India: The 70% Conundrum (Part I) – What Does The Haryana RERA Imply?

Last Updated: 12 June 2019
Article by Abhilash Pillai and Apoorv Jain

There is a requirement under the Real Estate (Regulation and Development) Act, 2016 (Act) to keep aside 70% of receivables from allottees in a separate, designated bank account (RERA Account). This has, from the outset, been viewed as a measure of great reform that would prevent siphoning of funds and ensure that money collected for the purpose of a particular project is, in fact, used for that project. However, the manner and method of utilisation and withdrawal of money lying in the RERA Account has always been a matter for considerable discussion and debate.

Illustratively, the Uttar Pradesh Real Estate Regulatory Authority has, in April 2019, directed banks not to adjust interest payments against the money that is required to be deposited in the RERA Account. This issue has recently come to the fore and become a matter of serious deliberation in Haryana.

Supertech Homebuyers Case

While taking cognisance of utilisation of sale proceeds/ receivables realised from the allottees of a project by a promoter, the Haryana Real Estate Regulatory Authority (H-RERA), in the case of Supertech Limited, came down heavily on withdrawals by the lenders (including banks/ financial institutions) for violating Section 4(2)(l)(D) of the Act, which provides for 70% of the sale proceeds/ receivables realised from the allottees of a real estate project to be deposited by the promoter in the RERA Account. The Act provides that such amount can only be withdrawn in proportion to completion of the project, in compliance with the procedure laid down in this regard.

H-RERA, while deciding on this matter, which pertained to the development of the Hill View Project, Gurugram, by Supertech Limited, took note of this provision, and observed that Supertech Limited had only maintained a single escrow account and deposited the entire sale proceeds/ receivables realised from the allottees in the said account. This, at the outset, was itself a breach of the Act, which mandates a separate account to be maintained in which 70% of receivables from the customers should be deposited.

Further, Supertech Limited also authorised its lender to withdraw amounts from such escrow account. H-RERA has held that even if the requirement of a separate account is overlooked, the lender was in violation of Section 4(2)(l)(D) of the Act, which mandates that any withdrawal from the 70% share of the sale proceeds cannot be made without fulfilling the conditions laid down in the Act. The said amount of 70% belongs to the allottees of such project till the promoter incurs and has paid for expenditure on land and construction costs.

The Developer is a Custodian of Allottees' Money

While it was never in doubt that the money lying in the RERA Account cannot be withdrawn at will, H-RERA has now gone a step ahead and clearly held that a promoter, as a mere 'custodian' of the deposited amount, does not even have the right to create a charge on the RERA Account. This is based on a mistaken assumption that creation of a charge would automatically enable the lender to withdraw money from the RERA Account, on which the lender has a charge. In the normal course that would be true, but exercise of any such right can only be in accordance with law.

In the instant case, H-RERA has proposed imposition of a penalty on the promoter for violation of Section 15(1) of the Act, in terms of which majority rights and obligations in respect of a real estate project cannot be transferred, unless the promoter has obtained prior consent from two thirds of the allottees and of the real estate authority. The lender was also directed to show cause as to why such punitive action should not be taken against it. The action of the promoter that has triggered this violation has not been explained in the order of H-RERA. However, based on the general theme of the order, the trigger appears to be the assignment of the account in which the entire receivables were deposited, and the right of the lender to withdraw from such account. This is noteworthy, as even in the instant scenario, the promoter continued to function as such, and retained its development rights and obligations, in respect of the project.

Criminal Liability – Policing Without Authority?

H-RERA has gone on to hold that withdrawal from the RERA Account is an act inviting criminal liability on the part of the promoter's and lender's directors, managers and officers. The police commissioner was also directed to register a criminal case for misappropriation of funds.

At the outset, it may be noted that the Act does not impose any criminal liability for not maintaining 70% of the sale proceeds in the RERA Account; penalty for breach of this requirement has been stipulated at up to 5% of the estimated project cost. Imprisonment is provided for only in instances where orders of the Real Estate Appellate Authority have not been complied with. Neither does the Act provide for the real estate authority to have powers to direct the police commissioner in the manner that it has. The basis of issuing directions to initiate criminal proceedings is, therefore, not very clear.

RERA Account – A No Lien Account

As a probable fallout of these proceedings, H-RERA has also issued directions on May 10, 2019, under which it is mandated that the RERA Account must always remain free from 'all encumbrances, lien, loan and control of any third party i.e., lender/ bank/ financial institution'.

The directions further state that 70% of the amount from the master customer collection account should be transferred to this RERA Account automatically at the end of each business day. The RERA Account should be exclusively used for the construction and development of the project and proportionate land cost. The directions issued by H-RERA also mandate that no amount from the RERA Account should be used for the repayment/ pre-payment of any project loan/facility.

The directions further state that the remaining 30% amount received from the customers/ allottees should be deposited in a separate account named as the Promoter's Free Project Account'. The amount lying in this can be utilised for making finance costs and the repayment/ pre-payment of loans, if any. The directions further state that the funds available in this 30% account may be used freely for business activities related to the same project provided the real estate authority has not issued any directions to the promoter for such account. In other words, the funds available in this 30% account cannot be used for other projects.

Revision of Order – Worth the Time and Effort

The order passed by H-RERA in the instant case strives to clear the dust on many aspects, but not necessarily with pleasant consequences for stakeholders. The order is also incomprehensible on some aspects, as discussed above.

It may be noted that the lenders to the project have already approached the Real Estate Appellate Tribunal, which has, in an order issued earlier in May, 2019, set aside the order of H-RERA on the ground that principles of natural justice were not followed while deciding on the matter, and has accordingly directed H-RERA to adjudicate afresh, after giving the lenders an opportunity to be heard.

The order of H-RERA appears worthy of a relook, not only to clear the air on various matters of law, but also from a business and economic perspective. This would certainly reinstate the confidence of lenders who finance such projects in their ability to leverage cash flows of the projects, not to mention providing a fillip to the developers who are already facing a liquidity crunch.

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.

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