Is it constitutional to apply RERA with retrospective effect?

The application of the Real Estate (Regulation and Development) Act to all ongoing projects, may give rise to several legal issues. We examine the impact that this may have, on developers and property buyers

On May 1, 2017, all 92 provisions of the Real Estate (Regulation and Development) Act, 2016 (RERA or the Act) were brought into force. The Act has introduced new obligations on real estate developers and in cases of default, prescribes penal liabilities. Significantly, the Act applies not only to future projects but also to ongoing projects, where construction began prior to May 1, 2017. Consequently, it appears that the Act may well erode and interfere with the accrued/vested rights of developers and customers, under contracts executed among them prior to May 1, 2017.

 

Impact of retrospective application of RERA

The Act applies to all ongoing projects, where completion certificates have not been obtained, irrespective of whether construction began prior to May 1, 2017. For instance, Section 3(1) of the Act, restrains a developer from advertising and selling any space in a project, without registering the project with the Real Estate Regulatory Authority (the Authority). For ongoing projects for which a completion certificate has not been issued, this registration is to be obtained mandatorily within a period of three months from May 1, 2017. Any violation of Section 3, could result in a penalty of up to 10 per cent of the estimated cost of the project. In cases of continuing defaults, imprisonment is also prescribed. The Act also provides for penal consequences, in cases of breaches of obligations committed during registration.

One issue, however, is that when developers commenced construction, they had no knowledge of the provisions of the Act or the proposed penalties, in the case of defaults. Therefore, bringing these projects within the purview of the Act at this point of time, may amount to punishing the developers for delays or other irregularities, which occurred during a period when the Act was not in force.

 

Grounds for prospective applicability

(1) As a general principle, laws are to be applied prospectively. The Supreme Court of India, in CIT v Vatika Township (P) Ltd (2015), held that a new legislation ought not to change the character of past transactions carried out upon the faith of the then existing law. Therefore, the Act, being a substantial new legislation, ought to operate prospectively. Further, the Act is neither clarificatory nor declaratory of the existing laws. Rather, it is substantive, creating rights and liabilities and therefore, presenting all the more reason for its prospective application. The Act has also made certain validly executed agreements void, thereby, taking away vested rights that have already accrued by way of such agreements.

See also: What is RERA and how will it impact the real estate industry and home buyers?

(2) The Act provides for penal consequences in cases of default. Article 20(1) of the Constitution provides that no person shall be convicted of any offence, except for violation of a law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence. Prior to May 1, 2017, the relationship between a developer and a purchaser was governed by the terms of their contract. However, the Act, in its sweeping manner, provides for penal provisions against a developer, even for acts that were not punishable when committed, namely modification of specifications, alteration in super area, minor structural changes, etc. Therefore, it appears that such penal provisions, if made applicable to ongoing projects, may violate Article 20(1) of the Constitution of India and thereby, be unconstitutional.

(3) The rule of prospective application of statutes, is applied more strictly in cases of statutes providing for penal consequences. Article 20(1) of the Constitution makes it a constitutional right to not be punished for acts which were not punishable when committed.

(4) There is no saving clause under the Act, which protects developers for acts which were earlier permitted or for which the parties, by agreement, had fixed damages as a relief. The accrued rights of such developers will be abated, if ongoing projects where such agreements have already been executed, are brought within the purview of the Act.

(5) Another point of concern is the possible delay of a project that is on the verge of completion. It is possible that a developer may contractually have agreed to hand over possession of flats/apartments in a real estate project, before May 1, 2017. However, due to reasons beyond the control of the developer, the handing over of the property may have been delayed. Under the existing contract, the developer may have had to compensate the buyer for such delay on a fixed-sum basis. However, under the Act, the developer is now obligated to refund the entire investment made by the buyer, along with interest and compensation. Further for an alleged delay, which is to be treated as a violation of the Act, the developer is also liable to pay a penalty. The delay can also give a right to a buyer to apply to the Authority for the revocation of registration, which will impact the developer’s right to carry on trade.

Therefore, the Act, in that sense, not just erodes accrued rights, but also tampers with the justified expectations of persons who, in acting reasonably, believed that the legal consequences of their actions will be determined by the known state of the law established at the time of their actions. While the Act attempts to ensure fairness and transparency for consumers, this cannot be permitted to play out in a manner that imposes unfair and inequitable considerations on developers.

Some states, namely Uttar Pradesh and Andhra Pradesh, while framing their respective rules, seem to have considered such points and already appear to have excluded such ongoing projects from the purview of the Act, in cases where the developer has already made an application seeking the issuance of a completion certificate. Other states though like Rajasthan, Madhya Pradesh and Odisha and the Union Territory of Delhi, have retained the extant language of the Act. However, the state rules, being delegated legislation, will not prevail over the Central Act.

Constitutionality is the touchstone of all legislations. It remains for the courts to answer, if approached, whether the Act will withstand the challenge of constitutionality.

(Abhijeet Swaroop is a principal associate and Ankur Khandelwal is a senior associate at Khaitan & Co, Delhi)

 

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