Understanding the Need for Dual Safeguards Under RERA and HMDA
Introduction
Real estate developers in Telangana increasingly question the necessity of dual compliance i.e., maintaining 70% of allottee funds in a separate bank account under Section 4(2)(l)(D) of the Real Estate (Regulation and Development) Act, 2016 (“RERA Act”), while simultaneously mortgaging 10% / 5% of the total built-up area to the relevant municipal authority (“Municipal Authority”) under Rule 25(d) of the Building Rules of 2012, issued vide G.O. 168, dated April 7, 2012,[1](“Building Rules”). According to the real estate developers, both of these provisions ostensibly ensure project completion. Then what is the requirement to comply with both? However, a closer analysis reveals that these provisions serve fundamentally different purposes and create complementary, not redundant, safeguards.
Understanding the Distinct Provisions
RERA Act
Section 4(2)(l)(D) of RERA Act mandates that promoters shall deposit 70% of amounts received from allottees in a separate bank account exclusively for construction costs and land costs of that specific project. Withdrawals of such fund is permitted only in proportion to project completion, certified by an engineer, architect, and chartered accountant[2]. The purpose of the aforesaid provision is to ensure that funds collected from allottees are used exclusively for the development and completion of the specific project for which they are received.
HMDA Act
Rule 25(d) of the Building Rules provide that the owner is required to hand over 10% of the built-up area to Municipal Authority by way of a notarised affidavit. In respect of row houses / detached houses / cluster housing, 5% of the units are required to be handed over to Municipal Authority[3]. The provision serves as an enforcement mechanism to ensure construction is undertaken as per the sanctioned plan by creating a financial stake that discourages violations. Further, Regulation 6 under Annexure-IX of the Building Rules states that in case of any violations, the handed over portion of the building will be disposed-off in public auction by the Municipal Authority.[4] This acts as a deterrent against unauthorised constructions and deviations from sanctioned plans.
Three Fundamental Differences
Detailed below is an analysis of the fundamental differences between both the provisions upon a plain reading of the same.
Primary Objective
Section 4(2)(l)(D) of the RERA Act aims to protect allottees financially and prevent fund diversion by requiring that 70% of amounts received from allottees be deposited in a separate account. This ensures that allottee’s money is protected and used only for the project. In contrast, Rule 25(d) of Building Rules focuses on ensuring that construction follows the sanctioned plans. It requires the owner to hand over 10% / 5% of the built-up area to the Municipal Authority, which creates a deterrent against deviations from sanctioned plans for construction.
Nature of Security
These provisions use entirely different methods to achieve their objectives. RERA Act provision works through financial control where funds can be withdrawn only in proportion to project completion, and each withdrawal must be certified by an engineer, architect, and chartered accountant. This ensures continuous monitoring throughout construction. However, the provision in Building Rules, works by holding a physical portion of the property as security. Regulation 6 under Annexure-IX states that in case of violations, the handed over portion of the building will be disposed-off in public auction. Thus, RERA provides ongoing financial supervision, while HMDA creates a penalty mechanism that is triggered only when violations are detected.
Stakeholder Protection Focus
The provisions protect different stakeholders and interests. RERA Act protects individual allottees who have paid money but not received possession, preventing promoters from misusing their funds. Building Rules, on the other hand, protects the broader public interest in planned urban development and regulatory compliance. In essence, RERA protects individual allottee’s money, while Building Rules protect the integrity of urban planning.
Why Both Provisions Are Essential
To illustrate, ABC Developers is constructing “ABC Apartments” with 100 allottees who have paid INR 50 Crores. Midway through construction, the developer diverts INR 20 Crores to fund another struggling project and also adds an unauthorised 16th floor to increase the profits. Here’s where the two provisions work differently. Section 4(2)(l)(D) of RERA Act requires the developer to maintain 70% of allottee’s money in a separate bank account, allowing withdrawals only proportionate to certified project completion. This prevents the fund diversion attempt, as the developer cannot access the money for other projects. However, this provision does nothing to prevent the unauthorised floor addition. That’s where Rule 25(d) of the Building Rules becomes crucial, due to which the developer has handed over 10% of the built-up area to municipal Authority, which can be auctioned if construction deviates from the sanctioned plan.
If only RERA is in force without the Building Rules, the project would be completed with proper fund utilisation, but the developer could still build an unsafe, non-compliant structure with unauthorised floors and reduced safety setbacks. Similarly, if only the Building Rules were in force, the developer would follow the sanctioned plan to avoid losing the 10% mortgage, but could divert allottee’s funds elsewhere, leaving the project incomplete or abandoned. In simple terms, RERA ensures that the project gets completed by protecting allottee’s money, while Building Rules ensure it is completed correctly by protecting urban planning and safety standards. Neither provision can substitute for the other because they address fundamentally different risks.
Legal Principles Supporting Dual Compliance
RERA is a central legislation focusing on protection of individual allottees and ensuring efficient and transparent transactions in the real estate sector. Whereas Building Rules are state-level rules addressing urban planning, metropolitan development, and ensuring compliance with sanctioned building plans. Section 88 of RERA Act explicitly provides that its provisions shall be in addition to, and not in derogation of other laws, while Section 89 of RERA Act grants overriding effect only where actual inconsistency exists, thereby mandating complementary operation of regulatory frameworks. A harmonious reading of both the provisions gives full effect to both legislative intents i.e., financial protection under RERA and structural compliance under Building Rules, operating at different regulatory levels (i.e., Central versus State) for distinct but complementary purposes.
Conclusion
The dual compliance requirements under RERA Act and Building Rules are complementary safeguards addressing distinct risks, not redundant obligations. RERA’s separate account mechanism prevents fund diversion, while the Building Rules’ hand-over provision deters violation of sanctioned plans. Section 88 of the RERA Act expressly provides that its provisions operate in addition to, and not in derogation of other laws, establishing legislative intent for harmonious operation. In a sector marked by project abandonment and regulatory violations, one provision ensures projects are completed, the other ensures they are completed as per the sanctioned plan. Both are essential for comprehensive protection of homebuyers and urban planning integrity.
References
[1] In exercise of the powers conferred by Section 56 of HMDA Act, 2008.
[2] Section 4(2)(l)(D) of RERA Act.
[3] Rule 25(d) of the Building Rules of 2012, issued vide G.O. 168, dated April 7, 2012.
[4] Regulation 6 of Regulations for Registration of Licensed Builder / Real Estate Developer / Firm, issued under the Building Rules.