The Real Estate Act, 2016: Implications on M&A

The Real Estate (Regulation and Development) Act, 2016 has been passed by both houses of parliament. The law has multiple implications on various stakeholders such as buyers of flats and office, builders, and promoters, construction contractors. We have analysed below the impact of the law on M&A in real estate industry. Section 15 of the act provides obligations and prior approval in the case of M&A transaction by builder if there are already any allottees.

Obligations of promoter in case of transfer of a real estate project to the third party

• The promoter shall obtain written consent from two-third allottees, except the promoter, and written approval of the Authority before transferring or assigning his majority rights and liabilities in respect of a real estate project to a third party

• On the transfer/ assignment being permitted by the allottees and the Authority, the intending promoter shall be required to independently comply with all the pending obligations and the obligations as per the agreement for sale entered into by the erstwhile promoter with the allottees. Such transfer shall not result in an extension of time to the intending promoter to complete the real estate.

Questions

The act defines promoter as –

• A person who constructs a building or a building consisting of apartments, or converts an existing building or a part thereof into apartments, for the purpose of selling the apartments to other persons.
• A person who develops the land into a project, constructs structures of the plots, for the purpose of selling.
• Any development authority or public body constructing buildings or apartments on lands or plots owned by them or placed at their disposal by the Government for the purpose of selling.
• An apex State level co-operative housing finance society and a primary co-operative housing society which constructs apartments or buildings for its members or the allottees of such apartments or buildings; or
• Any other person who acts himself as a builder, coloniser, contractor, developer, estate developer or claims to be acting as the holder of a power of attorney from the owner of the land or on which the building or apartment is constructed or developed for sale; or
• Such other person, who constructs any building or apartment for sale to the general public

 As per Act, Person means-

• an individual;
• a Hindu undivided family;
• a company;
• a firm under the Indian Partnership Act, 1932 or the Limited Liability

Partnership Act, 2008, as the case may be;

• a competent authority;
• an association of persons or a body of individuals whether incorporated or not;
• a co-operative society registered under any law relating to co-operative societies;
• any such other entity as the appropriate Government may, by notification, specify in this behalf;

The Act states that approval and consent are mandatory in case of transfer of majority rights and liabilities and not rights or In case it is only rights or liabilities then it can be interpreted that no approval and consent is needed.

The Act doesn’t provide an explanation for what majority means. In a general sense, majority means more than half. Thus it is to be believed that rights or liabilities more than 50% will be considered as majority.

As per the Act, Real Estate Project means the development of a building or a building consisting of apartments, or converting an existing building into apartments, or the development of land into plots or apartment, for the purpose of selling all or some of the said apartments/plots/building etc.

The definition states that the real estate project means the development of building/ apartments therein etc. for the purpose of selling the same. It is to be assumed that the provisions of the act will not apply to such real estate project not meant for sale of building/ apartments etc. and for personal purpose or be renting.

Allottee is defined in the act as the person to whom a plot, apartment or building, has been allotted, sold (whether as freehold or leasehold) or otherwise transferred by the promoter and includes the person who subsequently acquires the said allotment through sale, transfer or otherwise but does not include a person to whom such plot, apartment or building is given on rent.

For the purpose of Section 15, allottee, irrespective of the number of apartments or plots, booked by him or booked in the name of his family, or in the case of other persons such as companies or firms or any association of individuals, or booked in its name or in the name of its associated entities or related enterprises, shall be considered as one allottee.

When promoter shall issue allottee an allotment letter, the said building or apartment is said to be allotted to the allottee.

The act does not provide the exact details for same. But it is to be believed that post booking and fulfilling the conditions, as prescribed by the promoter.

The Act imposes monetary penalties on the promoter of up to 5% of the ‘estimated cost of the project’ (as determined by the RERA) for disclosure related defaults, and up to 10% for other defaults, along with a maximum imprisonment of three years.

Implications of Section 15 in case of following situations-

1. Transfer of real estate project by wholly-owned subsidiary to its holding company:
   In the said case the ownership does not change as the beneficiary is the holding company. The rights have been extinguished on such transfer and also there in no payment involved in a transfer. Hence it is to be believed that no consent or approval is required in this case.
2. Transfer of real estate project by a promoter to the third party:
   Promoter needs to obtain written consent from two-third allottees, except the promoter, and written approval of the Authority prior transfer of transfer of real estate project.
3. Does it lead to a transfer of real estate project in case there is a change in partners having more than 50%  of profit sharing of LLP or more than 50% of shareholding in a case of a company?
   As ownership change of more than 50% should be considered as a transfer. However, other views can be that there is no transfer involved since the rights and liabilities are not transferred to the third party as the beneficiary owner is LLP/ company.
4. Does it lead to a transfer of real estate project in case there is change more than 50% directors of a company?
   There is change in more than 50% directors, but there is no change ownership of rights and liabilities so it may not be considered as transfer.
5. In case if there are no allottees, still the approval for authority is needed?
   In the Act, there is no clear mention of whether the approval is to be taken from the Authority if there are no allottees. Though we believe that the question of consent does not arise if there are no allottees, since the provisions are made to safeguard the allottees.

Conclusion:

The new law will require one more approval in case of merger /demerger or acquisition in case of real estate business. As approvals of 2/3 allottees other than promoter itself are required, it may delay the merger/acquisition and may lead to a collapse of the deal. It is ideal if allottees write to the authority if they have any objection and authority gives clearance or not instead of having dual approval.

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