Force Majeure invoked! What happens to real estate now?

June 9, 2020 6:20 PM

In times where real estate players are frantically reviewing their contracts to invoke a clause that legally absolves them from non-performance of their contractual obligations, the force majeure clause gains utmost prominence.

real estate, real estate in India, Force Majeure, COVID-19, RERA , Ministry of Finance Although victory over the Indian economy’s pandemic and reopening remains elusive, but deadline relaxation coupled with liquidity infusions may help the real estate industry see some light at the end of the tunnel.

The world is in a stasis with the Novel Coronavirus (COVID-19) infecting millions of people world over. Industries have come to a standstill and likewise, the land business is not saved either. Resources and incomes fall faster than expenditures in a crisis.

The slow-balisation of economies under COVID-19 pretext has immobilized citizens, frozen funds, thus arresting industry growth. It has adversely affected real estate project completion due to lack of labor availability on account of mass migration and plummeting asset prices thereby depressing purchasing power across the real estate sector and its customers. Therefore, its resilience will be put through a litmus test in times where even banks and financial institutions, a monetary cushion for other industries, are under immense pressure for survival. In times where real estate players are frantically reviewing their contracts to invoke a clause that legally absolves them from non-performance of their contractual obligations, the force majeure clause gains utmost prominence.

Section 6 of the Real Estate (Regulation and Development) Act, 2016 (RERA Act) has envisaged the force majeure condition and states that the registration granted may be extended by the Authority on an application made by the promoter in that regard due to force majeure. The Explanation provided to this section states that the expression “force majeure” shall mean a case of war, flood, drought, fire, cyclone, earthquake or any other calamity caused by nature affecting the regular development of the real estate project. Therefore, the explanation to Section 6 which defines Force Majeure includes “any other calamity caused by nature”.

In instances where the agreement contains a ‘Force Majeure’ clause, the promoter has to ascertain the scope of the force majeure clause to ascertain whether the terms epidemic/ pandemic or the like are specifically stated therein. Once the promoter triggers the force majeure clause in the agreement with the allottee, the present crisis will not frustrate the entire contract or absolve the promoter of delivery of units but it will merely give the promoter an extension of time to perform the agreement. Hence, the promoter of a real estate project will get extension of time to handover the possession of the units forming part of the real estate project if so provided by the contract. The duration of such extension will depend on the impact of COVID-19 on the project.

Consequently, until construction milestones linked to payments are achieved by the promoter, the allottee will also not be called upon to pay further installments. However, for achieved construction milestones which trigger a payment installment by the allottee, it is highly unlikely that any sort of extension will be granted by the promoter.

On the other hand, if the agreement does not contain a ‘Force Majeure’ clause and there rises a failure to handover possession on the part of the promoter, the allottee has the right to withdraw from the project under Section 18 of the RERA Act. In such cases, the promoter is bound to return the amount received by him in respect of that apartment with interest at such rate as maybe prescribed including compensation. However, if the allottee does not wish to withdraw from the project, the allottee shall be paid interest for every month of the delay till the handing over of the possession of the apartment.

In cases where a contract does not incorporate provisions dealing with the consequences of certain supervening events, the doctrine of frustration as embodied in Section 56 of the Indian Contract Act, 1872 may apply. Section 56 of the Contract Act inter alia provides that a contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. However, given the present circumstances and the impact of the global crisis, a party may not be keen to go down the route of frustration which ultimately causes termination of the contract in its entirety and may at best want temporary relief from performance of its obligations under the contract.

Generally, invocation of Section 6 of the Act is not automatic and the promoters will have to make an application to the Authority for extension. However, the Ministry of Finance of India has considered the COVID- 19 as a natural calamity and a Force Majeure event giving a breather to the real estate players in India, along with an extension of the registration and completion date suo-moto by 6 months for all registered real estate projects expiring on March 25, 2020, to infuse growth into the country’s ailing real estate industry. Although this move may not fully save the industry from the economic shocks it is in, it is likely to provide the real estate industry with resilience and resources to survive and take on the bigger battles that lie ahead as consumer buying power would be severely hit by the pandemic, with real estate dropping low on their priority list.

The real estate industry has been struggling with a sluggish trajectory of development that came to a complete standstill during the pandemic. Supporting real estate players to survive the bear-run, the Ministry of Finance announced a 6-month extension of the suo-moto registration and completion date for all registered projects which expire on or after March 25, 2020. Given the fact that the present global crisis has brought a lot of economic activities to a grinding halt and is unprecedented and one which no average contracting party could have foreseen, the government move is a step in the right direction in recognizing the Force Majeure clause.

Similarly, Singapore has on 7th April 2020 passed the COVID-19 (TEMPORARY MEASURES) ACT 2020 (ACT 14 OF 2020), to provide temporary measures, and deal with other matters, relating to the COVID-19 pandemic. This Act which comes into force on 8th April 2020 provides for inter alia temporary relief from actions for inability to perform scheduled contract as well as additional relief for inability to perform construction contract or supply contract.

Although victory over the Indian economy’s pandemic and reopening remains elusive, but deadline relaxation coupled with liquidity infusions may help the real estate industry see some light at the end of the tunnel. The Force Majeure clause has the power to sustain an entire industry and keep it afloat while the COVID-19 dust settles, and not jeopardize the sustenance of real estate players by leaving a lot at the discretion of judicial interpretation where words of a contract are sacrosanct. The regulatory relaxations and economic relief packages announced in the light of the pandemic may support the demand for housing and help to achieve the government’s objective of ‘Housing for All’.

(By Sonam Chandwani, Co-Founder and Managing Partner of KS Legal & Associates)

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