General Aspects of Real Estate in India & Key Regulatory Framework

1. INTRODUCTION:

“Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.” 

The real estate industry is vast and diverse, with many verticals such as land, design/construction, development, investment, lending, and so on. With its favourable demographics and strong economic growth, India is emerging as one of the world’s most important business locations, making it an appealing place for property investors, as demand for property is primarily determined by business development and demographic trends. The nature of demand has recently changed, with heightened consumer expectations influenced by higher disposable incomes, increased globalisation, and the implementation of innovative real estate products and services.

2. The Term “Real Estate”:

The term “real estate” refers to both land and buildings. The term “land” refers to both the air above and the ground below, as well as any buildings or structures on it. It includes residential homes, commercial offices, trading spaces such as theatres, hotels, and restaurants, retail outlets, industrial buildings, factories, and government structures.[1] Thus, real estate refers to immovable property, which can be either land or a building or both. Real estate differs from personal properties such as furniture, money, clothing, and so on in that any type of personal property is movable with the owner.[2]

Real estate refers to land as well as improvements to it such as commercial and residential structures, roadways, and ports that are all fixed in place. The process of constructing new infrastructure on real estate is known as construction. Because of their close interdependence, these industries are frequently treated as a single entity. Far from being a single activity, large-scale real estate development requires a wide range of professionals to multitask, including financial analysts, legal experts, project managers, construction managers, design engineers, and project architects, among others.

• The real estate transaction includes –

1. Purchase
2. Sale and
3. Development of Land (both residential and non-residential buildings)

Since real estate is so vast, it necessitates a variety of laws, the scope of which is divided into four categories:

• Residential Real Estate: – Residential places are where people live. It includes both new and resale homes. It is also referred to as home space. These are the homes where a joint or nuclear family resides. The structures that involve in this space are houses, apartment buildings, townhouses and vacation houses, where a person or family resides. 

• Commercial Real Estate: – Commercial space is a trading and office space i.e., shopping malls, medical clinics, hotels, and offices are examples of commercial real estate. The primary function of these operations is to generate revenue by running business, thereby getting rent and increment of value.

• Industrial Property: – Building and constructing buildings and property, as well as warehouses, are examples of industrial property. The structures can be used for research, manufacturing, storage, and distribution of goods. Commercial real estate includes some buildings that distribute goods. Because zoning, construction, and sales are all handled differently, classification is critical. Government declares some places exclusively as industrial spaces.

• Vacant Land: – The open land can be used for anything. It includes both vacant land and working farms and ranches. Undeveloped, early development or reuse, subdivision, and site assembly are all subcategories of vacant land.

• Warehousing: – Warehousing is a location where products are stored for an extended period of time. Warehousing requires very little upkeep. Certain areas have been designated as warehousing zones, and the lands in those areas are used as warehouses. Companies such as Amazon and Flipkart require a large amount of warehousing space to store their products until they are delivered. This area assists the company in preventing product damage and facilitating transportation.

3. Overview of Real Estate Laws in India:

The rules and regulations that govern every aspect of a real estate property transaction are known as real estate laws. Every real estate transaction, whether it is the acquisition, sale, transfer, or foreclosure of a property, involves complex requirements. Real estate laws are in place to protect the rights to property that is owned, purchased, or sold.

Key Legislations Governing the Real Estate in India:

1. The Real Estate (Regulation and Development) Act, 2013
2. The Transfer of Property Act, 1882
3. The Indian Easement Act, 1882
4. The Registration Act, 1908 
5. The Indian Stamp Act, 1899
6. The Indian Contract Act, 1872
7. The Specific Relief Act, 1963
8. Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013
9. Land Revenue Codes
10. SEBI norms for Real Estate Mutual Funds
11. State Laws governing Rent Control and Real Estate Transactions
12. Local Body laws relating to property tax

1. The Real Estate (Regulation and Development) Act, 2013

This Act governs development, marketing and sale of real estate projects to protect the interests of consumers in the real estate sector.  The Act established an adjudicating mechanism for speedy dispute redressal vide the Real Estate Regulatory Authority and the Appellate Tribunal and mandates compulsory registration of projects and key players in real estate sector.  Corresponding RERA Rules and regulations have been adopted by the States to ensure effective implementation of the Central Act at local level.

2. Transfer of Property Act, 1882 –

‘Transfer of Property’ means an act by which a living person conveys property to one or more living persons, or to himself, or to himself and one or more other living persons, in the present or future; and “to transfer property” is to perform such act. A living person includes a corporation, association, or group of individuals, whether or not it is incorporated.

The Transfer of Property Act of 1882 [3] is primarily concerned with the transfer of immovable property. It does not apply to transfers by operation of law, such as the transfer of immovable property required by a court order for insolvency or forfeiture, among other things.

3. The Indian Easements Act, 1882: –

Section 4 of the act states that an easement is a right which the owner or occupier of certain land possesses, as such, for the beneficial enjoyment of that land, to do and continue to do something, or to prevent and continue to present something being done, in or upon, or in respect of, certain other land not his own. [4]

4. The Registration Act, 1908: –

The Act was intended to ensure accurate land records by requiring information about all land transactions. The Act is also used to ensure that transactions involving other immovable property are properly recorded. The Act also allows for the registration of other documents, which can add legitimacy to them. For this purpose, registration authorities have been established in all districts.

The Registration Act of 1908, [5] among other things, provides a method of public registration of documents in order to provide people with information about legal rights and obligations arising from or affecting a specific property. The registered documents may later be of legal importance and aid in the prevention of fraud. Certain types of documents gain inviolability and importance through registration.

According to Section 2(6) of the Registration Act, 1908, “Immovable Property includes land, building, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth but not standing timber, growing crops nor grass”.

5. Indian Contract Act, 1872 –

In most cases, a real estate transaction starts with an agreement between the parties. The law defines when a party is said to have the capacity to contract. All of the legal requirements for a valid contract, such as consideration, intent to contract, and validity, must be met. This Act governs laws related to contracts in India including the capacity to enter into a contract, execution and implementation thereof and breach and remedies available to the parties thereto.

6. FDI Guidelines for Real Estate: –

Foreign direct investment (FDI) is an investment made to serve the investor’s business interests in a company located in a different country than the investor’s home country. In fact, FDI is capital provided by foreign investors to enterprises in another economy, either directly or indirectly, with the expectation of profiting from capital participation in the management of the enterprise in which they invest.

7. Labor Laws

Labour law, also known as employment law, is the body of laws, administrative rulings, and precedents that address the legal rights and constraints of workers and their organisations. As such, it serves as a go-between for many aspects of the relationship between trade unions, employers, and employees. In other words, labour law establishes the rights and responsibilities of employees, union members, and employers in the workplace. Labour laws are those that serve as a bridge between workers, employers, trade unions, and the government.

With an intention to address the inhuman working conditions and poor health and safety standard in the real estate industry, the Government of India enacted the Building and Other Constructions Workers (Regulation of Employment and Conditions of Service) Act, 1996. [6] It is a social welfare legislation that aims to benefit workers engaged in building and construction activities across the country. 

8. The Contract Labour Act, 1970

The Contract Labour (Regulation and Abolition) Act 1970 seeks to protect the interest of workers employed on contract. is to prevent exploitation of contract labour and also to introduce better conditions of work. It applies-

(a) to every establishment in which twenty or more workmen, art employed or were employed on any day of the preceding twelve months as contract labour.

(b) to every contractor who employs or who employed on any day of the preceding twelve months twenty or more workmen.

 a workman shall be deemed to be employed as “contract labour” in or in connection with the work-of:-an establishment when he is hired in or in connection with such work by or through a contractor, with or without the knowledge of the principal employer.

(c) “contractor”, in relation to an establishment, means- a person who undertakes to produce  a given result for the establishment, other than a mere supply of goods or articles of   manufacture to such establishment, through contract labour or who supplies contract   labour for any work of the establishment and includes a sub-contractor ; 

4. The Issues Covered under the Real Estate Laws:

• Legal Contracts and Agreements 
• Dispute Resolutions related to real estate property distribution or possession 
• Buying, selling, acquisition, leasing, and disposition of various types of real estate properties 
• Real estate taxation issues
• Preparing a plan and monitoring the construction of a real estate 
• Drafting deeds and contracts for real estate transactions.

• Types of Ownership Interests in Real Estate (Immovable Property) include –

• Freehold: Gives the owner the right to use the property for any lawful purpose and sell it whenever and to whomever he or she wants.
• Life estate: A real estate interest granted to a life tenant until that person dies. The interest expires when the life tenant dies.
• Estate for years: Similar to life estate, but for a set number of years.
• Leasehold: The right to own and use real estate under the terms of a lease.
• Reversion: The right to own the free interest in real estate after a life estate, estate for years, or leasehold expires.

• The main players in the real estate market include the following:

1. The Landlords/ Owners
2. The Builders/ Developers/ Contractors
3. Real Estate Agents
4. Tenants and
5. Investors

5. Foreign Exchange Management Act 1999 (FEMA) and Foreign Direct Investment Policy (FDI Policy):

The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Indian Parliament that “consolidates and amends the law relating to foreign exchange with the goal of facilitating and increasing external trade.”

Foreign investment is welcome in almost all industries. Foreign Direct Investment (FDI) can be made through two channels: the automatic route and the government route. Under the Automatic Route, the foreign investor or Indian company does not need RBI or Government of India approval for the investment. In the case of the government route, the foreign investor must obtain approval from the RBI or the Government of India.

The purchase and sale of immovable property in India by foreign entities and persons not residing in India is governed by FEMA and FDA. It resolved many issues in real estate, increasing transactions between people from various countries.

Non-resident Indians (NRIs) and people of Indian origin (PIOs) are free to invest in residential or commercial real estate in India, according to Indian real estate laws. However, when purchasing a farm house or a plot of agricultural land, NRIs must obtain permission from the RBI.

Foreign nationals of non-Indian origin who reside in India (except the 11 countries listed in (a) above) can purchase immovable property. Foreign nationals of non-Indian origin living outside India can acquire/transfer immovable property in India on a five-year lease and can inherit immovable property in India from a resident.

Any foreign investment in the real estate sector is subject to a slew of FEMA regulations. Foreign investment has traditionally been prohibited in the real estate sector. [7] According to the 2014 FDI Policy [8], “real estate business or farm house construction” is a “prohibited sector” [9] in terms of FDI. However, because the term “real estate business” is not defined in this Policy, its scope cannot be determined. It is also worth noting that the term was not defined in the FDI Policies of 2013, [10] 2012, [11] or 2011. [12] However, a definition can be found in the 2010 FDI Policy, [13] albeit within parentheses, and in an otherwise unrelated sub-Paragraph dealing with the eligibility of resident entities for NRI/PIO investments, [14] which defines real estate business as “dealing in land and immovable property with the intention of earning profit or income therefrom.” It is noteworthy that, after a four-year pause, the definition of “real estate business” has been refined a more prominent place in the 2015 FDI Policy, [15] and occurs in the clarifications issued under the construction development sector. [16]

The preceding definition, [17] which, while defining real estate business as dealing in land and immovable property for profit, excludes from its scope development of townships, construction of residential/commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, and townships. As a result, while real estate has traditionally been off-limits to FDI in terms of dealing in land, certain other sectors dealing with built-up infrastructure have been distinguished and excluded from the scope of “real estate business.”

6. Challenges Faced in the Real Estate Sector:

1. Unavailability of Land: The government should set aside a large portion of underutilised and vacant land parcels for development through land regulations, land readjustment, and land pooling policies. This will help the real estate sector grow and will help financially disadvantaged developers. The Land Acquisition, Resettlement, and Rehabilitation Act of 2013 is being called into question.

2. Long-Pending Infrastructure Projects: The Indian real estate market is rife with examples of delayed and long-pending infrastructure projects, whether in the public or private sectors. The main cause of the delay is insufficient funding and a lack of technologies to complete them on time. Furthermore, the lengthy approval process is a significant challenge. Due to the lack of a single-window clearance option, project approvals in India range from days to years, resulting in time and cost escalation.

3. Overpopulation: By 2050, India will be the world’s most populous country, with more than half of the population living in urban areas and Tier 1 cities. To sustain such a large population, India requires more large-scale new cities and urban centres to provide all necessary resources to the inhabitants. As a result, nationwide housing construction is critical.

4. Outdated Building Techniques: Indian real estate is the only industry in the world that continues to use old building techniques and is overly reliant on human labour. As a result, regular maintenance is required. On the contrary, new construction techniques necessitate the use of high-quality building materials such as concrete and iron slabs, which require less human involvement. [18]

5. Delayed Infrastructure Projects: One of the major roadblocks for infrastructure developers that leads to project delays well before RERA is a lack of or irregular funding. In addition to the challenges of obtaining funding for the project, the real estate developer must comply with at least 40 different government regulations before beginning construction. [19]

The time it takes to obtain these permissions ranges from a few months to a year and raises the cost of the property by 10-20% for both consumers and developers. While RERA has been successful in combating the issue of transparent financial usage, the sector is calling for a single-window clearance system to streamline and accelerate the approval mechanism.

6. Tax and Demand Shifts: In addition to the previously mentioned financial difficulties, the implementation of the GST is a factor that is haunting the real estate sector. Prior to the implementation of GST, an under-construction property was subject to a 4.5 percent service tax. However, post-GST, the rate has risen sharply to 12%, reducing the appeal of the ordeal for property investors.

Because buyers previously paid registration and stamp duty on properties, the addition of GST has increased the statutory cost of the investor’s property by 20%. The trends in the real estate sector necessitate policy changes in several areas of the infrastructure development cycle. Furthermore, the current economic slowdown is the result of the aforementioned factors, which often overlap. [20]

7. Conclusion:

In a growing economy, the real estate sector attracts a lot of attention from everyone, including foreigners. India has a policy that encourages non-residents to invest in the construction and development sector. The policy is only available to NRIs for investment in independent premises. The real estate sector in India has come a long way since it was heavily regulated. Construction development has not only been made more open to foreign investment, but regulatory requirements have also been relaxed in order to attract more foreign funding. It is important to conduct proper title due diligence and to ensure that the documentations are proper, and to verify the permits in order to mitigate the challenges faced in the real estate sector.

End Notes:

[1] https://niti.gov.in/planningcommission.gov.in/docs/plans/planrel/fiveyr/10th/volume2/v2_ch7_6.pdf

[2] https://niti.gov.in/planningcommission.gov.in/docs/plans/planrel/fiveyr/10th/volume2/v2_ch7_6.pdf

[3] The Transfer of Property Act, 1882.

[4] The Indian Easements Act, 1882, Sec. 4.

[5] The Registration Act, 1908.

[6] Building and Other Constructions Workers (Regulation of Employment and Conditions of Service) Act, 1996.

[7] FEMA Notification No. 1/2000-RB dated May 3, 2000 [‘FEMA 1’], available at: < http://rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=155>.

[8] Consolidated FDI Policy Circular of 2014 (Department of Industrial Policy and Promotion (‘DIPP’), Ministry of Commerce & Industry, Govt. of India, 17th April 2014.

[9] Paragraph 6.1(f), 2014 FDI Policy.

[10] Consolidated FDI Policy of India, vide Circular 1 of 2013 (DIPP, Ministry of Commerce & Industry, Govt. of India, 5th April 2013).

[11] Consolidated FDI Policy of India, vide Circular 1 of 2012 (DIPP, Ministry of Commerce & Industry, Govt. of India, 10th April 2012).

[12] Consolidated FDI Policy of India, vide Circular 2 of 2011 (DIPP, Ministry of Commerce & Industry, Govt. of India, 1st October 2011).

[13] Consolidated FDI Policy of India, vide Circular 1 of 2010 (DIPP, Ministry of Commerce & Industry, Govt. of India, 1st April 2010) [‘2010 FDI Policy’].

[14] Paragraph 3.3.2(iv), 2010 FDI Policy.

[15] Consolidated FDI Policy Circular of 2015 (DIPP, Ministry of Commerce & Industry, Govt. of India, 12th May 2015), available at: < http://dipp.nic.in/English/policies/FDI_Circular_2015.pdf>

[16] Note (i), Paragraph 6.2.11.2, 2015 FDI Policy.

[17] Reserve Bank of India, Master Circular on Foreign Investment in India.

[18] https://www.greenscapegroup.co.in/blog/indian-real-estate-sector-and-the-current-challenges/

[19]https://www.financialexpress.com/economy/5-legal-challeneges-in-real-estate-home-buyers-should-know/250549/

[20]https://www.asianage.com/business/in-other-news/071219/4-key-challenges-in-indian-real-estate-segment.html

Author: Abhishek Gupta, Senior Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at abhishek@samistilegal.in