Authored By: Anushka Rai
Noida International University
Case Name: NEELKAMAL REALTORS SUBURBAN PVT. LTD. v. UNION OF INDIA & ORS.(2018) AIR 2018 (NOC) 398 (Bom.)
Court:
High Court of Bombay
Bench: Division Bench consisting of Justice Naresh H. Patil and Justice R. G. Ketkar
December 06, 2017
Petitioners: Neelkamal Realtors Suburban Pvt. Ltd. and other builders challenging the constitutional validity of Real Estate (Regulation and Development) Act, 2016
Respondents: Union of India (legislature authority enacting RERA), State of Maharashtra, Maharashtra Real Estate Regulatory Authority (MahaRERA)
FACT OF THE CASE
On 1 May 2017, the Parliament of India implemented the Real Estate (Regulation and Development) Act, 2016 (“RERA”) in an effort to bring accountability and transparency to the real estate sector, which has experienced delays and mismanagement for some time, while lacking in consumer protection[1]. This Act applied to all projects, including those that are already under construction, requiring them to be registered with the relevant Real Estate Regulatory Authority before any further sale or advertisement could take place.
After RERA was enacted, Neelkamal Realtors Suburban Pvt. Ltd. and other developers challenged the constitutional validity of RERA in the Bombay High Court[2]. The developers argued that the requirement to register existing projects; the requirement to maintain and deposit any seventy percent of project fund in a separate escrow account; and the requirement to complete a project in accordance with revised dates imposed under the RERA were unreasonable restraints on their business and retrospectively changed their contractual obligations. The petitioners also argued that all the provisions violated their rights under Articles 14 and 19(1)(g) of the Constitution of India.[3]
The legislation was defended by the Union of India and State administrations, who emphasized that there had been rampant irregularities in the real estate sector that exploited homebuyers.[4] The respondents maintained that the application of RERA to ongoing projects was justified because most of the complaints originated from ongoing projects. They also added that the Act was not punitive or retrospective but regulatory and retroactive to ensure consumer protection to guarantee future behavior without impacting past transactions.
ISSUES RAISED
- Whether the application of RERA in respect of ongoing projects equivalent to retroactive legislation and infringing existing rights?
- Whether the provisions of RERA, particularly the requirement to register ones project and set aside seventy percent of the purchase price of the project in an escrow account, infringe the guaranteed rights to trade or business under Article 19(1)(g) of the Constitution of India by creating excessive restrictions?
- Whether the powers granted to the Real Estate Regulatory Authority and the Appellate Tribunal under RERA are unreasonable or excessive thereby infringing Article 14 of the Constitution?
- Whether RERA, in its overall structure, collisions the interests of homebuyers and developers in a manner that is fair and reasonable in this kind of legislative regulation?
ARGUMENTS OF THE PARTIES
Petitioner Side
The petitioners argued that the Real Estate (Regulation and Development) Act, 2016 (“RERA”) has operated retrospectively because its provisions became mandatory with respect to even on-going projects. It was contended that the act of imposing such obligations fundamentally altered the original contractual obligations that were negotiated and existing between the developers and the home buyers, which would have the effect of disturbing vested rights. They argued that the retrospective effect was clearly arbitrary and unconstitutional because the pre-existing legal regime or environmental relationship did not take into account these particular obligations, when projects began.
Moreover, it was contended by the petitioners that depositing seventy percent of the amount of project funds into escrow unduly burdened developers financially. The petitioners asserted that this restriction significantly limited their ability to manage funds in accordance with commercial needs and market conditions. Because it dictated how funds were to be utilized, RERA was alleged to be infringing on the fundamental right to carry on trade and business under Article 19(1)(g) of the Constitution of India.[5]
The developers also took issue with the obligatory registration of projects that were already underway, asserting that the requirement imposed administrative and financial hardship, as well as delays in the construction itself. They contended that builders were subject to excessive regulation, while homebuyers received unilateral benefits under the statute. They also claimed that this violated Article 14 of the Constitution because the statute was not operating on an equal footing and treated promoters as a class differently than homebuyers.[6]
Finally, the petitioners claimed that the broad powers given to the Real Estate Regulatory Authority and to the Appellate Tribunal were an excessive delegation of authority that made it possible to exercise discretion, exposing developers to excessive penalties and litigations.[7] They argued that these combined powers would render the law discriminatory, despite its ostensible purpose as a regulatory framework.
Respondent Side
The respondents justified the constitutional validity of the Real Estate (Regulation and Development) Act, 2016 (“RERA”) by emphasizing that the Act’s principle aim is to protect consumers. They argued that the real estate industry has been long plagued by delays, fund diversion and want of accountability which caused tremendous hardship to home buyers. Since the bulk of complaints arose from ongoing projects, the application of RERA to ongoing projects was not arbitrary but was necessary in order to maintain transparency and restore public confidence in the housing industry.
They also argued that RERA was not a new law with retroactive effect, and that it did not revive completed transactions or void any past contracts, it simply added regulatory obligations to the ongoing performance of existing projects. By mandating registration, disclosure, and the use of escrow accounts for cash flow, the Act was meant to ensure that future construction would be completed in a reasonable, and clear, manner. Thus, the law was a regulatory framework, not punitive.
The respondents also argued that the limitations on the developers were reasonable and legally permissible. Under Article 19(6) of the Constitution reasonable limits can be established in the interests of the public.[8] In this case the provisions sought to establish a fair balance of interests between promoters and developers, permitting builders to operate their businesses as consumers are also safeguarded from exploitation. The Act therefore met the tests of Articles 14 and 19 and was a reasonable exercise of legislative authority.
JUDGMENT
The Bombay High Court upheld the comprehensive constitutional validity of the Real Estate (Regulation and Development) Act, 2016 (“RERA”).[9] The Court concluded that the legislation was enacted to safeguard the rights of homebuyers and regulate accountability in the real estate sector on behalf of the public interest. The Court determined that the Act was procedural but not retrospective, but rather applied to future obligations in respect of ongoing projects specifically, and not to disturb or modify any completed transactions or prior contractual rights.
Therefore, the petitions submitted by Neelkamal Realtors Suburban Pvt. Ltd. and others were rejected. The Court noted that the developers were obligated to adhere to the RERA provisions; such as registration of continuing projects and that the project funds need to be maintained in an escrow account in seventy percent of the costs. The Court viewed these as reasonable restrictions within the limits of Article 19(6) of the Constitution in order to prevent malpractices and to ensure timely completion of projects.[10]
The Court also elaborated that the authority given to the Regulatory Authority and the Appellate Tribunal was not arbitrary, but rather required to achieve the purpose of the legislation. The Court dismissed the challenge thereby holding that RERA would govern all new projects and ongoing projects and charted a path of effective regulation of the real estate sector.
LEGAL REASONING / RATIO DECIDENDI
The Bombay High Court made a distinction between retrospective and retroactive legislation for the purpose of sanctioning the affect of RERA onto the pending projects. The Court explained that a retrospective law reopens and nullifies past transactions, whereas a retroactive law accepts a past transaction whilst regulating future impacts of the past transaction. Before concluding that the law was retroactive (and, thus, constitutionally valid), the Court emphasized that RERA did not void prior contractual obligations, but mandated compliance from its inception.
With regard to the issue of fundamental rights, the Court determined that the restrictions on developers, including both the mandatory requirement of registration and the seventy percent escrow, were reasonable restrictions under Article 19(6) of the Constitution. The justification for these restrictions were the prevention of diversion of funds, assured completion of the project on time, and the protection of poor homebuyers. The Court stated that where private commercial activity has a direct effect on public welfare than the State has broad powers to regulate these activities in the public interest.
The Court also dismissed the argument that RERA violated Article 14, stating that the Act was uniformly applicable to all promoters and sought to remedy serious inequity between builders and homebuyers. The principle of reasonable classification was satisfied, as the developers were considered a different class requiring regulation because of their superior bargaining position. Therefore, the Act’s consumer-centered approach was neither arbitrary nor outside the authority granted to the legislature.
The Court, to support its reasoning, invoked the principle of purposive interpretation of regulatory statutes designed and enacted in the public interest. The Court reiterated that the courts conducting review must give effect to the legislative intention of protecting the weaker sections of society — in this instance, home buyers. This rationale was reaffirmed by the Supreme Court in Pioneer Urban Land & Infrastructure Ltd. v. Union of India, where the Supreme Court found that RERA’s constitutional validity and that consumer protection is a legitimate basis for legislative intervention in commercial transactions.[11]
OBSERVATIONS
The ruling in Neelkamal Realtors Suburban Pvt. Ltd. v. Union of India was the first significant judicial endorsement of the Real Estate (Regulation and Development) Act, 2016, confirming its constitutional validity and clarifying the Act’s operation as retroactive rather than retrospective.[12] The Court reaffirmed the position that some reasonable restrictions of a trade can be validly imposed in larger public interest and sought to balance developers’ narrow property rights against the homebuyers’ real need for protection.
This decision had a huge impact on the future of real estate regulation in India, as it provided a basis for transparency, accountability, and consumer protection in a sector that has traditionally had its share of irregularities. It subsequently gained support from the Supreme Court, attesting to its importance over the long term in legitimizing RERA as a significant piece of consumer legislation.
REFERENCE(S):
- LiveLaw, Bombay High Court Upholds Constitutional Validity of RERA (Dec. 7, 2017), available at https://www.livelaw.in
- PRS Legislative Research, The Real Estate (Regulation and Development) Bill, 2016 – Legislative Brief (2016), available at https://prsindia.org
- Ministry of Housing and Urban Affairs, Government of India, Real Estate (Regulation and Development) Act, 2016 Overview (2017), available at https://mohua.gov.in
- Bar and Bench, Neelkamal Realtors v. Union of India: Bombay High Court Verdict on RERA (2017), available at https://www.barandbench.com.
- Economic Times, Impact of RERA on Real Estate Developers and Buyers (2018), available at https://economictimes.indiatimes.com
- Neelkamal Realtors Suburban Pvt. Ltd. v. Union of India, AIR 2018 (NOC) 398 (Bom.).
- Pioneer Urban Land & Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416.
- The Constitution of India, 1950.
- The Real Estate (Regulation and Development) Act, No. 16 of 2016, Acts of Parliament, 2016 (India).
- The Transfer of Property Act, No. 4 of 1882 (India).
- The Consumer Protection Act, No. 68 of 1986 (India).
[1] The Real Estate (Regulation and Development) Act, No. 16 of 2016, Acts of Parliament, 2016 (India).
[2] Neelkamal Realtors Suburban Pvt. Ltd. v. Union of India, AIR 2018 (NOC) 398 (Bom.).
[3] INDIA CONST. arts. 14, 19(1)(g).
[4] Neelkamal Realtors Suburban Pvt. Ltd. v. Union of India, AIR 2018 (NOC) 398 (Bom.).
[5] INDIA CONST. art. 19(1)(g).
[6] Id. art. 14.
[7] Neelkamal Realtors Suburban Pvt. Ltd. v. Union of India, AIR 2018 (NOC) 398 (Bom.).
[8] INDIA CONST. art. 19(6).
[9] Neelkamal Realtors Suburban Pvt. Ltd. v. Union of India, AIR 2018 (NOC) 398 (Bom.).
[10] INDIA CONST. art. 19(6).
[11] Pioneer Urban Land & Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416 (India).
[12] Neelkamal Realtors Suburban Pvt. Ltd. v. Union of India, AIR 2018 (NOC) 398 (Bom.).
