Cost of advertisements are not a part of the cost of construction



Status as on 17/06/2019

In a notification dated 6th June, 2019 passed by the Government of Maharashtra, an amendment was made to the Maharashtra RERA rules (MahaRERA). The amendment, amongst other things, added an explanation regarding how the funds collected from people whom a plot has been allotted to (allottees) should be used. According to Section 4(2)(l)(D) of the central RERA, a developer is bound to use 70% of the funds collected from allottees for the purpose of construction.

Till now, developers could include costs of advertisements and promotions in the cost of construction as the interpretation was loose. However, the explanation added through the amendment in the MahaRERA makes it abundantly clear that ‘cost of construction of the project shall not include marketing and brokerage expenses towards sale of apartments.’ The funds collected from allottees must only be reserved for the purpose of construction, this would ensure that these funds are not siphoned off for a different project but rather are used for the timely completion of the same project.

RERA prescribes a separate account for this purpose, withdrawal from this account requires approval from an engineer, an architect and a chartered accountant, the nature of this approval suggests that it is exclusively for construction but the same is not expressly mentioned. An ASSOCHAM report points out that this ambiguity may turn into a malpractice in fund disbursal. Therefore, the recent amendment is a boon.

However, it is detrimental to smaller projects as they lack funds for advertising and promotion as it is. These projects must now collect funds apart from those collected from allottees in order to keep up the rising prices of the real estate and advertising market.

Thus, the clarification passed by MahaRERA limits the scope of misusing funds of home buyers. It is aimed at bringing down the wrongdoings of huge property developers who uses funds from one project to finance another. The purpose of such an amendment is in line with the purpose of RERA i.e. protection of home buyers. Such an amendment should be followed by other State Governments as well in order to afford this protection to everyone.


Disclaimer – Please note that the above articles is based on the interpretation of related laws and judicial pronouncement which may differ from person to person. The reader are expected to take the expert opinion on the matter.

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