LEGAL ISSUE FOR REAL ESTATE INDUSTRY
The old proverb defining the essentials for life goes on saying “ Roti, Kapda aur Makan.” Nothing more is required to say about the importance of Real estate sector in the Economy. During the last 50 odd years, the real estate sector have made rapid development, making a sufficient contribution in the Indian economy. But have we given it, its due place in the Indian economy. Have our outlook of real estate players have came out of the old concept of “ Thekedars.” Unfortunately, no.
Though government of almost all states have formed development authorities in their respective state for the development of real estate in the state, but the overall situation is not improving, for the reason that the demand for real estate is much higher than the rate of construction by these development authorities. Eleventh Five Year plan has estimated the urban housing shortage of 24.7 million units with 99% of the shortage pertaining to Economically Weaker Sections (EWS) and Lower Income Group (LIG). Here the crucial role of private players in the real estate sector comes into play. At the present rate of growth, these development authorities will not be able to meet the real estate (housing, infrastructure and commercial) requirement of the citizens of this country.
Inspite of all these odds, the facts remains that the real estate contribute a lot in the Indian economic growth. However, there are certain legal impediments which keeps on checking its rate of growth and there is an urgent need for the legislature to review them in the light of changed circumstances.
PRESENT LEGAL FRAMEWORK
STAMP DUTY ISSUE
Till few years down the line, taking loan on the real estate was not a healthy sign. But now, the situation has changed. A major portion of the new house/ shop owners are people who have availed the credit facilities for the same. With the increase in the quantum of credit by the financial institutions, the legal complications now continue to hit much larger number of persons. There is also a need for simplification thereof, with the increase in quantum thereof. If we take the quantum of stamp fees payable while creating a mortgage deed, it varies from 2% to 5%. The resultant is that since the mortgage by deposit of title deed is valid, generally bankers resort to this method. Unfortunately, this system of mortgage has its own disadvantages which have serious repercussions. In this type of mortgage, the factum of mortgage of property is not registered with the sub registrar and hence it is almost impossible to find out whether or not it is created by a third person / outsider, who may be interested in purchasing the property. This creates an added risk to both the bankers and the subsequent purchaser of the property. Even the method of newspaper advertisement inviting general public to inform the intended purchaser, by a person having any interest in the property may not serve the purpose because, this is not treated as the conclusive method by the Courts.
Besides, even at the time of financing a new property, this rate of stamp duty imposes an additional burden on the purchaser, resulting in lowering down his purchasing power by 10 – 20%. This is so, as the person availing the housing loan is to invest only 15 - 20% of the total cost. And therefore if he has to share an additional burden of 2 – 5%, this will result in lowering down his cash in hand to be invested in property and consequently the total quantum of his investment ( Personal + Loan funds).
Now, there is an urgent need for the change of rates at which the mortgage deed is required to be stamped, for the benefit of general public at large and to control and curb the dishonest dealing in the property trade on the basis of false title deeds. If the rate of % of stamp duty payable on the mortgage deed is reduced to a fixed amount of say Rs. 1,000/= to Rs. 5,000/= ( based on some kind of slab). All the financial institutions will restore to the creation of mortgage by the registered mortgage deed. This will result in one hand enhancement of the revenue collection to the government, as by creating of mortgage by deposit of title deed, nothing substantial comes to the public exchequer and on the other hand and more important, it will also reduce the cases of sale of immoveable property by creation of false document of title, whereas the original is already mortgaged to the financial institution.
LAND ACQUISITION
The development authorities created by the respective state government is created with the purpose of achieving the planned growth of the cites and further to ensure that the housing needs of the people of this country are met. In almost all the development authorities Act, the power to acquire land for the purpose of development is bestowed on them. This power has been bestowed on them to ensure that there is no dearth of land for the development. The fact remains that inspite of these powers, development authorities are not able to keep pace with growing housing requirements.
The short question is, If the government cannot meet and provide the basic amenities of even housing to the general public for the living, are the citizens of this country bound to live in this curse only because the development authorities are not able to keep pace with the growing housing demands. Why shall the general public of this country be compelled to continue to live their life without a shelter in inhuman condition. Is it not the duty of the government to endeavor to provide all the support to the institutions, companies and individuals who are ready and willing to support the government in this mammoth task. Why shall the concessions and exemptions which are available to the development authority be not available to the private builders who are ready and willing to carry out the developmental work in accordance with the governmental plans. It is also an undisputed position that the demand supply gap cannot be bridged without the help of real estate companies.
Out of the many difficulties which real estate companies have to face, in carrying out its function is the difficulty with dealing with the landowners and their respective brokers. Land ownership in
Abandonment of the project at this stage has its own cost and therefore, the most practical solution is to go ahead with the project. But getting ahead is also not easy, as the subsequent owners realizing the position of the real estate company, sells their land only on exorbitant price and not otherwise. The consequence is increase in the project cost and the additional burden has to be shifted to the consumer. Whereas development authorities don’t have to face such a situation and they acquire the land at the fair market price. Land price, which is a substantial cost of the total project cost, therefore plays a important role in the pricing difference in the private and development authority sale price.
Government ought to develop some mechanism to make available land to the private players in the same manner in which they are made available to the development authorities. They however, may impose certain conditions as to the manner in which the developmental work needs to be carried out, including but not limited to % of Free / green space, % of constructed space, % to be reserved for the economically weaker class of persons, % of FAR, and so on. But at the same time, it must not take away the competitive edge and should leave the market forces of demand and supply to the determination of prices of those structures which are left over after satisfying the basic governmental policy.
DISPUTE RESOLUTION
With the newer and complex scheme being launched by the real estate companies, the chances of dispute between the buyer and the real estate company are increasing on the fast pace. Keeping an eye on these disputes, most of the agreements of real estate companies are containing an arbitration clause. The basic purpose of inclusion of arbitration clause in these agreement is quick and fair disposal of the dispute between the parties in comparison to ordinary civil courts, which generally takes a fairly long period. For this reason only the interference of the courts was also kept at minimal, not only during the arbitration proceedings, but also in the matters of granting of right appeal to the aggrieved party. Courts, of late, further understanding the specific need of the commercial world has also permitted an officer / advisor of the parties to be an arbitration, provided that the parties agrees to it and the said person conduct the arbitration fairly. In nutshell the principle that if the parties by their consent has chosen a particular person to be a judge in their case, the court will not question their choice and that person will be permitted to act, irrespective of the fact that the said person may not be even well in legal system. In other words, the courts interference in the arbitration matter was supposed to be minimal.
In this respect, it is important to mention that the need for early disposal of commercial disputes has been long felt. Legislature has realized the fact that in commercial world, a spin effect of vicious circle may be felt if the disputes are not resolved quickly and in effective manner. The disputes arising in the real estate industry also falls in this category. Their importance is further increased by the fact that in Indian senario , majority of real estate buyers treat it as a long term buy which is expected to last for decades, if not generations, and therefore, a quick and effective system of dispute resolution is the need of the hour.
Arbitration Act, 1940 has several bottle necks which resulted in the completely new enactment of Arbitration and Conciliation Act, 1996. However, recent judgment of Hon’ble Supreme Court in the matter of “National Insurance company Vs. Vs Boghara Polyfab Pvt Ltd” held in 2008 that whether or not there is a full and final settlement arrived between the parties is an arbitrable dispute and there is a requirement of the appointment of arbitrator for the adjudication of this issue. The implication thereof is that there is a need for the adjudication by an arbitrator even if the real estate company settles its dispute with its buyer and there is a full and final settlement receipt / document / agreement signed between the two. Therefore the better course of action will be instead of getting a full and final discharge from the concerned person (which may potentially initiate litigation), it is advisable that if there is an arbitration clause, let the arbitrator hold 2-3 sittings are thereafter, give an award on the merits of the case or in terms of the compromise filed before him by both the parties. Having done so, the real estate companies will be safe otherwise, the other side may take recourse under this judgment and initiate arbitration proceedings even after receiving full and final settlement amount. Nut, unfortunately this will involve time and money, but in the light of the ratio laid down by the Hon’ble Supreme Court in the aforementioned matter, this seems to be safe course of action.
CONSUMER CASES
Besides, this another disturbing area is the consumer cases. It is unfortunate that in many instances, these cases are filed to exhort the real estate companies. These consumer courts are also not bound by the provisions of Civil Procedure Code and the evidences tendered by the consumer is given an edge in comparison to the evidence tendered by the real estate companies. The lust for filing the consumer complaints are many (1) negligible court fees is payable (2) comparatively quick disposal of cases (3) No requirement to engage a counsel and therefore not costly (4) Benches are generally consumer prone. In these factual setup it is important that the real estate companies tries to avoid these consumer cases to the maximum possible extent. Arbitration clause in the agreement is a good means to do so. Even after the arbitration clause, if a consumer complaint is filed , the defense of arbitration clause has to be taken on the very first date. If the companies submits themselves to the jurisdiction of the consumer courts, inspite of arbitration clause, consumer courts may pass appropriate orders.
The legal system, needs these changes to meet the changing demands of commercial world, in general, and real estate industry, in particular and until the laws are streamlined, the industry cannot run on the fast track path.
Written By :-
Praveen Agrawal,
B Com, LLB, ACS
Advocate on Record,
Supreme Court of
DDA flat no 36 E, Pocket 1
Mayur Vihar – I,
Phone 9811702850
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