RERA fears make private equity firms and strategic investors tweak real estate contracts

Many private equity as well as strategic investors who have invested in real estate, mainly at project level, are renegotiating their contracts with the developers fearing litigation and fines once the new real estate regulations come in to force.   The fear is that under the Real Estate (Regulation and Development) Act (RERA), they can be labelled as developer and may have to face strict penalties for any violation of rules by the projects they fund. The responsibility of compliance under the RERA is on the promoter. And the term has a wide definition to cover not only the developer, but also a landlord and private equity or strategic investor, if they actively participate in the project.   Industry trackers said the renegotiations between the developers and investors have already begun. The investors are either looking at diluting their stake or inserting clauses in contracts whereby their liability would reduce.   These commercial contracts between an investor and the developer may not have legal protection from RERA, said industry experts. The clauses that investors want to insert include shifting the monitory obligation to pay fines from investor to the developer. So in case of a fine, the developer would be required to pay the fine directly, without involving the investor.   Industry trackers said in last few years, many investors, including PE firms, were actively involved in design, development and marketing strategies for projects. These investors would now fall under the definition of promoters and will be obliged to comply with RERA.   In many cases, especially where a foreign PE fund has invested in a project, diluting stake is also being considered. Some investors are looking to entirely exit such projects or reduce their stake and thereby lessen the control. However, this may not be that easy.   The regulation is aimed at keeping irregularities in the sector under control, said experts. RERA is set to provide a fillip to the overall real estate funding environment, they said. The developer would be required to take a disciplined approach for project execution and the same should reflect in the investment agreements by any private equity investor.

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