RERA Regime – Landowners & Promoters

In light of the above, this paper aims to understand the definition of a 'promoter' as provided in RERA, analyze the views taken by the Authorities in its various orders and circulars, and evaluate the impact of the same on the underlying contracts between the landowners and developers.

Brief Overview

Under RERA, it is the promoter of the real estate project that has the responsibility of registering the project with the Authority^[3] and complying with all the provisions specified thereunder, including completing the project and handing over units to the allottees.^[4] It is solely the promoter of the registered real estate project who is liable to refund the money or pay interest to the allottees upon failure to deliver apartments within the time committed therefor^[5]; and/or be subject to penalties for contravention of the statute.^[6] It then becomes essential to understand who will be considered a 'promoter' of a real estate project under RERA.

A 'promoter' has been defined in Section 2(zk) of RERA as follows:

""promoter" means:

• a person who constructs or causes to be constructed an independent building or a building consisting of apartments…..for the purpose of selling…; or
• a person who develops land into a project…. for the purpose of selling…; or
• any development authority….; or
• an apex State level co-operative housing finance society…; or
• any other person who acts himself as a builder, coloniser, contractor, developer, estate developer or by any other name or claims to be acting as the holder of a power of attorney from the owner of the land on which the building or apartment is constructed or plot is developed for sale; or
• such other person who constructs any building or apartment for sale to the general public. Explanation.—For the purposes of this clause, where the person who constructs or converts a building into apartments or develops a plot for sale and the persons who sells apartments or plots are different persons, both of them shall be deemed to be the promoters and shall be jointly liable as such for the functions and responsibilities specified, under this Act or the rules and regulations made thereunder;"^[7]

(emphasis supplied)

RERA Authorities

The Authorities in the States of Maharashtra, Goa, Karnataka, Rajasthan and Gujarat have issued circulars and orders for laying down the circumstances in which a landowner may be classified as a promoter:

Maharashtra, Goa & Karnataka

The MahaRERA^[8] issued a circular on December 4, 2017, declaring that where the developer has agreed to share revenue generated from the real estate project with the landowner, the latter will also be considered as a promoter under RERA.^[9] The circular further states that, while the liabilities of a developer and owner towards each other will be governed as per their mutual agreement or arrangement, with respect to the withdrawal of money from the project bank account, the developer promoter and the 'landowner promoter' shall be at par with each other. For this purpose, the landowner promoter who is entitled to a share of the total area being developed, is required to open a separate bank account for deposit of 70% of the sale proceeds realized from the allottees of its share, in compliance with the provisions of RERA.^[10]

Similarly in February 2018, GoaRERA^[11] issued a circular stating that landowners or investors who, by virtue of an arrangement with the developer, are entitled to a share of revenue generated from the sale of apartments or a share of the total area developed for sale which are marketed and sold by them, would be covered within the scope of 'promoters' under RERA. The Authority has further clarified that, such landowners would be "jointly liable for the functions and responsibilities specified under the Act in the same manner as the promoter who actually obtains building permissions and carries out construction", however, their liabilities would be co-terminus with the development agreement.^[12] The circular also imposes an obligation of opening a separate bank account by the landowner promoters in a manner similar to that prescribed by MahaRERA.

Subsequently, KarRERA^[13] has followed suit and issued a circular^[14] which is akin to the circular issued by MahaRERA and GoaRERA. The circular issued by KarRERA imposes additional obligations on the promoters, including submission of a joint affidavit in the format prescribed by the Authority^[15] and ensuring that the development agreement expressly includes compliance with the terms of the KarRERA circular.

Rajasthan

A more cautious approach has been taken by RajRERA^[16] vide its circular dated June 30, 2020.^[17] The Authority has clarified that the mere fact that the landowner is entitled to receive a certain part of sale proceeds (gross revenues) of the project does not make him a promoter^[18] and the Authority has laid down the following criterion with respect to landowner promoters:

"6. Whether a landowner will be named and treated as a promoter will depend on the terms of the development agreement….when the development, by its intent or expression, disclose any of the following conditions:-

(a) The landowner himself has some role as a builder, coloniser, contractor, developer or estate developer in construction or development…; or

(b) The landowner has a share in the area developed for sale in the project, with the intent of marketing or selling it or any part of it before completion of the project; or

(c) The landowner, through the development agreement and/or a power of attorney (irrevocable for the term of the development agreement), does not give to the developer-promoter all powers of sale and conveyance of all the units to be sold, along with proportionate undivided interest in the land in the name and on behalf of the landowner, such that the landowner is required to sign all agreements for sale or sale deeds, etc.…; or

(d) The landowner proposes to share profit or loss of the project; or

(e) It is specifically agreed in the development agreement that the landowner shall be named or treated as a promoter under the Act."

(emphasis supplied)

Gujarat

The GujRERA^[19] by its order dated May 23, 2019^[20], mandated that a joint affidavit be given by the promoter and landowner for ensuring fulfilment of their respective commitments under the development agreement, including participation by the landowner in execution of deeds of conveyance and title transfer to the allottees. Provided that, the landowner's responsibility in such case would be limited to the extent of such title transfer. The Authority further held that where the landowner takes share of the completed unit/ flat for the purposes of sale, the landowner and developer will both be promoters under RERA.^[21]

Analysis

From a perusal of the foregoing circulars, it is evident that all the aforementioned Authorities have in some instance or another, classified a landowner as a 'promoter' under RERA. While their views as to the circumstances may differ, it is clear that landowners are being held accountable as promoters under RERA, even though the definition of 'promoter' in sub-paragraph (v) thereof^[22], clearly brings out the distinction between the owner of the land and its developer and despite the definition being an exhaustive one.^[23] The common thread in all these circulars seem to be that the treatment of landowners as promoters would be almost entirely dependent on the commercial understanding between the owner and developer captured in the underlying contract.

Traditionally, landowners would receive monetary compensation for devolution of development rights in favour of developers. However, this practice is now almost extinct considering the size and scale of real estate projects, and instead landowners today generally receive a share in revenue from the project or a share in built-up area which can then be sold by the landowner directly or through the developer for a marketing fee. Most of the Authorities quoted above have taken a view that these landowners who have a stake in the real estate project would be 'promoters' for the purposes of RERA. Such a view has far-reaching ramifications for landowners, as it would expose them to onerous obligations and harsh penalties under RERA.

It therefore becomes crucial for a landowner to negotiate development agreements in such a manner that his liability and obligation thereunder is limited and he is not treated as a 'promoter' under RERA, in consonance with the view taken by the Authority of that State.

Nidhi Arya is Partner and Ayushi Jain is an Associate at Argus Partners. Views are personal.