Real Estate Law Does Not Mention The Word 'Escrow'. Should It Worry You?

Expectant homebuyers are eagerly waiting for May 1, when the Real Estate (Regulation & Development) Act, 2016, will come into force and change the sector for their benefit. If they want to do business, developers will have no choice but to register themselves with the state Real Estate Regulatory Authority (RERA) , they will have to provide all details about their past and ongoing operations. They will have to keep buyers updated about the progress of their projects. Most of all, they will be severely punished for any wrongdoings. In all likelihood, the law by fixing accountability will cleanse the sector of many of its existing evils. However, there is a small detail that may not be as pleasing for home buyers.  

While the debate over the rules and regulations progressed, a lot of emphasis was laid of setting a guideline under which developers will have to open an escrow account to deposit funds collected for project constructions.  In reality, the text of the law nowhere mentions the word escrow; it only talks about a separate account.

Also read: 10 Frequently Asked Questions About Real Estate Law

For the uninitiated, an escrow account is a bank account opened by two contractual parties which appoint a third party, also known as a trustee or an escrow agent, to manage funds for completing a transaction. Depending on the fulfillment or non-fulfillment of commitments, this escrow agent may or may not allow fund transfer to either party. A separate account, on the other hand, is a current account and one does need prior approvals of a body to withdraw funds

Under the provisions of Section 4 of the law, a developer for registering a project has to submit, among other documents, a declaration letter about fund collected for construction. This declaration should state “that 70 per cent of amount realised for the real estate project from the allottees, from time to time, shall be deposited in a separate account to be maintained in a scheduled bank to cover the cost of construction and the land cost and shall be used only for that purpose”.

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This measure is put in place to ensure developers do not use the money raised for a particular project to launch a new venture, a practice they are widely accused of adopting. This practice is also cited as a major reason for project delays. The law mandates that a developer has to withdraw money from this separate account “in proportion to the percentage of completion of the project."

While a developer will not need an approval from the RERA to withdraw funds, there are other conditions to be met.

“The amounts from the separate account shall be withdrawn by the promoter after it is certified by an engineer, an architect and a chartered accountant in practice that the withdrawal is in proportion to the percentage of completion of the project,” the Real Estate law mandates. One way to ensure there is no lacuna with regard to this provision using which developers can indulge in a foul play, these parties — engineers, architects and chartered accountants — should be made liable for giving a go ahead to developers to withdraw money.

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Then, there are other conditions, too.