Bombay High Court Upholds the Constitutional Validity of RERA

Bhushan Shah & Neha Laxman are with Mansukhlal Hiralal & Company.

The Supreme Court of India had transferred a series of writ petitions filed by developers and builders challenging the constitutional validity of certain provisions of the Real Estate Regulation and Development Act, 2016 (RERA or Act) to the Bombay High Court. On 6 December 2017, a division bench of the Bombay High Court passed a judgement upholding the constitutional validity of the provisions that were sought to be challenged.

Following is a brief overview of some of the important provisions of RERA challenged by the various petitioners and the decision of the Court.

1. Retrospective application of RERA: Section 3 of RERA mandates that all ongoing projects for which an occupational certificate has not been issued must also be registered under the Act. The Petitioners contended that this amounts to a retrospective application of the Act and disregards the contractual agreement executed between the promoters and the allottees prior to the commencement of RERA.

The Court held that the aforesaid provision merely envisages that projects which are incomplete at the time of commencement of RERA must be registered. While getting the project registered, promoters are entitled to prescribe a fresh time period for completion of the remaining work to ensure that they are not visited with the penal consequences laid down under the Act. Moreover, given the extent of defaults that have occurred on the part of promoters in allotting premises to buyers, it is imperative for the ongoing projects also be registered under the Act to regulate the development of such projects. In view of the aforesaid, the contentions raised by the petitioners in this behalf were held meritless.

2. Funds to be parked in an escrow account: Section 4(2)(l)(D) of RERA mandates that 70% of the funds realized from the allottees for real estate projects must be deposited in a separate bank account to cover the costs of land and construction and can only be used for the aforesaid purpose. The petitioners submitted that in certain cases allottees may fail to deposit the requisite money, or various other situations may arise whereby the promoter is unable to deposit the money. They also raised the contention that the promoters are divested of their funds and would be exposed to adverse statutory consequences.

The Court held that the amounts were to be deposited in a separate account merely to ensure that they are utilized for the purposes of the project and not misused. Moreover only 70% of the funds are required to be kept in the escrow account and 30% of the funds are available to the promoter, thereby ensuring that the rights of the two parties are balanced. The Court also held that RERA could not possibly provide for every situation where the promoters would be unable to deposit 70% of the funds in a separate account and the same should be dealt with by Real Estate Regulatory Authority (Authority) established under RERA. The Court also clarified that the amounts realized by the promoter would remain its money and in no case expropriated or taken over by the Authority established under RERA. Therefore, the aforesaid provision was held to be within the constitutional framework.

3. Extension of Registration: Section 5 of RERA states that the registration of a real estate project shall be valid for the period declared by the promoter in its application. Section 6 allows the Authority to extend the registration for a further period not exceeding one year, on account of a force majeure event such as war, flood, drought, fire, cyclone, earthquake or other calamity. The petitioners challenged the same in view of the fact that it does not take into account circumstances outside the control of the promoter such as shortages of raw material, labour etc., which may delay a project.

The Court held that the Authority established under RERA will examine on a case to case basis whether there exists exceptional circumstances stalling the completion of a project and, in such exceptional cases, the Authority can allow the same promoter to continue with the project instead of revoking the registration.

4. Powers of the Authority on lapse of registration: Section 8 confers wide powers on the Authority established under RERA, to be exercised upon lapse or revocation of registration. It also confers on the association of allottees the right of first refusal to complete the remaining development work. The petitioners contended that the Authority is left with no choice but to hand over the remaining development work to the association of allottees in the event they apply for the same. Section 8 does not contemplate handing back of possession to the promoter and is thus an expropriatory legislation.

The Court, adopting a harmonious construction between the different provisions of RERA, held that if the Authority feels that there are compelling circumstances that disable a promoter from completing the project, even beyond the extension granted under Section 6 of RERA, the Authority would be entitled to continue registration of the project by exercising its powers under sections 7(3), 8 or 37 of RERA. Such powers would be exercised on a case to case basis. Moreover, an obligation to construct premises, is not a proprietary right and therefore the same does not amount to an expropriatory legislation.

5. Payment of interest to allottees: Section 18 of the RERA provides for payment of interest by promoters to allottees in the event of delayed possession. The petitioners challenged the same, inter alia on the grounds that the Authority can engage another agency to complete the project; however, penal interest would still have to be paid by the promoter and that in certain cases the promoter may genuinely lack funds to pay the interest and compensation and on a failure thereto, it would be met with penal consequences. This provision was unnecessarily harsh and unreasonable.

The Court held that the requirement to pay compensation is not a penalty but compensatory in nature in light of the delay suffered by the allottee who has paid for an apartment but has not received possession of it. In case the promoter fails to pay such compensation it would amount to an unjust enrichment by the promoter in respect of the hard earned monies of the allottees. Such a liability is not created for the first time under RERA but was also envisaged under the Maharashtra Ownership of Flats Act, 1963 (“MOFA”) and therefore the said provision is valid and constitutional.

Concluding Comment: The intent of RERA is to bring transparency and safety in the real estate sector by putting in place a regulatory mechanism for the sector. It seeks to prevent ‘distortion’ and ‘structural abuse of powers’ in this sector. The Court, while upholding the constitutionality of RERA, has safeguarded this intent and interest of homebuyers across the state. At the same time, by alleviating certain apprehensions held by builders and developers, the Court has sought to strike a balance between the interests of both parties.

– Bhushan Shah & Neha Laxman

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