or under some kind of a transfer (which may not be for consideration) will also be considered as an allottee.
 

For instance, Mr Vakil said, “If a developer sells a flat to a certain prospect A, and during construction A sells the flat to B, and then B in turn sells it to prospect C, then under the new bill, prospects A and B will also be held responsible and will be considered as allootees. In short every subsequent buyer of a flat will be considered as an allottee under the definition making it irrelevant”.
 

Some of the most positive aspects of the bill are the fact that every last detail about the project including the registered real estate brokers will have to be uploaded on a website at the time of registering the project, and advertisements for sale and marketing can commence only thereafter. An allottee is entitled to ask the developer for anything and everything that affects his title to the property. This includes entitlement to possession as promised by the developer, for failure to deliver or even delay in giving possession. For the first, time the realty regulatory bill also defines the obligations of an allottee to the developer—mainly to make payments as agreed, including including registration charges, stamp duty or other levies as agreed in the original agreement.
 

Adding his voice to Mr Vakil’s, Mr Parimal Shroff, one of the brightest and best known names in realty laws said, “If tomorrow I try to purchase certain premises in bulk and later decide to sell them off, I too will become a promoter” under the draft bill. His view is that this is a welcome move and explained why such bulk buyers had been included in the definition of allottees.
 

Mr Shroff said, “Developers often resort to bulk sale for the purpose of tax planning within the group and to avoid their responsibility under the Maharashtra Ownership Flats Act, 1963 (MOFA). The flats are first sold to an investor or bulk buyer using just an allotment letter. The investor later sells it to a customer. When there is a problem, the builder throws up his hands and calls the purchase a second sale to evade responsibility under the Act. This is the situation in Maharashtra, which is among the few states that have comprehensive, if faulty, legislation covering the realty business. The draft Union Bill however plugs the loophole of builders or developers evading responsibility for those consumers who make a purchase from bulk buyers. In the light of what the experience in Maharashtra, this is a positive move from the consumers perspective and will have to be harmoniously considered with other definitions under the Bill, said Mr Shroff.
 

An allotment letter is just a temporary arrangement between the developer and investor, which is not covered under the MOFA, and therefore not legally binding, until both the parties intent to convert it into a stamped and registered agreement. Under the MOFA, when a buyer terminates the contract to buy the apartment if developer does not commence project construction within a year of allotment letter, the builder had to refund the amounts paid by the buyer with simple interest of 6% per annum. In addition, in case the project is abandoned for any reason other than force majeure or on failure to give possession to the buyer, the developer is expected to refund the amount paid by the customer with 9% interest under the MOFA in Maharashtra.
 

Read more about the Real Estate Regulation Bill:
 

• Will the regulation really exclude commercial property?

• The humungous job of monitoring 30,000 crore sq ft of construction planned

• Registration of brokers: Huge challenges ahead

• Moneylife Foundation event on decoding the realty regulator

• Here is the Real Estate Bill, kept hidden from public
• Centre and states may collude on parallel laws, cost