How power in real estate shifting slowly from builders to home buyers
This case has made me old,” says 8-0-year-old Sudha Sheth, a Mumbaibased gynaecologist who recently secured a favourable verdict in the National Consumer Commission against Lodha Developers. Sudha and her surgeon husband, Naren, pored over piles of paperwork and emails for over five years, in their bid to spot inconsistencies that may help them in their case against the mighty builder.
“It was so depressing…,” she recalls. “For a builder, fighting a legal case is no big deal. They have a batch of lawyers. But it’s pretty unnerving for consumers… the builder must have thought we’d die before this case reached its conclusion,” she guffaws. (See accompanying story for case details).
The Sheths are amongst several homebuyers who have taken up cudgels against real estate builders and have won cases in the National Consumer Disputes Redressal Commission (NCDRC or the National Commission) in the recent times. While there are no records as to how many cases have gone in favour of homebuyers, the number of consumers lodging complaints against erring builders is steadily rising.
The National Commission received over 1,700 housingrelated cases in 2014 – 15, vis-a-vis a few hundred cases in the previous years.
“The national commission’s jurisdiction (in housing) is above Rs 1 crore. These days most city apartments are priced above that mark; so they make it to the apex consumer court easily. Also, complaints against builders are on the rise,” says Gagan Chhabra, a Gurgaon-based lawyer specialising in real estate cases.
Homebuyers have limited options when they realise they are wronged by unscrupulous builders. They can either approach the commission (district, state or national – depending on the value or their apartment) or file a criminal suit. A bulk of consumer complaints come in the form of delay in giving possession, faulty construction, wrongful calculation and pricing of super area (or common area), fraudulent agreements, additional (cash) claim for parking lots, delay in the registration of booked property, unreasonable maintenance charges etc.
“Many such problems come up because of one-sided agreements structured by builders. Consumers are at a huge disadvantage when you peruse documents closely,” says Sahil Sethi, a senior associate at law firm Saikrishna & Associates. Sethi secured a favourable verdict for the owners of Jaypee’s Kalypso Court Project in Noida.
THE LEGAL ROUTE
Almost all the cases filed in the National Commission are fiercely contested by the builder. Stoppage of work for want of local body approvals, economic downturn, labour shortage, holdup in buyer payments, run-ins with National Green Tribunal and shortage of bricks, water and sand top the list of builders’ excuses.
“Consumer courts are firmly bound by consumer protection laws of the land. These courts are not biased, but they give a fair and patient hearing to consumers,” says Chhabra.
Consumer courts are relatively more protective of consumer rights and dispense good justice. For instance, a builder levies 18% interest on payments due from homebuyers. To bring equity, when cases pertaining to inexplicable delays in handover of projects come up for hearing, consumer courts direct builders to pay 18% interest on the amount deposited with the builder. In normal course, builders pay 4 – 6% interest (to consumers) for project delays. To prevent builders from delaying the case by asking for adjournments, the National Commission has started levying “adjournment cost” on parties not appearing in the court at the time of hearing. These can be as high as Rs 10,000 to 20,000 per missed hearing.
There are options for consumers to apply for relief in Civil Courts too. Civil courts can give pecuniary compensation for up to `1 crore, which is much higher than the limits set for State and District Consumer Forums. “Some advocates prefer Civil Court over Consumer Forum as the applicability of Code of Civil Procedure and Indian Evidence Act makes it convenient for lawyers to establish their cases,” says Geetanjali Dutta, a practising lawyer at Bombay High Court.
Homebuyers would be even more protected against unscrupulous builders once States set up the real estate regulator mechanism, as propounded by the recently-passed Real Estate (Regulation and Development) Act, 2016 (or RERA).
“It’s too early to say which option consumers would choose… RERA brings in a lot of clarity within the real estate sector. Higher conviction rate may encourage consumers to approach regulators for legal recourse. Regardless of that, consumer forums would still be relevant,” feels Chabbra.
Anil Bhattar, co-founder & COO of Radisson Consulting, a Mumbai-based firm with significant practice in real estate sector, feels real estate appellate tribunals would play an important role in alleviating the problems of homebuyers.
“Appellate tribunals will adjudicate cases in 60 days as against the earlier provision of 90 days. Real estate needs a regulator more than any other asset class (like stock market) as it affects more consumers,” says Bhattar.
THE NEW ACT
The RERA, at least on paper, is set to make the process of buying a house easier. The Act is intended to bring transparency and accountability in realty sector, thus increasing consumer confidence and benefiting the sector as a whole. While the Act lights up a ray of hope for tormented homebuyers, stringent compliance norms are giving sleepless nights to many a real estate developers.
“It’s very complicated and one-sided… RERA needs a lot of changes before implementation,” says a leading Mumbai builder having multiple business interests. RERA makes it mandatory for all builders to register their project with state real estate regulatory authority, tagging along extensive information about the project, construction plan, land-related clearances and approvals from local bodies.
“This bill is meant for consumers, and not exactly for builders. It’s meant to protect homebuyers. The first objective of transparency is met with this bill; there’ll be adequate disclosure from now on,” opines Niranjan Hiranandani, Chairman, Hiranandani Group.
RERA would not be applicable to projects laid out in less than 500 sq.mts of land or in cases where number of apartments does not exceed eight units. Projects that have finished completion prior to the commencement of Act as well as those up for renovation/redevelopment, which does not involve fresh sale of apartments, would not come under RERA.
“It’s a good move for consumers, but for builders it is getting another set of approvals and licences. But if all these build the confidence of buyers, it is good,” says Gaurav Gupta, director at Omkar Realtors. Construction approvals vary from state to state in India. In some cases, it’s as high as 40 – 50 approvals, which may take anywhere between 6 to 16 months.
“Approvals will have to keep pace with builders. Ideally, all state governments should start an online route, where approvals are handed out within a stipulated time-frame,” says JC Sharma, vice chairman, Sobha Developers.
“Also, once the approvals are given, there should not be any retrospective regulatory annotations which would result in stoppage of work,” Sharma adds. Builders feel the government should take more responsibility with regards to giving quick approvals. “If approvals take time, builders do not have anyone to voice their concern,” says Hiranandani.
“This is partly covered in Maharashtra through the Right to Services Act; but in overall terms, delay in approvals could be a big lacuna. Realty regulators should have been empowered to address this issue,” he adds. The Act also obliges the developers to park 70% of project funds in a dedicated bank account. “This is to prevent developers from diverting buyer funds to other projects. Such diversions are seen to cause delay in project completion,” says Bhattar of Radisson Consulting.
Big builders, however, are not quite pleased with keeping money idle in a special account. This rule may trigger illiquidity in the system and it may impact builders with stressed balance sheets. It may also increase the working capital needs of developers, who would now be forced to borrow at higher rates to seed their ongoing projects. This, in a way, may increase prices as well, they opine. “There could be some cost-push in their structure, which may result in higher prices for apartments. But this is only going to be a short-term trend,” says Samantak Das, chief economist and national director (research), Knight Frank.
“RERA calls for a change in business model for builders. They will not be able to do things like soft launches anymore. Developers will also have to rework their capital structure to meet working capital needs,” says Das.
The new Act will also weed out ambiguous concepts like built-up area, super built-up and carpet area. Builders will not be able to charge consumers on the basis of ‘builtup area’ (areas that do not form a part of the apartment, but common areas like lift cage, podium and lobby-area) as it is considered illegal under the current law. “The scrapping of carpet and super area concepts will increase the price of apartments, but there’ll be no change in common areas provided by builders,” feels Gupta of Omkar Realtors.
“Builders would give the same amenities and open spaces, but they will load up charges on carpet area. Builders will have to realize cost paid for the land they purchased to offer these facilities,” he adds. The new law ensures that any delay in project completion will make developers liable to pay the same interest as the EMI being paid by consumers to the bank. This will encourage homebuyers to book apartments in workin-progress projects.
“This is a welcome move,” says Naveen Safaya, who booked an apartment in Amrapali’s Dreamvalley project (Noida extension) in 2010, but has not received possession till now.
“We were supposed to get possession in 2013… now the builder is saying we’d get our flats in 2017,” laments Safaya.
“I paid over Rs 20 lakh for this apartment, taking a home loan from the bank…now am under much duress. I’ve to pay home loan EMI, along with rent for the place where am staying now,” the 40-year-old says.
Delay in possession is not the problem of a few homebuyers, but of many consumers across major cities in India. As per Knight Frank scrolls, average delay (for project completion) in NCR region is about 2 – 2.6 years, and 6 – 8 years in extreme cases. In Mumbai, almost all projects are delayed by 1 – 1.6 years; builders in South India have relatively lower delays than their peers in other parts of the country, states the Knight Frank research.
Big builders like Rajeev Talwar, CEO of DLF Ltd, feel that customers should only be allowed to book in a project once the “shell” of the building is constructed. “Till that time, banks and other financial institutions should support the project; project start-up funds should not be taken from homebuyers,” Talwar says.
“By doing so, the homebuyer gets to see where he’s investing his money. Till such time the project shell is constructed, there’s huge risk with regards to completion of the project. Homebuyers should not be made to face such risk,” he adds.
“You cannot run mammoth plans like ‘Housing-for-all’ on public money. You need institutional support… The government and RBI should encourage financial institutions to lend to real estate projects. Not all builders are crooks,” Talwar adds.
RERA has added more teeth to its laws by including punitive actions against erring builders. Developers who violate the orders of RERA appellate tribunals may have to face a jail term of upto three years, with or without a monetary penalty. To counter flaws in construction, the Act has held builders liable for structural damages for a period of five years from the date of handing over possession.
Also with RERA, developers will not be able to alter master plans without the written consent of buyers. This, in a way, would bar builders from charging additional money over pre-agreed costs. This may come as a relief for several homebuyers in the Delhi NCR area. “Builders keep asking us money all the time,” says Annu Khan, president of Noida Extension Flat Owners & Members Association.
“They extract money from us for everything – from rise in labour cost to increased brick prices. They’re doing this to make good their (additional) payments made to farmers as per a recent court directive,” Khan says.
WHAT ABOUT INVESTORS
“A regulator will help the sector in a big way. It’ll bring in operational guidelines and fly-by-night operators would vanish,” feels Gaurav Mittal, MD of the Northbased CHD Group.
“More importantly the concept of ‘investment flats’ may go out of the window.
But genuine investors will thrive, says Sharma of Sobha Developers. “Opportunistic investors (who book flats by giving a token amount, only to downsell at higher prices (at a later date) have already come down in numbers. With RERA, we’ll see genuine investors who will stay on till the project is completed,” Sharma adds. It may take 12 – 18 months before states put in place all regulatory mechanisms to implement RERA. “Even with a real estate regulator, one cannot be cent percent sure as there are forces like an economic meltdown which can impact the best-laid plans,” concludes Talwar.