What Is The 70% And 30% Rule Of RERA

If you purchased an under construction property in India prior to 2016 then there was one thought that followed virtually every buyer of the same type of property:What if the builder took my money and didn't finish the project?And in many instances it indeed did happen that way.

Developers would launch several projects at once, obtain money from the purchasers for Project A and thereafter utilize these funds towards purchase of land, repayment of loans or funding construction at the second location. When the cash flow became scarce then, the construction would slow down. Purchasers would continue paying EMI’s and rentals, while awaiting possession that kept delaying.

This fact was one of the principal reasons as to why The Real Estate (Regulation and Development) Act, 2016, often abbreviated as RERA introduced the commonly known 70:30 rule. The rule under Section 4(2)(l)(D) of the Act essentially mandates developers to block a majority of the funds received from home purchasers for the same project and not divert the money for other purposes.On paper, it sounds very technical.In reality, this rule is the best protection that any buyer has while purchasing a property in India.

What Exactly Is the 70% and 30% Rule Under RERA?

Under this rule, where builders take any payments from customers for a RERA registered project, 70 percent of that collection has to be held in a separate bank account dedicated to that project. The balance 30 percent can be used by the builder freely for their business related purposes.

These 70 percent funds do not sit inertly. They have been earmarked for expenditures specific to the project such as construction cost of building which also includes payments to contractors, laborers, structural work, on-site construction etc and land costs related to the same project (which may include land purchase or lease charges where applicable).

The logic is fairly simple, if purchasers are paying towards construction of the building then most of their money should be utilised for construction.It is on the remaining 30% of the money that a large part of confusion arises.

Many people believe this 30% money can be used by the builder absolutely in any way they deem fit, which is not completely true. While it's not completely locked to the project account like the 70%, it is still generally meant for expenditures such as salaries, administrative costs, marketing expenses, payment of finances and other general business operations.

Why Did RERA Introduce This Rule in the First Place?

To appreciate the significance of the 70:30 rule it helps to retrace and comprehend real estate market scenarios prior to RERA introduction.A very common business practice was cross funding:Suppose the builder launched a residential project in Noida and starts taking installment payment from buyers.

Instead of utilising it for construction he diverted a portion to purchase land for another project in Gurgaon. Subsequently that project too requires funds.This was and continued to be a pattern and in the long run a number of projects depended on sales from new projects for funding their construction. However with slowing markets, these projects failed to be completed and builders were left stranded with buyers funding their EMIs and rents.

The rule therefore aimed to arrest the cycle that led to delayed housing projects in India over the last two decades and brought much financial discipline into the business. It stated simply that a buyer’s payment should mainly fund that project itself.The rule also substantially reduced builder’s scope to keep juggling funds between unrelated projects indefinitely.

Is It Really an Escrow Account?

It will be common to find brokers and even news articles referring to this as a "RERA escrow account."Technically this isn't quite correct.This separate bank account is required as per the Act and it isn't necessarily an escrow account held by a third party and controlled by the third party. Under Section 4(2)(l)(D) of the Act, each RERA registered development must have its own project bank account.Why does the distinction matter?Many purchasers erroneously believe that the controller is directly administering withdrawals. Not really. The builder does withdraw the money, but this is governed by certain regulations under RERA.

Can Builders Freely Withdraw the 70% Money? No. There Are Conditions.

This is where the real benefit of the rule is realized.The builder is unable to withdraw cash from the separate account on a whim. Withdrawals must be tied to the percentage of construction completed and prior to making any withdrawal, 3 professionals (Engineer, Architect & Chartered Accountant) are required to issue a certificate.These professionals confirm that the money being withdrawn is proportional to the actual construction carried out to date.

Essentially, what you take out should ideally equal the value of work completed at site. For example if a project has completed only 25% construction then an upward swing in withdrawals will be unusual.

This condition ensures that builders don't arbitrarily withdraw a large percentage from the account while the project doesn't take off from the ground. Additionally, all project accounts are subjected to a periodical audit and compliances reports need to be provided to the regulator.

Does This Rule Apply to Every Property Purchase?

No.The 70:30 rule is applicable only to RERA registered projects.While the rule has defined size & number of apartments beyond which a project should be registered under RERA, application rules are prone to variations across states. Certain small projects or projects which are specifically exempt are out of the RERA ambit and thus the separate bank account stipulation might not be applicable.This makes the question about RERA compliance of a project that much more crucial.

Common Misunderstandings About the 70:30 Rule. One common misconception is that 70% means the builder can not touch this money. That is incorrect as money can be withdrawn in proportion to construction. The withdrawal needs certification by three professionals.A second misunderstanding is that the 30% is pure profit. That is not correct. This is actually used to take care of salaries of the employees, general operational cost, financing costs etc. A third is that RERA will not lead to any delays. That is not correct as only about 30% of the funds received can be utilized at the discretion of the builder.

Conclusion: One of the Most Important Buyer Protections You Probably Never Ask About

The 70:30 rule might appear as just another clause buried in the legal jargon of RERA but the silent and subtle impact it has on the economics of the Indian real estate market cannot be underestimated.Where buyers were hitherto paying funds for the construction of properties without understanding where the money was actually going, it now ensures (in registered developments) that the greater proportion of the payment received will remain locked to specific construction and land expenses for that specific project.

What buyers must understand is simple, do not just inquire about possession dates and amenities when buying an under construction property, ask another question too: "Is the project RERA compliant and does the builder have good financial practices?"Because the beginning of construction delays always lies with the misuse of the funds.