Why the Maharashtra Housing Act, 2012 Should be Repealed

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1 Why the Maharashtra Housing Act, 2012 Should be Repealed Nagendra Goel Vol. 49, Issue No. 19, 10 May, 2014 Nagendra Goel is with the Policy and Programme Support Unit of the Ministry of Housing and Urban Poverty Alleviation, Government of India. Does the Maharashtra Housing Act, 2012, notified for implementation on 24 th February 2014, weaken the existing legal architecture available under the Maharashtra Ownership Flats Act, 1963? Or does it strengthen the proposed framework under the Real Estate Bill, 2013 or nullifies the reform provisions provided under it? This article attempts to unfold and decipher the provisions of the Maharashtra Housing Act, 2012 vis-à-vis the Real Estate Bill, 2013, with the provisions of the Maharashtra Ownership Flats Act, 1963 in hindsight, which this Act has now repealed. The Maharashtra Housing (Regulation and Development) Act, 2012 (hereinafter the State Act) has been welcomed by the mainstream mediaand Maharashtra hailed as the first state in the country to come up with a housing regulator. However, the news coverage has missed the devil that lies in the detail. An attempt is made to point out the serious flaws in the State Act, by way of deliberate insertions, which end up harming home buyers interests rather than protecting them while making beneficiaries of the developers. The State Act received presidential assent in February this year, whereas the centre introduced its own legislation the Real Estate (Regulation and Development) Bill, 2013 (hereinafter referred to as the central bill) in Parliament on 14 th August What is pertinent to note is that the State Act, despite being a later law negates most of the proposed provisions of the central bill which aims at reforming the residential real estate sector. Central Bill Empowers the Buyer The central bill aims to correct many anti-consumer practices, and despite the constitutional limitations within which it has been drafted, is an exhaustive and consumer friendly legislation, empowering a home buyer to demand his or her due. Recognising the power asymmetry prevalent in the real estate sector, it envisages setting the benchmark in consumer protection. It aims to protect home buyers from the effects of surreptitious practices resorted to by the developers such as carrying out development without permission or flagrantly contravening it. It is the home buyer who has invested a lifetime s savings who bears the brunt of these practices. It also tries to protect home buyers from abuses accruing from one-sided contracts entered into by the developers and which are heavily loaded against the former. The thrust of the central bill is transparency in a sector plagued by frauds and delays and is aimed at addressing most of the ills. Clause 3 prohibits the developer from selling any residential real estate (though it does not prohibit its development since that is not within the legislative domain of the centre) without first registering the project with the Real Estate Authority, to be established under the Act. This registration is only permitted after all approvals for development of a project have been received by the developer from the concerned competent authorities.

2 This requirement has been inserted to prevent fly-by-night developers from duping gullible home buyers. It thus targets the existing practice of launching projects and collecting funds without taking due approval from competent authorities for physical development and which has become the norm and source of funds for creating land banks for even the reputed developers. Two Illustrative Cases The recent case in Noida, where two towers of the Supertech Emerald Court group housing project were ordered to be demolished by the Allahabad High Court illustrates my argument. A similar situation is presented by the Campa Cola society case in Mumbai. In the latter case, the Bombay High Court had ordered demolition of the illegal floors and the ruling was ratified by the Supreme Court in February 2013 following a special leave petition (SLP) by a residents association. In the Esha Ekta Apartment Cooperative Housing Society Limited and others vs Municipal Corporation of Mumbai and others the Supreme Court referred to a 2004 judgment (Friends Colony Development Committee vs State of Orissa) which stated that..unwary purchasers in search of roof over their heads and purchasing flats/apartments from builders, find themselves having fallen prey and become victims to the designs of unscrupulous builders. The builder conveniently walks away having pocketed the money leaving behind the unfortunate occupants to face the music in the event of unauthorised constructions being detected or exposed and threatened with demolition.. A public interest litigation (PIL) (Pawan Prabhakar Harde and others vs State of Maharashtra and others) has also been filed in the Bombay High Court in December 2013 praying for prohibition of sale of plots/land without requisite approval under the state laws. Again, in December 2013 the apex court (Municipal Corporation of Greater Mumbai vs Kohinoor CTNL Infrastructure Company Pvt Ltd) struck down the relaxations in the mandatory rules for open spaces which would lead to the serious erosion of recreational space at the ground level, affecting the minimum necessities of life, and will therefore lead to violation of the right to life. Ignoring Home Buyers Despite these rulings and ignoring the concerns of home buyers, the Maharashtra government has provided legal sanctity to the status-quo in the real estate sector and permitted the sale of properties/apartments by developers without approvals from development authorities This also goes against the much needed reform measure proposed under the central bill. What is more shocking, however, is that the State Act imposes a fine of a meagre Rs 1000 per day on the developer for failing to register with the regulatory authority. It allows developers to collect upto 20% of the unit cost from the home buyers without a written agreement. As registration and sale is permitted without approvals home buyers have no guarantee that this amount will be returned. The central bill on the other hand allows only 10% as booking amount to be taken from home buyers without agreement and which is in line with the current industry practice as a measure of the buyer s seriousness. Furthermore, registration given by the regulatory authority to a project under the State Act, shall only be revoked where the right to land has been held to be invalid by a court of law. Thus, the developer is free to contravene other provisions without the threat of deregistration, making the regulatory authority a toothless body and the need for registration and compliance a farce. The central bill on the other hand says that contravention of approvals granted

3 by the competent authority, unfair trade practices, and contravention of the rules and regulations made by the bill can be grounds for de-registration. It also mandates imposition of penalty based on percentage of cost of project for contravention. The State Act mandates that the developer shall be liable to return the investment with interest not exceeding 15%, in case the home buyer suffers any loss following incorrect information by the developer. This cap of 15%, without any recourse to compensation inherently ignores the likely increase in the value of the property. On the other hand, the central bill provides for compensation as determined by the adjudicating officer to be paid to the home buyer apart from the return of principal and interest. It has also undone a 2010 judgment of the Supreme Court ( Nahalchand Laloochand Pvt Ltd versus Panchali Co-operative Housing Society Ltd) which said that parking space cannot be sold to home buyers as it is a part of the definition of apartment under the Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act (MOFA), The State Act, which repeals the MOFA, defines parking space to mean open or closed parking, as the case may be and permits it to be sold accordingly. By one stroke what was won by home buyers after long and arduous years of litigation, has been conveniently nullified. The central bill on the other hand provides that covered parking shall be a part of the apartment and open parking is a part of the common area. Under the State Act the developer is not liable for services such as electricity; water supply etc if the service provider does not provide them. This is in contrast to the central bill which makes the developer liable for these basic services. Though the State Act mandates the developer to maintain a separate account for sums taken from the home buyers the former is allowed to collect further sums from home buyers whenever the amounts are depleted. This is a superfluous protection to the developer, a leeway to excuse escalation and should best be left to individual contracts between the developer and the home buyers. The State Act also provides that in case of increased floor space index (FSI) due to change in the law or government policies, the developer can exploit the enhanced FSI without permission of the home buyers. However, where the occupation certificate (OC) has been issued, an association of home buyers formed, and conveyance carried out, the increase in FSI which is proportionate to the FSI utilised or consumed by the conveyed structure/towers to the total FSI of the layout, shall belong to the association. But the developer is not obliged to obtain consent or permission from the association or home buyers in the said layout land or phase of the project for the purpose of utilising the balance FSI. Concomitantly, the requirement of mandatorily creating an individual association of home buyers for every structure/tower protects the developer from forfeiting the increased FSI only only in the case of structures/tower where conveyance has been passed to the association, and only to the extent of the proportionate FSI conveyed. In cases where the structure/towers have not been conveyed to the association, the developer has full freedom to enhance the number of floors in those structures/towers. This liberty given to the developer by the State Act to make alterations after the plan has been advertised and the home buyer has made a choice not only makes redundant the requirement of prior permission under MOFA but also circumvents the judgment of the Competition Commission in the Belaire Owners' Association vs DLF Limited case. The Commission held that an increase in floors would be tantamount to violating personal choice. The home buyers interest is further hurt

4 by putting pressure on common services which would have to be shared by the increased number of residents than the originally envisaged one. A similar judgment was given by the Allahabad High Court in the Supertech case. The State Act says that in case the developer is not able to deliver the unit for reasons beyond his control or his agents, the home buyer shall be entitled to receive the amount with maximum 15% interest. This is akin to permitting the developer to give any reason under the sun to escape responsibility for delay or even failure to deliver! The most a home buyer gets is his or her amount with interest (maximum 15%) but not the compensation as is provided in the central bill. The State Act in another clause states that the land underneath all buildings shall be conveyed to the association, but it is silent about the lands beyond these buildings. The entire project including common areas and open spaces should belong to the association, and the developer should not hold them in perpetuity. Penalising the Home Buyer Ironically, the State Act seems suspicious of home buyers and the provisions seem to suggest that it is they who are the root cause of all prevalent problems in the sector. It provides that if a home buyer fails to comply with obligations under the law he or she is liable to be penalised to the exten of the amount defaulted. For instance, if a home buyer delays payment of Rs 1 lakh the penalty can be payment of an additional Rs 1 lakh. This appears to be an extremely harsh provision. In case a developer defaults the penalty imposed is the lower of the threshold while a defaulting home buyer has to pay the higher part of the threshold, thereby making it appear that it is a law to regulate home buyers. In case of contravention of orders of the regulatory authority or the appellate tribunal by the developer or the home buyer, the punishment can extend to three years of imprisonment. The developer and the home buyer have both been treated at par, for violations, though their responsibilities are varied and the outcome of their respective non-compliance cannot be compared. The State Act also exempts development and sale of real estate by government agencies such as the Maharashtra Housing and Area Development Authority (MHADA) from its ambit. In an era of competition and accountability, exempting development authorities with the freedom to renege on contractual obligations and depriving the benefits of a sector specific regulator to the home buyers in Maharashtra is unfair to say the least. The central bill, on the contrary, mandates equal responsibility on the development authority and the private developer involved in sale of residential real estate by defining promoter to include both a private developer and a development authority/public body. The members of the regulatory authority and the appellate tribunal under the State Act are to be appointed by the state government rather than by an independent selection committee. The central bill, on the other hand, provides for appointment of the members of these two bodies by an independent selection committee, to ensure impartiality. Regulatory laws provide for summary procedures for dispute settlement specifying that the civil procedure code (CPC) and the Indian Evidence Act would not apply, however the State Act provides for a CPC based dispute resolution mechanism, thereby negating the need for a fast track adjudication mechanism. This will only lead to delays and harassment of the consumer.

5 The preamble to the State Act says that it aims to repeal MOFA, as it did not provide for an effective implementation arm for its various statutory provisions. However, what is seen is that the State Act aims to whittle down the provisions of MOFA, in so far as the responsibilities mandated on the developers are concerned. The State Act has also weakened the penalty provisions which are the backbone of any regulatory law for effective compliance by diluting it vis-à-vis developers and making it very harsh vis-à-vis home buyers. Under Article 254(2)a later law on the subject by the centre ( in this case the enactment of the Central Real Estate Bill, 2013) would override the State Act to the extent of repugnancy. But, it is not all that simple, as the road to deciding repugnancy is long and uncertain. Also, all those projects sold/launched under the provisions of the State Act, until the central bill is enacted will always be governed under the State Act, thereby singling out certain properties leading to constant suffering of those who have bought unit in those projects. Suspicious Haste The State Act is being projected as having been drawn up on the basis of the draft Model Act, on Real Estate, circulated by Ministry of Housing and Urban Poverty Alleviation, in This is untrue since it is nowhere near the said Model Act. It has been re-written to subserve developer interests rather than consumer protection. It is surprising that the State Act does not enshrine a single window system for approvals that has been a long standing demand of the developer community. This is so despite it having wider powers under the Constitution (power to give directions to the municipal/development authorities) than the central government. The important question in this entire issue is: why has the state government moved so quickly to get it enacted even as an exhaustive central legislation is pending in Parliament? If the state government is concerned about home buyers, this law should be repealed. The home buyers of Maharashtra would prefer to wait a little longer for the central bill to be enacted rather than bind themselves under a law that does not serve their interests.