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Force Majeure Clause and Impact of COVID-19 on Real Estate Sector



Abstract

The ongoing Covid-19 epidemic has exposed mankind to several unprecedented problem and circumstances which are envisaged to have far reaching consequences on the social fabric of the society. The imposition of lockdown across the nations has a direct nexus with the slowdown of the economy as it is leading to difficulty of businesses to fulfill their contractual obligations and sustain operations. In the backdrop of this, the author has tried to analyze the impact of pandemic on real estate sector and the identification of this crisis as one of the categories of force majeure. The article also discusses the recourse available with the developers to bring back the working of the project at a normal pace in order to rejuvenate its economy.


Introduction

Today, the real estate industry is one most flourishing industry in India. The demand for residential and commercial property is emerging and consequently so is the number of builders and developers who plays a significant role in redevelopment of housing societies. At this time, the non fulfillment of contractual obligation which are currently in motion is one of the major areas of dispute between the developers and the buyers and the sudden outbreak of Covid-19 has tremendously added fuel to the fire. In exercise of powers conferred under Section 10(2)(l) of the Disaster Management Act, 2005, vide Order dated 24.03.2020[1], the Ministry of Home Affairs, Government of India issued certain guidelines under which all commercial and private establishments except for essential services listed therein were asked to remain closed for a period of 21 days with effect from 25.03.2020. However, this list of exceptions did not include construction services and hence all construction activities in respect of real estate projects have come to a grinding halt. The developers are not able to complete their projects within the vicinity of time frame as mentioned in their contractual obligation with the buyers. One of the major reason of such slow progress is the abandonment of labours who are the fundamental resource in making of the project are walking to their home towns due to lockdown restrictions. Also, many states have temporarily suspended the welfare provisions in order to cut down their cost and boost their investments and business that are hit hard by the pandemic. Even when the lockdown is lifted, quick starting of operations will be too difficult for almost all sectors especially for a labour-intensive industry such as real estate, the reverse migration is tantamount to the last straw on the camel’s back. Apart from the Labour shortage, near-total restrictions on logistics and transport have immensely disrupted supply chains leading to scarcity of raw materials in this industry.


Is the Covid-19 Pandemic A Force Majeure Event Under RERA?

In light of this pandemic, it is important to understand the impact on performance of various contracts and statutory obligations and the applicability of the Force Majeure clauses. However, the concept of force majeure has neither been defined nor specifically dealt under the Indian statutes. Considering it from the contractual perspective, a force majeure clause provides temporary reprieve to a party from performing its obligations under a contract upon occurrence of any unforeseeable circumstances. To put it simply, due to any acts of god such as fire, flood, war, etc., parties are unable to perform their part as it is not reasonably within the control.


Section 6 of the Real Estate Regulation Act [2]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". Calamity has not been defined under the Act. However, the Ministry of Finance of India has considered the COVID- 19 as a natural calamity and a force majeure event. [3] It further clarifies that, “a force majeure clause does not excuse a party’s non-performance entirely, but only suspends it for a duration of the force majeure” and it cannot be an ex-post facto event.[4]


Also , The Ministry of New & Renewable energy[5] has reiterated the occurrence of Covid-19 as a Force Majeure Event. Offering some relief to real estate developers, the Finance Minister in May 2020 extended six months registration and completion dates of all projects under Real Estate Regulatory Authority which will be applicable on all real estate projects expiring on or after 25 March, 2020.[6] Certain states have taken cognizance of the fact that the lockdown has severely affected the construction work in real estate projects and have made certain allowances in delay of the project. Such as Rajasthan Real Estate Regulatory Authority extended completion deadlines for under-construction projects by one year for the projects which were supposed to be completed on or after March 19, 2020[7], Maharashtra government extended the period of validity for registration of such projects by three months from 15th March 2020[8], Tamil Nadu Real Estate Regulatory Authority has extended the completion period (and as such the validity of registration) of all registered projects by five months[9], The Uttar Pradesh Real Estate Regulatory Authority has opened the gates for the promoter to apply for further extension under section 6 of RERA act in addition to the automatic extension of registration[10].


Once the promoter triggers the force majeure clause in the agreement with the allottee, the present crisis will not frustrate the entire contract because there is no destruction of the subject matter which is one the grounds in frustration of contract[11] and operation will remain ongoing in future. It will not 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 contract. The duration of such extension will depend on the impact of COVID-19 on the project which is likely uncertain considering the present circumstances.


Recourses Available with Developer

The covid-19 outbreak has stalled the construction of thousands of real estate projects, putting a stop on home sales and creating cash flow problems for most developers. The residential sector had already been reeling from a prolonged slowdown and the lockdown has only deepened the crisis. It will take a while for most of them to resume construction because lakhs of labourers have left cities and migrated back to their villages. In such uncertain and critical conditions, the only way developers and contractors could resolve the delay is by recruiting workers by offering them extra wages or incentives or perks, including safe working conditions. The delay in work will lead the buyers to be more reluctant to book under-construction flats, instead they will be opting for ready units leading to decline in the growth of this sector. The developers in case of financial distress can seek help from Special Window for Affordable and Mid Income Housing ( SWAMIH) investment fund which has so far approved Rs 8,767 crore for 81 stressed residential projects.[12]India’s largest mortgage lender Housing Development Finance Corp (HDFC) is also looking to invest in real estate funds to finance such projects.[13] The Rs 12,500-crore fund providing with the green-shoe option of additional Rs 12,500 crore, aims to provide financing to enable completion of stalled housing projects and ensure timely delivery of apartments to the troubled homebuyers.[14]

Conclusion

Though there is no doubt that the lives of people are important against the unparalleled threat posed by COVID-19 however a delicate balancing act is required whereby essential services and large-scale employment generating sectors such as agriculture and construction are authorized to resume operations. One has to also take this as a learning opportunity to explore commercially viable legal solutions to avoid a scenario where such health pandemic may lead to an economic pandemic.

[1] Order No 40-3/2020-DM-I(A) dated 24.03.2020. [2] Section 6, the Real Estate Regulation Act, 2017 [3] Office Memorandum No.F. 18/4/2020-PPD dated 19th February 2020 titled 'Force Majeure Clause', issued by Department of Expenditure, Procurement Policy Division, Ministry of Finance, Government of India available at https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause-%20FMC%20.pdf [4] Supra [5] Energy vide Office Memorandum bearing no. F. No. 283/18/2020-GRID SOLAR dated April 17, 2020 available at https://mnre.gov.in/public-information/current-notice [6] https://www.rera.tn.gov.in/homePageFiles/TNRERA-Circular-06042020.pdf [7] http://rera.rajasthan.gov.in/Home/NotificationPDF [8] MahaRERA Order 13 /2020: MahaRERA/Secy/25/2020: Revision of Project Registration Validity and Extended Timeline for Statutory Compliances, in view of COVID 19 Pandemic [9] https://www.rera.tn.gov.in/homePageFiles/TNRERA-Circular-06042020.pdf [10] https://www.up-rera.in/pdf/prjext.PDF [11] Taylor v. Caldwell (1863) 3 B & S 826 [12] Ankit Sharma, Rs 8767 crore approved so far under SWAMIH for 81 ‘stressed’ projects , July 23, available at https://realty.economictimes.indiatimes.com/news/industry/finance-ministry-approves-rs-8767-crore-for-81-stressed-projects/77134310 [13] Kailash Babar, Special situation funds, NBFCs eye investment opportunities in stressed real estate, July 20,2020 available at https://realty.economictimes.indiatimes.com/news/industry/special-situation-funds-nbfcs-eye-investment-opportunities-in-stressed-real-estate/77061034 [14] Kailash Babar , Government's stress fund for stuck projects sees surge in funding proposals, June 15,2020 available at https://realty.economictimes.indiatimes.com/news/industry/governments-stress-fund-for-stuck-projects-sees-surge-in-funding-proposals/76393644

Author Details: Ruchika Baweja (Institute of Law, Nirma University)

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