Real estate sector is one of the core sectors in the economy in terms of its contribution to GDP, employment of labor force and the multiplier effects it has on other vitals of the economy. However, despite its fundamental importance to the economy, this sector has been plagued by delays, fraud, cheating, and imbalance of power between developers and consumers.
The Real Estate (Regulation & Development) Act, 2016 (hereinafter referred to as the ‘RERA Act‘) was enacted with much fanfare in the year 2016 to establish a regulator for the real estate sector. Prior to the promulgation of the Act, there were widespread malpractices prevalent including large scale diversion of funds from real estate projects. The builders would often enter into unconscionable Builder Buyer Agreements (hereinafter referred to as “BBA“) with the buyers that would excessively penalise the latter in case of any default on their end and which provided for nominal interest rates if the builder failed to give possession on time. The difference in bargaining power between the builder and buyer led to other instances of cheating wherein builders took huge advances from the buyer without commensurate construction in the project or without executing binding contracts with the buyers; show of high handedness by the builder by unilateral change in sanctioned plans, costs escalation in the project to be recovered from the buyers etc. In the absence of an effective regulator, the buyers were left in a lurch and would find themselves running from pillar to post for redressal of their grievances.
The RERA Act has sought to address all these grievances. It provides for a state regulator for the sector with which the real estate project has to be compulsorily registered. The registration application shall contain mandatory disclosures such as details about the enterprise of the promoter, previous projects, the number, type, and carpet area of the project, the proforma of allotment letter, agreement for sale, declaration that there is legal title to the land etc. This has promoted transparency and accountability in the sector.
Further, a landmark provision section 4(2)(l)(D) has been introduced in the Act which provides that seventy percent of the amounts realised from the real estate project have to be deposited in a separate account to be utilized exclusively for land cost and construction cost. This provision checks the diversion of funds from the real estate project, ensures that the funds are utilized for the purpose they were raised and requires a certificate from the Engineer, Architect to ensure that the funds released are in commensuration with the construction of the project.
Moreover, among the many laudable provisions in the Act, it is also provided that both the promoter and allottee are liable to the same rate of interest in case of default by any of them of obligations cast upon them by the Act.
Despite its commendable object and provisions, certain issues pertaining to the operation of the RERA Act have been challenged before Courts and are now pending for consideration before the Supreme Court-:
- Retrospective operation of the Act
The first and foremost issue that has found its way in the corridors of the Court room is whether the Act has a retrospective effect and if so, whether the same is legally tenable.
This issue has surfaced primarily because of proviso of section 3 of the Act which imposes the obligation of registration of the real estate project with the Real Estate Regulatory Authority. The proviso to section 3 is reproduced as hereunder-:
“…Provided that the projects that are ongoing on the date of commencement of this Act and for which the completion certificate has not been issued, the promoter shall make an application to the Authority for registration of the said project within a period of three months from the date of commencement of this Act.”
The ongoing projects have been defined in clause 2(o) of the Haryana Real Estate (Regulation & Development) Rules 2017 (hereinafter referred to as “Haryana Rules”) as-:
“a project for which the licence was issued for the development under Haryana Development and Regulation of Urban Areas Act, 1975 on or before the 1st May, 2017 and where development works were yet to be completed on the said date, but does not include:
- Any project for which after the completion of development works, an application under Rule 16 of the Haryana Development and Regulation of Urban Area Rules or under sub code 4.10 of the Haryana Building Cde 2017, as the case may be, is made to the Competent Authority on or before the publication f the Rules; and
- That part of any project for which part completion/completion, occupation certificate or part thereof has been granted on or before the publication of these rules.
Therefore, the under-construction projects i.e. whose development works were underway at the time of commencement of the Act, were included within the ambit of the Act. Only those projects/part of the project were exempted from registration which had received either completion/part completion, occupation/part occupation certificate from a competent authority.
The expression completion certificate has been defined under section 2(q) of the Act, as a certificate which is issued by the competent authority certifying that a real estate project has been developed according to sanctioned, layout plans etc.
An occupation certificate is defined under section 2(zf) of the Act as a certificate issued by the competent authority certifying that the building has provision for civic infrastructure such as water, sanitation and therefore, permitting occupation of the building.
The Act was contended to be retrospective as the compliances created by the Act were made applicable to under-developed projects/part of it for which no completion or occupation certificate was received. This had the effect of applying the obligations imposed by the Act to projects conceived and undertaken even when there was no knowledge that such an Act could be subsequently come to regulate the sector. To this effect, the Act was alleged to be retrospective in nature.
The second bone of contention regarding the retrospective nature of the Act was that the provisions of the Act were superimposed on the BBAs, lawfully executed prior to coming in force of the Act. For instance, a BBA provides a rate of interest of twenty per cent to be paid by the allottee to the builder in case of default by the allottee in payment of an instalment. However, it provides an interest rate of a mere two percent if the builder defaults to give possession within the stipulated date. This imbalance was corrected by the Act as it provides a uniform rate of interest applicable on each party if there is a default on either end.
The Authority has after the coming into force of the Act, applied the standard rates of interest to both builder and buyer, thus overriding the clauses of an executed BBA. This too has been challenged on the ground of retrospectivity.
These issues were extensively dealt by the Bombay High Court in the case of Neelkamal Realtors vs. Union of India wherein it was held that the Act was prospective in nature,;paragraph 235 of the judgment is reproduced as follows -:
“For the reasons already indicated, aforesaid decisions are not applicable to the facts of the present case. I have already indicated that the provisions of RERA are prospective in nature. The penalty under section 18, 38, 59, 60, 61, 63 and 64 is to be levied on account of contravention of the provisions of RERA, prospectively and not retrospectively. These provisions, therefore, cannot be said be said to be violative of Articles 14, 19(1)(g), 20(1) and 300-A of the Constitution.”
Further, it was observed in paragraph 121 of the judgment,
“….Retroactive- Acting backward; affecting what is past. (of a statute, ruling, etc). extending in scope or effect to matters that have occurred in the past. (Of a statute, ruling etc.) extending in scope or effect to matters that have occurred in the past. ……On analysis it soon becomes apparent, moreover, that it is used to cover atleast two distinct concepts. The first, which may be called ‘true retroactivity’, consists in the application of a new rule of law to an act or transaction which was completed before the rule was promulgated. The second concept, which will be referred to as quasi-retroactivity, occurs when a new rule of law is applied to an act or transaction in the process of completion….”
It has been further held in paragraph 122 of the judgment that, ” We have already discussed that the above stated provisions of RERA are no retrospective in nature. They may be to some extent be having a retroactive or a quasi-retroactive effect but then on that ground the validity of the provisions of RERA cannot be challenged. The Parliament is competent enough to legislate law having retrospective or retroactive effect. A law can be framed to affect subsisting/existing contractual rights between the parties in the larger public interest.
The Punjab and Haryana High Court in a case titled as Experion Developers vs. Union of India has also placed reliance on paragraph 86 of the judgment of Bombay High Court in the Neelkamal Realtors case wherein, “….The Parliament is competent to enact a law affecting antecedent events. In the case of State of Bombay vs. Vishnu Ramchandra, AIR 1961 SC 307, the Apex Court observed that the fact that part of the requisites for operation of the statute were drawn from a time antecedent to its passing did not make the statute retrospective so long as the action was taken after the Act came into force. The consequences for breach of such obligation under RERA are prospective in nature.”
It was held that the challenge to section 13, 18(1) and 19(4) of the Act and Rules 8 and 15 of the Haryana Rules as regards their retroactive applicability to ongoing projects was rejected.
Regarding the second point of issue, it was observed by the Bombay High Court in the same judgment in paragraph 181,
“…Agreements entered into with individual purchasers were invariably one-sided, standard format agreements prepared by the builders/developers and which were overwhelmingly in their favour with unjust clauses on delayed delivery, time for conveyance to the society, obligation to obtain occupation/completion certificate etc. Individual purchasers had no scope or power to negotiate and had to accept these one-sided agreements.”
A similar kind of clause was found in an agreement dealt in the case before the Supreme Court titled as Ireo Grace Realtech Pvt. Ltd. vs. Abhishek Khanna & Others, wherein it was finally concluded and settled in paragraph 181 as,
“The aforesaid clauses reflect the wholly one-sided terms of the Apartment Buyer’s Agreement, which are entirely loaded in favor of the Developer, and against the allottee at every step. The terms of the Apartment Buyer Agreement are oppressive and wholly one-sided, and would constitute an unfair trade practice under the Consumer Protection Act, 1986.”
Mandatory pre-deposit u/s 43(5):
Section 43(5) of the Act can be reproduced as hereunder-:
(5) Any person aggrieved by any direction or decision, or order made by the Authority or by an adjudicating officer under this Act may prefer an appeal before the Appellate Tribunal having jurisdiction over the matter.
Provided that where a promoter files an appeal with the Appellate Tribunal, it shall not be entertained, without the promoter first having deposited with the Appellate Tribunal atleast thirty per cent of the penalty, or such higher percentage as may be determined by the Appellate Tribunal, or the amount to be paid to the allottee including interest and compensation imposed on him, if any, or with both, as the case may be, before the said appeal is heard.
Therefore, the mechanism of appeal as has been provided in the Act, provides that if right of first appeal is to be preferred before the Haryana Real Estate Appellate Tribunal (hereinafter referred to as ‘Appellate Tribunal“) by the promoter there is a mandatory requirement of pre-deposit that must be fulfilled by the promoter. The mandatory requirement is that before the appeal is entertained, the promoter will have to pre-deposit with the Appellate Tribunal atleast thirty per cent of the penalty or more or such amount that has to be paid to the allottee as interest or compensation. Similar, obligation is not imposed on the allottees or real estate agents or other aggrieved persons who wish to appeal against the decision of the Authority.
Consequentially, this provision has been challenged by the promoter, on the ground that it is arbitrary and unconstitutional, in violation of Article 14 of the Constitution, as it unfairly imposes an obligation on the promoter which is not imposed on other similarly situated persons.
The matter came to be heard by the Punjab and Haryana High Court in CWP 38144 of 2019 namely Experion Developers vs Union of India &Ors, wherein the Court placing reliance on other judgments of the Supreme Court and High Court made the following observations-:
Firstly, that the right of appeal is a creature of the statute and therefore, it can be made conditional upon fulfilling certain conditions by the statute itself. It has been further held that the Appellate Authority does not have inherent powers to waive the limitation or precondition prescribed by the statute for filing an appeal as the inherent, incidental or implied powers vested in the Appellate Authority cannot be invoked to render a statutory provision nugatory or meaningless. The waiver of pre-deposit, in exercise of the writ jurisdiction of the High Court could be granted only in cases of extreme hardship.
Secondly, a perusal of the Act makes it clear that while limited rights and duties are prescribed for the allottees under section 19 of the Act of 2016 several onerous duties and obligations have been imposed upon the promoters namely registration, adherence to sanctioned plans, insurance of real estate project, payment of penalty, interest, and compensation. This classification between the consumers and promoters is based on intelligible differentia between the rights, duties and obligations of the allottees/consumers and the promoters and is in furtherance of the object and purpose of the Act to protect the interest of the consumers viz a viz the promoters in the real estate sector. Therefore, the promoters form a separate and distinct class and as the prescription of pre-deposit is in furtherance of the object of legislation, therefore, the imposition of the condition of pre-deposit upon the promoters satisfies the test of Article 14 of the Constitution of India.
Therefore, it was held that section 43(5) stands the test of reasonable classification as prescribed by Article 14 as classification between promoters and other stakeholders is based on intelligible differentia which has a rational nexus to the object sought to be achieved which is protection of the interest of consumers in the real estate sector as set out in the Preamble to the Act.
Segregation of powers between Authority & AO-:
The Act has established two independent adjudicatory forums namelythe Authority and the Adjudicating Officer (hereinafter referred to as ‘AO‘). Since the initial days of implementation of the Act, there has been a conflict of opinion regarding the power to grant refund i.e. return of investment and compensation, whether it was within the purview of the Authority or with the AO.
The Haryana Real Estate Appellate Tribunal (hereinafter referred to as ‘Appellate Tribunal“) settled the controversy in the case Sameer Mahawar vs. M.G. Housing Pvt. Ltd., held that refund and compensation were exclusively within the domain and jurisdiction of the Adjudicating Officer and all other incidental reliefs prayed along with such relief, would also be within the jurisdiction of the AO only. It was observed,” that violations and causes of actions arising out of the same bundle of facts/rights giving rise to the multiple reliefs shall be placed before one and the same forum for adjudication in order to avoid the conflicting findings.
The complaints for the grant of relief of compensation can only be adjudicated by the adjudicating officer as per the provisions of section 71 of the Act and rule 29 of the Rules. Similarly, if compensation is provided as part of the multiple reliefs alongwith refund/return of investment with interest flowing from the same violation/violations and causes of action, the complaints have to be placed before the adjudicating officer exercising the powers under section 31, 71(1) read with rule 29 of the Rules as only the adjudicating officer is competent to deal with the relief of compensation.
Subsequently, the “Haryana Rules” were amended on 12.09.2019, rule 28 and 29 of the same clearly demarcated the powers and responsibilities of the Authority and the AO.
Rule 28 provides for filing of complaints before the Authority i.e. an aggrieved person can file a complaint regarding contravention of any provisions of the Act, Rules and Regulations against the promoter, allottee and real estate agent. It is then incumbent on the Authority to conduct an inquiry under section 35 of the Act and if contravention/violation is found, to grant relief as per the directions of the Act. The power to grant the relief of refund with interest and delay possession charges have been given solely to the Authority by virtue of the said Rule.
Rule 29 of the Rules gives power to the AO to adjudge compensation for violations of section 12,14,18 and 19, after a violation has been established by the Authority, in accordance with the factors laid down in section 72 of the Act.
Therefore, a cumulative effect of rule 28 and 29 is thatthe power to determine violation and grant relief lies with the Authority and in case of contravention established, the power to grant compensation lies with the AO.
The validity of the aforementioned rules was challenged before the Punjab and Haryana High Court in CWP No. 38144 of 2018 titled as Experion Developers Pvt. Ltd. vs. State of Haryana &Ors. The Court applied the settled rule of harmonious construction and held that the amended rules were not ultra vires the Act. The validity of the Haryana Rules was upheld and it was reiterated that the power to grant refund, interest on the refund amount, interest on delay in delivery of possession and penalty or interest thereon, it is the Authority which has power to examine and determine the outcome of the complaint. However, the relief of compensation or interest by way of compensation comes within the purview of AO on the basis of the collective reading of section 71 and 72 of the Act.
It is important to note the key findings given in the case Experion Developers Pvt. Ltd. vs. State of Haryana &Ors have been challenged before the Supreme Court.
In the Special Leave Petition titled as M/s Sana Realtors Pvt. Ltd. vs. Union of India, operation of the order in CWP no 38144 of 2018 was stayed until further orders and these issues, as on date, are in abeyance till, they are conclusively determined by the Supreme Court. In the same SLP, vide order dated 18.01.2020; the execution cases filed pursuant to the orders of the regulatory authorities were also stayed until further orders.
Article 141 of the Constitution provides that “the law declared by the Supreme Court should be binding on all courts in India”. Therefore, the issue of retrospective application of the Act, section 43(5) and demarcation of powers between the Authority and AO, once finally adjudicated and determined by the Supreme Court will be applicable across States and Courts in India, thus bringing clarity in the rule of law and enabling and facilitating the state regulators to achieve the intended objects of the Act. As these outstanding issues are settled by the highest Court of the land, there will be more respect and certainty for the decisions pronounced by the RERA Authority and the AO.
Section 43(5) will limit the number of appeals, as a result of which the decisions of the Authority/AO will be accepted as final and correct, thus leading to an expeditious disposal of disputes. As the Act will create an effective ecosystem for resolution of disputes, it will inspire confidence among all stakeholders and prevent breaches and fraud by any side with impunity. This, in turn, will streamline the sector which will more efficiently cater to the demand for housing, retail and commercial space in a planned, orderly and regulated manner.
Views are personal.
The Author is an Advocate.