Does RERA Stand on Strong Constitutional Ground?

It’s been barely 6 months of implementation and India’s real estate law is already facing an existential challenge. Over 21 writ petitions have been filed across the country alleging that some of its provisions are unconstitutional. The Supreme Court has asked the Bombay High Court to rule on this issue first to avoid conflicting high court decisions, and its ruling is expected soon.

The Real Estate (Regulation & Development) Act, 2016 was legislated to level the playing field between real estate developers and buyers. Its provisions attempt to bring more accountability to project delivery and penalise lapses therein. But these very provisions are now under scrutiny.

While RERA is actually intended to be a reform legislation, with an intent to bring more transparency and efficiency to the industry, at the same time, it is not going to be easy for the regulator or the state legislature to implement it immediately since the act is not aligned with all stakeholders in the industry. It will require interpretation which will lead to multiple litigation, as we see now.

Nirav Jani, Partner, Hariani & Co

To be specific most of the challenges are regarding...

• The applicability of RERA to on-going projects
• Overlap with other statutes such as contract law and debt recovery laws
• Lack of judicial members on the regulatory authority constituted under RERA

The petitioners are primarily real estate developers and their lenders who argue that these provisions are against constitutional principles that guarantee right to equality and right to practice trade and profession.

Retroactive RERA

The first challenge against RERA is that it penalises builders and real estate developers retroactively for lapses in on-going projects i.e. projects that were initiated before the new law was enforced.

The new law imposes a penalty, by way of interest, on the builders for failing to complete a project within the stipulated time, even if this failure occurs in a project that was started before RERA was enforced.

The courts have previously ruled that if Parliament enacts a retrospective law, it is not bad simply because it is retrospective. The Parliament does in fact have the legislative powers to do this but it should not pass laws having retrospective effect when there are vested, settled and accrued rights. These rights should not be disturbed and it is a public policy to follow the integrity and sanctity of contract.

Gopal Jain, Senior Advocate, Supreme Court

A new law should not be disruptive and one should always lean in favour of prospective and not retrospective law, he said.

RERA In Conflict

The second ground for challenge is the conflict between RERA and other statutes, such as those for debt recovery and enforcement of security and contract law.

Interference With Contract Law

Lawyers representing real estate developers and promoters of real estate projects have argued that RERA interferes with contractual freedom of these stakeholders since some of its provisions overlap and conflict with terms of contract entered into with counterparties. In case of such conflict, the statutory law will trump contractual provisions.

At the core are terms of development commonly found in contracts between developers and buyers - such as date of completion and potential penalty for breach of contract. RERA overrides these with its own penalties and timelines. The carve outs - exceptions to penalty payments - under the new law are also far more limited when compared to what could have been agreed contractually.

The new act disregards certain provisions of the agreement that were valid under the erstwhile land laws and continue to be valid under the Contract Act. This appears to be unfair since all the obligations of the developer continue to exist under the same agreement while many rights of such developer become invalid.

Bhoumick Vaidya, Partner,  Kanga & Co

The act distorts well established legal principles that have guided the industry so far, said Jani. He added that this may create more confusion and more apathy for consumers than clarity.

Interference With Debt Enforcement Laws

Lenders are another set of stakeholders that have challenged the act on grounds that it interferes with their ability to enforce their security.

Typically, financial institutions extend loans to builders to develop property, in exchange for mortgage over the land or pledge of the builder’s shares or any such security interest.

So far lenders have relied solely on debt recovery laws and the SARFAESI Act to enforce their securities and sell or transfer interest in the project. Under RERA lenders need the approval of homebuyers and the regulator to enforce the security if it results in a change in shareholding.

Under the new regime it seems that flat buyers have been given a superior right to the lenders, Vaidya said.

The Maharashtra authority, in recognising this issue has issued a clarification last week that lenders shall not be required to take this approval if such security interest has been disclosed while registering the project. There is however, no clarity on this issue for any lending that is provided after a project has been registered. And it is also important to note that apart from Maharashtra, none of the other states have provided clarifications on this topic.

Bhoumick Vaidya, Partner,  Kanga & Co

Vaidya expects this will impact the market for such loan securities as any new developer that subsequently takes up the project will also be liable for all obligations of the erstwhile developer. This could then negatively affect the demand to buy distressed assets, he added.

A contrary view has been taken by some experts who believe that the intent behind RERA is to ensure, over everything else, on-time completion of projects.

RERA is a welfare legislation brought into force in order to protect the interests of flat purchasers. While, protection of interests of other stakeholders like banks is equally important, this law brings in a mechanism to ensure that projects are completed. The banks and other stakeholders will have to realign their positions on enforcement of security in order to push real estate developers to ensure that projects are completed, as promised.

Dhaval Vussonji, Founding Partner, Dhaval Vussonji & Associates

RERA Adjudicator

The final argument against RERA is that the regulatory authority passing orders under the act lacks members having judicial background although it performs quasi-judicial and adjudicating functions.

The state government has refuted this argument on grounds that the regulatory authority primarily performs administrative functions and therefore does not require a judicial member.

Much like the functioning of the adjudicating authority under SEBI, it would be appropriate that the authority under RERA also has persons in each matter that have technical expertise, financial expertise and industry background, as well as a member that has legal background, for when there are issues that interplay with existing law and legal principles to arrive at a fair and just adjudication.

Bhoumick Vaidya, Partner,  Kanga & Co

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