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Real Estate Sector Bills: Ignoring Ground Reality?

Published on Fri, Jun 21,2013 | 12:05, Updated at Fri, Jun 21 at 12:05Source : 

By: Kosturi Ghosh, Partner & Savitha KG, Counsel, Trilegal

The bills recently introduced to regulate the real estate sector in India - the Land Acquisition, Rehabilitation and Resettlement Bill, 2011 (LARR) and the Real Estate (Regulation and Development) Bill, 2011 (RE Bill) (together the Bills) - which focus on different aspects of real estate development,  are born of a common predicate - that of protecting the interests of "affected parties". These are people affected by land acquisition and those affected by the deficiencies of residential real estate projects in India. Despite this laudable object, there are questions in the minds of many stakeholders on the impact of the Bills on development of real estate projects and on the real estate sector as a whole. In this article, we seek to explore the reasons underlying these questions.

One of the major challenges faced by real estate developers is the scarcity of developable land. Additionally, in most private land transactions, developers are impeded by the lack of clear and marketable title of the landowners. As a result, most developers look to acquire land with government assistance. However, under the proposed regime, when an acquisition is to be made, inter alia, for the benefit of public-private partnerships or private companies, the government should obtain consent of 80% of the project affected families prior to the proposed acquisition. The all-encompassing definition of "affected families" under the LARR brings into its fold landowners, agricultural laborers, sharecroppers, tenants, artisans, persons working in the affected area for three years prior to the acquisition where the acquisition would affect their primary source of livelihood, etc. Therefore, it is mandatory for the government to identify the large number of affected persons and ensure that a majority of them are amenable to the proposed acquisition. With this requirement in place, acquisition of land through the government machinery would become more onerous and time consuming for private developers.

Under the LARR, the land acquisition process involves undertaking a Social Impact Assessment (SIA) study.  The LARR does not prescribe a minimum threshold for the SIA study, making it a mandatory exercise even for minor acquisitions. This would create unnecessary delays for developers looking to acquire smaller parcels of land for small to mid-size projects for housing, old age homes, schools, etc. which are critically required for urban areas. The SIA report is then evaluated by a multi-disciplinary expert group consisting of two non-official social scientists, two experts on rehabilitation and a technical expert on the subject relating to the project. The expert group is not guided by unified parameters to assess proposals for land acquisition. This could result in inconsistent assessment of projects by different expert groups which could unfairly benefit a few fortunate developers in the immensely competitive sector. The LARR is also conspicuously silent on a time frame within which the entire process of land acquisition should be completed. This would not only result in delaying several projects, but would also serve as a rent seeking device for those looking to intentionally stall land acquisition proposals.

Under the proposed regime, developers are under an obligation to provide compensation, rehabilitation and resettlement for landowners and project affected families, infrastructure facilities in the resettlement areas, etc. Interestingly, the LARR does not prescribe a yardstick for the compensation payable to affected families, thereby increasing the cost of acquisition manifold.

The LARR also imposes obligations of rehabilitation and resettlement on private companies which purchase land in excess of 100 acres in rural areas or 50 acres in urban areas. From a commonsense perspective, the domain of the LARR should be restricted to land acquisition which, in the traditional sense, refers to forcible acquisition of private property by the government for public purpose. Unless there is an element of force in private commercial land transactions, burdening a private developer with obligations of rehabilitation and resettlement for the sellers seems to be unwarranted. As a result of these obligations, the developer who could earlier exit the project on completion would now be locked-in until all the affected families are duly compensated and rehabilitated in accordance with the requirements of the LARR.

Reports indicate that the framework proposed under the LARR will increase the cost of land acquisition by as much as 150% mainly on account of the compensation, rehabilitation and resettlement obligations. This in turn will substantially increase the project cost since the cost of land acquisition constitutes at least 20-25 % of the total project cost. These increased costs will ultimately be passed on to consumers who will have to pay unsubstantiated and escalated prices to avail the benefits of real estate projects developed on the acquired land, further adding to the real estate bubble in India.

Once the land has been successfully acquired, the RE Bill introduces an entirely new layer of regulation and bureaucratic interaction in the guise of creating a "consumer law" for residential real estate ventures. Under this system, promoters of real estate projects have to register each phase of the project with the Real Estate Regulatory Authority (Authority), failing which, they cannot develop the land. When the government proposed these legislative reforms, it was hoped that the Authority would be vested with powers to comprehensively regulate the real estate sector and provide a single-window clearance for all approvals and sanctions related to real estate projects. Instead, the RE Bill has created another agency with its own set of procedures in addition to the multitude of local authorities regulating the real estate sector. Not only does the RE Bill result in duplication of governing bodies, but also fails to demarcate the sphere of operation of each of these bodies.

At the time of entering into a written agreement for sale with the buyer, the developer, inter alia, is required to inform the buyer about the time schedule for connecting the proposed project with various municipal services as applicable. In most states, the provision of these amenities is linked with obtaining approvals from numerous local authorities including obtaining the Occupancy Certificate or the Completion Certificate for the real estate project. Since this is not within the control of the developer, it would be almost impossible to commit to a timeline for providing these amenities to the buyers. The RE Bill seems to ignore the ground realities prevalent in most states with respect to the functioning of local government bodies. Therefore, mere regulation of developers without a corresponding check on the functioning of the local authorities would not serve the purpose of protecting the consumers from delays in project completion.

The RE Bill also mandates the developer to complete the construction of the building in accordance with the plans and structural designs sanctioned by the relevant competent authorities. This requirement already exists in the current legal regime and the local sanctioning authority is required to continuously monitor the construction of the building and its compliance with the sanctioned plans. The construction of buildings in deviation of the approved plan is attributable to the lack of implementation of the existing laws and not the absence of laws themselves. Hence, the introduction of a new Authority to police the developers may not necessarily remedy the existing problem.

From the stage of land acquisition to the stage of completion and handing over the project to the buyers, real estate developers have to face several impediments like scarcity of developable land area, dearth of project finance, delay in project completion due to multiple regulatory authorities, want of clear and marketable title over the land and the general downtrend in the real estate sector. Added to this, the consumer-centric approach of the proposed legislative reforms, while laudable in spirit, has completely disregarded the need to harmonize and standardize industry practices as a whole. Both the LARR and the RE Bill have been introduced to put in place certain processes to bring about fairness and transparency in real estate transactions. However, these processes, being tedious and prolonged in nature, fail to facilitate real estate development and give a much needed boost to the real estate sector in the current economic scenario.

Disclaimer: The contents of this article are intended for informational purposes only and do not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.


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