BACKGROUND

1. Development Agreements are common place in recent times when price of land is nearly 40% of the cost of a development project (“Project“) and Promoters prefer to defer the payment until they in turn earn from the Project.

2. In such cases, usually, the landowner receives his compensation towards cost of land in the form of either built-up areas or share in the revenues received from the Project.

3. Development Agreements have been in recent times hit by several controversies relating to taxation as an Association of Persons under the Income-tax Act and levy of service tax on developers for built up areas constructed as Owner’s share.

4. While the real estate industry has been grappling with the aforesaid issues, the Real Estate (Regulation and Development Act), 2016 (“the Act“), read with the Rules and Regulations made thereunder, has with effect from 1st May, 2017, introduced a new dimension effectively saying that the land owner cannot take 70% of the monies payable to him till the Project is complete. This could effectively spell a death knell for such transactions.

5. This write-up seeks to discuss the legalities around the aforesaid Order issued under the Act.

DEFINITION OF PROMOTER

6.      The term ‘Promoter’ has been defined in the Act, inter alia, to mean a person who:

1. constructs or causes a Project to be constructed; or
2. a person who develops land into a project by doing a plotted development; or
3. a development authority or a public body; or
4. a State level co-operative housing finance society and a primary co-operative housing society, which constructs projects for its members; or
5. a person who acts as a builder; or
6. a person who claims to be acting under a power of attorney of the owner of land; or
7. a person who constructs any Project for sale to the general public.

7. The definition of Promoter therefore indicates that it covers only a person who is actually involved in the development of the Project and would not cover a land owner, who merely grants rights to a Promoter to develop his land.

OBLIGATIONS OF A PROMOTER

8. In terms of Sub-clause (D) of Clause (l) if Sub-section (2) of Section 4 of the Act, a Promoter is required to deposit 70% of the cash flows received from flat purchasers in a separate bank account (“RERA Account“) and withdraw monies therefrom only in proportion to the completion of construction. 

THE AUTHORITY

9. The Maharashtra Real Estate Regulatory Authority (“the Authority“) has been set up by the Government of Maharashtra (“GoM“) under the Act with effect from 8th March, 2017.

THE ORDER

10. The Authority has, by an Order dated 11th May, 2017, directed that:

1. the cost of land payable to land owners by the Promoter cannot be regarded as cost of Project and cannot be withdrawn from the RERA Account;

2. for the purpose of withdrawal of monies from the RERA Account, such land owners should be considered as Promoters and termed as Co-Promoters;

3. the definition of Co-Promoter has been notified as “Co-Promoter means and includes any person(s) or organization(s) who, under any agreement or arrangement with the Promoter of a Real Estate Project is allotted or entitled to a share of the total revenue generated from the sale of apartments or share of the total area developed in the real estate project;

4. the liabilities of such Co-Promoters shall be as per the agreement or arrangement with the Promoters, however for withdrawal from the RERA Account, they shall be at par with the Promoter of the Real estate Project;

5. the land owner is required to give an undertaking to the Authority in Form B, which includes undertaking even obligations relating to the title to land and committing the date of completion; and

6. such land owners should open a separate bank account for deposit of 70% of the sale proceeds from the allottees. 

11. The Order covers all circumstances where:

1. a landowner is entitled to built-up areas in a development project;

2. a landowner is entitled to revenue generated from the sale of apartments;

3. an investor is entitled to built-up areas constructed by a Promoter and sold by the Investor.

URGENT CLARIFICATIONS TO THE ORDER

12. At the outset, the Authority should immediately clarify to aspects of its Order:

1. What is meant by “however for withdrawal from the RERA Account, they shall be at par with the Promoter of the Real estate Project“? – does it mean that the landowner cannot be permitted to withdraw any amount till any costs are incurred by him in relation to the Project?

2. Is the Undertaking in Form B to be given by the land owner, supposed to be restricted to the withdrawal of funds from the RERA Account or does it extend to other aspects such as title and delivery schedules?

3. Also, if the land owner is responsible for the title to the land quay the Promoter, is he required to give an undertaking to the RERA Authority as well?  

4. Whether the aforesaid Order is intended to apply even in circumstances where the Project is not marketed or sold by the land owner?

ORDER QUA THE ACT

13. We now examine the legality of the Order given the provisions of the Act and the Rules.

14. The Act provides that the 70% amounts realized from the Project are to be deposited in the RERA Account to cover the cost of construction and also the land cost. The amounts deposited in the RERA Account are permitted to be withdrawn to cover the cost of the project in proportion to the percentage of completion of the Project.

15. If the Act, permits such express provision for withdrawal of monies from the RERA Account towards cost of land then it is not clear as to how the Order can restrict such withdrawal.

ORDER QUA THE RULES

16. In pursuance of Section 84 of the Act, the GoM has made the Maharashtra Real Estate (Regulation and Development) (Registration of Real Estate Projects, Registration of Real Estate Agents, rates of interest and disclosures on website) Rules, 2017 (“the Rules“).

17. Rule 5 of the Rules provides for withdrawal of monies from the RERA Account in proportion of the cost incurred on construction and land cost to the total estimated cost of the Project. Explanation I to the Rules defines in detail as to what components would constitute land cost. Explanation II to the Rules explains that where cost of land cannot be ascertained, the ready recknor value thereof is to be considered as land cost.

18. Where the Rules make such explicit provisions for withdrawal of land cost, it is not clear as to how the authority has sought to levy a complete embargo on such withdrawals.  

ORDER QUA THE EARLIER CLARIFICATIONS

19. The Authority has put up certain Frequently Asked Questions (“FAQs“) on its website. FAQ no.61 has been answered as “No. There should be one designated bank account for every registered project or registered phase of the Project.”  The Order is clearly contrary to the thought contained in the FAQ albeit in a different context.

EFFECTS OF THE ORDER

20. In the above circumstances, if the Promoter was to make full payment of the value of the land to a landowner then the Promoter would be entitled to withdraw the amounts spent by him in the proportion described above. However, if the Promoter were to defer the payment of consideration to the land owner by relating it to the development of the Project then the land owner would not be in a position to withdraw the funds from the RERA Account till the development is complete or till the landowner incurs any costs on construction.

21. A number of lenders have lent to landowners based on the amounts receivable by them in the course of development. The Order would adversely affect the rights of the lenders whose cash flows will be postponed indefinitely till construction is complete. 

22. The effect of the Order is not borne out of the Act or the Rules and does not appear to be in the spirit of the law.

WHETHER THE AUTHORITY CAN IN THE GUISE OF REGULATIONS ALTER THE PROVISIONS OF THE ACT AND THE RULES

23. Section 20 of the Act provides that the appropriate Government (in the present case, GoM) is required to establish an Authority to exercise the powers conferred on it and perform the functions assigned to it under the Act.

24. A perusal of Chapter V of the Act does not seem to confer any powers on the authority to issue Orders such as the aforesaid or to prescribe any definitions or to extend the provisions of the Act to persons who do not fall within its ambit (such as Promoters) or to restrict the provisions of the Act and the Rules (by prescribing that land owners should not be allowed to withdraw the amounts deposited in the RERA Account).

25. Infact, a reading of the first part of the Order indicates that the Order has been passed in terms of the Regulations framed by the Authority itself and no such power is being exercised by it in pursuance of the provisions of the Act read with the Rules.

26. In the absence of any clarification, affected parties may have to challenge the Order before the appropriate forum.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.