A BIRD’S EYE VIEW OF JOINT DEVELOPMENT ARRANGEMENTS POST THE ENACTMENT OF THE REAL ESTATE (REGULATION & DEVELOPMENT) ACT, 2016

Prior to the enactment of the Real Estate (Regulation and Development) Act, 2016, (RERA Act), the RE sector (particularly the JD projects) were largely unorganised and lacked a specific regulatory authority to look into the disputes arising out of the RE sector

Joint Development (JD) arrangements blossomed in the Real Estate (RE) sector in India majorly because of 2 key strategic factors: (i) Huge market demand for both residential and commercial (including IT/ITes) projects and (ii) Inability of the landowners to mobilise necessary expertise, goodwill and resources to develop the lands into well-rounded projects. Resultantly and rightfully, the project proponents i.e., the developers in a win-win scenario, cashed in on the market opportunities to change the geographical landscape of the cities in India for the better by entering into JD arrangements with the landowners either on an area sharing or a revenue sharing model.

Prior to the enactment of the Real Estate (Regulation and Development) Act, 2016, (RERA Act), the RE sector (particularly the JD projects) were largely unorganised and lackeda specific regulatory authority to look into the disputes arising out of the RE sector. In other words, consumers of the RE sector were forced to approach the consumer redressal forums and / oralternatively seek legal remedy available before the jurisdictional civil courts resulting in delays. While state government drivenlegislations, for instance ‘The Karnataka Ownership Flats Act, 1972’ in the State of Karnataka did make an attempt to regulate the RE sector, but the very fact that it lacked a specific authority for speedy redressal of disputes did not assist the end consumers to derive the optimal benefit to safeguard their rights. With the introduction of the RERA Act, the Union Government of India has addressed this specific concern by empowering the states to constitute state specific authorities guided by the RERA Act and state specific RERA rules. The following snapshot demonstrates the hierarchy and timelines:

Now, the cornerstone of this this article being the status of JD arrangements post the enactment of the RERA Act, we wish to highlight 3 primary aspects that demonstrate the intent of the legislation which are as follows:

(i) Transparency: ‘Promoters’ (which includes both a landowner and a developer) in a JD arrangement are required to register the RE projects with the jurisdictional ‘Real Estate Regulatory Authority’ (RERA) inter alia providing detailed information about: (i)the ‘Promoters’ and (ii)the RE project. With time, to foster transparency and trust among stakeholders, the compliance requirement under the RERA has been streamlined to certain mandatory information viz KYC of the Promoters, specific details of the RE project, title of the project lands, status of construction related approvals, and the estimated timelines for completion of the RE project. For instance, RERA Act makes it mandatory for the Promoters to advertise (print or electronic medium) their RE projects only post receipt of a unique RERA Registration Number. This requirement is also strictly monitored by the state specific RERAs to avoid advertising and marketing of dubious and fraudulent RE projects.

(ii) Equal Accountability: The RERA Act read with the state specific RERA rules notified and amended from time to time have abundantly held that developers and landowners (who have entered into a JD arrangement) are both regarded as ‘Promoters’ for the purposes of the RERA Act with well-insulated list of obligations, responsibilities and functions to be complied with in the ordinary course of business. In fact, we have come across judicial precedents wherein: (i) an investor who causes to construct the RE project and (ii) a development manager who ideally works for a designated fee in a development management contract would also qualify as a ‘Promoter’. Such rulings by state specific RERA are more case to case specific and RERA themselves in their orders have clarified that the contents of each agreement shall have to be examined individually to determine whether a particular investor or for that matter a development manager would also qualify as a ‘Promoter’ under the RERA Act or not. In short, while certain orders of the RERA could be argued as a far out reach of the powers of the RERA Act by the RERA, it has however demonstrated the core intent of the RERA Act i.e, to protect the interest of the end consumers.

(iii) Financial Discipline: Promoters in a JD arrangement are required to maintain a separate bank account and shall deposit 70% of the amounts received for the RE project from the allottees in the said designated bank account. A Promoter, for each withdrawal, subject to submission of 3 distinct certificates (i.e., certificate of the engineer, architect and chartered accountant)can withdraw the amount deposited in the designated bank account in proportion to the percentage of completion of the RE project. Now, to curb rerouting of funds directly or indirectly by a Promoter, in the State of Karnataka, RERA issued a notification inter alia with additional directions that the ability of a Promoter to withdraw (including the ability of a Promoter to raise monies through financing facilities from lenders) for the RE project shall be proportionate to the relevant phase of the RE project and importantly, the lenders to such RE projects shall also ensure that the loans are disbursed to the designated bank account of the RE project published on the official website of the RERA and compliance to this requirement is also specified in the quarterly updates to be filed by the Promoters and also verified by the Chartered Account in their certificate. In fact, the RERA has taken step further and has directed that the unutilised portion of the monies borrowed in the existing projects prior to the date of issuance of such notification be also deposited in the designated bank account of the RE project.

In summation, given the stringent measures imposed by the RERA Act, there are instances wherein, the parties are hesitant to enter into a clear-cut JD arrangement as it would increase the burden on the parties to comply with the provisions of the RERA Act read with applicable RERA rules. Particularly, depending on the gravity of the default or uncured breach, per the provisions of the RERA Act, there are penal provisions which include huge fines upto 10% on the estimated cost of the RE project or imprisonment or with both. On the other hand, considering the growth volume of the RE sector, while the state specific RERAs from time to time have issued circulars, orders and notifications in exercise of its powers under the RERA Act to maintain transparency, monitor accountability of the ‘Promoters’ and financial discipline of the RE projects, only time will determine, whether such state specific RERAs possess the requisite administrative prowess to constantly monitor the compliances mandated therein and continue to usher much needed positive change in the RE sector in India.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.