One of the crucial changes implemented by the Regulating Authority is the imposition of maintaining an escrow account. According to Section 4(2)(l)(D) of the RERA, a promoter is required to enclose, along with the application for registration of real estate projects, a declaration supported by an affidavit, signed by the promoter or any person authorized by the promoter, stating that 70% (seventy percent) of the amounts realised for the real estate project from the allottees, from time to time, shall be deposited in a separate escrow account to be maintained in a scheduled bank (“RERA Account”). It is introduced as a trust building mechanism, the developers can access the funds solely for the purpose of construction purpose of the project.
It is made mandatory that withdrawal request for funds from the escrow accounts must be certified by an engineer, architect and a chartered accountant to ensure claims are justified. It is important as it prevents the developers from using the funds for other purposes, and also mitigates the risk of insolvency.
Escrow Accounts prevent incessant delays in delivery of the real estate projects. Thereby to protect consumer of a project, the act stipulates all builders or developers to transfer 70% of the funds collected to be deposited in an escrow account maintained with a scheduled commercial bank. Recently, the Delhi High Court, in the matter of AAA Portfolios Pvt. Ltd. v. Deputy Commissioner of Income Tax, held that funds lying in an escrow account cannot be appropriated by the tax authorities as recovery of taxes in connection with a taxpayer’s liability, when such funds are not held by the escrow agent on behalf of the taxpayer, or owed by the third party to the taxpayer.
Few real estate projects are exempted from obligations under the RERA, as per section 3 and section 9 of the RERA, it includes people having an area of land that does not exceed 500 sq meters or 8 apartments or in case where the real estate project does not involve marketing, selling of any plot or building for the purpose of renovation or repair or redevelopment, also include projects being developed outside the boundary of Planning Area or where the promoter receives completion certificate prior to commencement of this act.
Promoter as defined under section 2(zk) of the RERA, is a person who constructs an independent building or apartment for the purpose of selling it or an apex State level co-operative housing finance society and a primary co-operative housing society. In various instances promoters has been held to be guardians of the escrow accounts and same money cannot be used for any purpose other than the completion of the project.
The provision of escrow accounts goes on to state that the promoter can withdraw amounts from the escrow account, to cover the cost of the project in proportion to the percentage of completion of the project (“Proportionality Clause”). The main objective of the addition of this clause is to make sure that promoter doesn’t siphon the funds of one project to another. If this provision is absent this would create liquidity crisis for the promoters.
It has been observed that there is employment of substantial funds in the initial stages of the construction project which in return doesn’t have the same progress rate to the percentage of the completion of the project. It is quite complicated as there is no explicit guideline by the RERA to the effect of the percentage of the completion of the project.
While pre-construction costs would form a substantial portion of the total estimated cost of the project, the resulting contribution of such activity towards the percentage of completion of construction is minimal. Applying the Proportionality Clause would therefore constrain the promoter from withdrawing the costs already incurred on the project from the RERA Account.
This provision coupled with other provisions like Section 11(1)(g) & (h) of the RERA that prevents the promoter from creating any mortgage or encumbrance over the undivided share of land (along with the constructed area) after entering into agreements of sale with an allottee could create a liquidity crisis, compelling the small and medium promoters to seek alternate funding at higher rates of interests or delay the overall construction of the project, consequently compromising the revival of the real estate sector.
There are a few obligations or duties that are to be performed by such a promoter like responsibility to obtain the lease certificate, certifying that all dues and charges in regard to the leasehold land has been paid, and to make the same available to the allottees. Likewise, Section 19 under chapter 5 of the RERA, 2016 lays down obligations and duties of the allottee. The obligations and liability may be reduced when mutually agreed to between the promoter and such allottee.
The escrow account plays a major role to protect the interest of the allottees and maintain liquidity in the system. The payment through the escrow account helps to bring in the transparency in payment to the vendors. Still there are few tweaks to be made in the RERA in respect of the escrow account regarding the payment for the construction land in which the clarity has only been bought by Maha RERA.