Jun 19, 2023Investments

RERA & Escrow Accounts|Safeguarding Homebuyers' Investments

by Godrej Properties Limited

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The implementation of the Real Estate Regulatory Authority (RERA) in India has brought about significant reforms to protect the interests of homebuyers and ensure transparency in the real estate sector. One of the key provisions of RERA that has contributed significantly to consumer protection is the requirement for developers to maintain escrow accounts. This article explores the role of escrow accounts under RERA and highlights how they safeguard homebuyers' investments.

RERA and Escrow Accounts

Understanding the RERA Act 2016

The RERA Act of 2016, or the Real Estate (Regulation and Development) Act, is a pivotal piece of legislation designed to bring transparency, accountability, and discipline into India's real estate sector. This act primarily focuses on residential real estate projects and serves a dual purpose. Firstly, it safeguards the interests of homebuyers by ensuring they receive what was promised within specified timelines. Builders are mandated to register their projects, providing vital information accessible to potential buyers.

Salient Features of the RERA Act

The RERA Act introduces a comprehensive set of provisions that redefine property transactions:

  • State-Level Authorities: Each Indian state has RERA authority to monitor and arbitrate projects.
  • Mandatory Project Registration: All real estate projects must be registered with the RERA authority, provided they adhere to the guidelines.
  • Dispute Resolution: A fast-track mechanism is established to settle disputes.
  • Transferring Project Rights: Promoters must obtain written consent from at least two-thirds of project allottees to transfer rights and liabilities to a third party.
  • Compensation for Losses: Promoters must compensate buyers for financial losses resulting from third-party claims on under-construction property.
  • Complaint Redressal: Anyone can file a complaint regarding RERA rule violations by agents, buyers, or promoters.
  • Penalties: Promoters failing to follow RERA rules may face penalties of up to 5% of the property's estimated cost.
  • Appellate Tribunal: Unsatisfied with RERA authority decisions, one can appeal to the Appellate Tribunal.
  • Enforcement of Orders: Failure to comply with the Appellate Tribunal's order may result in penalties or imprisonment.

What is an Escrow Account?

An escrow account is a dedicated account set up by developers to hold funds collected from homebuyers for a specific project. The money deposited in the escrow account can only be utilised to develop and construct that project. This provision ensures that the funds collected from homebuyers are not diverted for any other purpose.

Escrow Account Benefits

Escrow accounts offer protection to both buyers and sellers in a transaction. Sellers don't need to worry about buyers not paying, while buyers are assured they'll receive the promised products or services. This concept is highly beneficial and widely used in real estate.

Escrow Accounts in Real Estate

Under the RERA Act, 70% of advances from homebuyers for a housing project are deposited in an escrow account managed by a scheduled bank in India. Similarly, this account should hold 70% of bank loans obtained for the project. These funds are solely for land acquisition and project development, ensuring that buyer advances aren't used for other purposes, a common practice that often leads to project delays and insolvencies.

Safeguarding Homebuyers' Investments

Escrow accounts mandated by RERA play a crucial role in protecting homebuyers' investments in several ways.

Prevention of Capital Misuse

To maintain escrow accounts, developers must utilise the collected money solely for the designated project. This prevents any diversion or misuse of capital, ensuring that the financial resources are directed towards the completion of the project as promised.

Timely Completion of Projects

Establishing escrow accounts under RERA acts as a mechanism to ensure timely project completion. Developers are incentivised to adhere to the project timelines since the funds from the escrow account can only be accessed for project-related activities. This discourages delays or deviations from the agreed-upon schedule, minimising the risk of extended waiting periods for homebuyers.

Enhanced Financial Discipline

RERA Escrow accounts promote financial discipline among developers. RERA ensures developers maintain a transparent and accountable financial system by segregating project funds into dedicated RERA accounts.

Solutions in Case of Project Delays

In the unfortunate event of project delays, homebuyers have recourse through the regulatory authorities established under RERA. These authorities can take necessary action against developers, including utilising funds from the escrow account to complete the project or compensate affected buyers.

The final word: Ensuring Financial Security and Project Completion

The introduction of escrow accounts under RERA has significantly strengthened the protection of homebuyers' investments in the real estate sector. By mandating developers to maintain dedicated accounts for project funds, RERA ensures financial discipline, project completion within stipulated timelines, and safeguards against capital misuse. As a result, homebuyers can have greater confidence in investing their hard-earned money, knowing that RERA's provisions are in place to protect their interests.
 

Frequently Asked Questions

1. What is the purpose of escrow accounts under RERA?

Ans: Escrow accounts mandated by RERA serve the purpose of safeguarding homebuyers' investments in real estate projects. In addition, they prevent fund diversion, ensure project timely completion, and enhance developers' financial discipline.

2.  How do escrow accounts benefit homebuyers?

Ans: Escrow accounts provide an added layer of security to homebuyers' investments by ensuring that the funds are utilised exclusively for the designated project. They minimise the risk of money misuse and project delays and provide a mechanism for grievance solutions in unforeseen circumstances.

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