The Novel Coronavirus (COVID-19) has hit populations around the world and has resulted in many restrictions, including free movement of people.
The World Health Organization has declared COVID-19 a pandemic and a public health emergency of international concern on 11th March 2020. In India, nationwide lockdown of 21 days commencing from March 25, 2020 was imposed by the Ministry of Home Affairs (“MHA”) to battle and prevent the spread of COVID-19 which has now moved to the phase Lockdown 5.0 or Unlock 1.0.
Speaking about the real estate sector, which was already reeling under the effects of a slow economy, has been further severely affected on account of this lockdown. During this lockdown period, construction activities were prohibited (subject to certain exemptions) which brought the development of real estate projects to a grinding halt. The present situation not only impacts the allottees/ flat purchasers but also exposes the promoters/developers of the real estate projects to a risk of potential default under the Real Estate (Regulation and Development) Act, 2016 (“RERA Act”) as well as the various agreements executed with the allottees in relation to such projects.
Therefore, it is important to understand the impact on performance of various contracts and statutory obligations and the applicability of the Force Majeure clauses.
Typically, a force majeure event is one which is an unavoidable event such as “act of God,” notably weather conditions including hurricanes, floods, tornadoes, earthquakes, landslides, and wildfires, as well as certain man-made events like riots, wars, terrorism etc.
Today, we seek to first analyse that whether the RERA Act itself provides for any provision which may render any relief to the real estate promoters in the present scenario for the various statutory obligations imposed by the RERA ACT on them; and then examine the impact of the pandemic on the contractual obligations owed by a promoter and an allottee towards each other.
IS THE COVID-19 PANDEMIC A FORCE MAJEURE EVENT UNDER RERA?
As per the RERA ACT, at the time of making an application for registration, a promoter is required to declare to the respective state authority established under the RERA Act (“RERA Authority”), the period within which the real estate project is to be completed by the promoter. Accordingly, the certificate of registration of the real estate project is valid for the period applied for.
Section 6 of the RERA Act authorises the RERA Authorities to extend the registration period in two circumstances:
- In the instance of a force majeure event on an application made by the promoter in that regard; or
- On account of reasonable circumstances (as considered fit by the RERA Authority), not attributable to a default on the part of the Promoter.
The term force majeure has been defined under section 6 of RERA Act to 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”.
The term “calamity” or “calamity caused by nature” have not been defined under the RERA Act. However, it could certainly be argued that the term force majeure would also include other events, such as the pandemic caused by COVID-19, which are beyond the control of the concerned party.
In fact, The Ministry of Finance, Government of India has recognised the COVID- 19 as a natural calamity and a force majeure event. The Union Finance Minister has also, at a press conference held on May 13, 2020, announced that, as a part of the Covid-19 Economic Relief Package granted by the Prime Minister of India, the Ministry of Urban and Housing Affairs will advise the States and Union Territories and their RERA Authorities to (a) treat Covid-19 as a “Force Majeure” event under RERA; and (b) extend the registration and completion date of registered projects expiring on or after March 25, 2020 suo-motu by 6 months without the need for individual application, and for a further period of upto 3 months, if required. Additionally, the promoter can seek an extension of the registration on grounds of the delay being due to ‘reasonable circumstances not attributable to a default on the part of the promoter’ since the pandemic and the consequent lockdown was beyond the control of the promoter.
Considering the above announcement, and with a view to reduce the stress on the developers and promoters, The Rajasthan Real Estate Regulatory Authority issued an order on May 13, 2020 providing for the following relaxation in regulations:
- Extension of the deadline of projects having valid RERA registration before March 19, 2020 by one year;
- Waiving the fees for the extension period;
- The certificate for extended period for completion of project to be made available online;
- Exemption to developers from displaying quarterly report of projects on the regulator’s website till March, 2021;
- Prohibition on any stringent action against developers for implementation of refund orders till March 31, 2021;
- No division by developers of their registered projects into more than one phase and to make such amendments in the building plan so that the interests of the allottees are not affected adversely. Provided, however, it has been made very clear in the announcement that all such amendments/ changes shall take place only after the consent of a minimum of two-thirds of the allottees is secured.
THE IMPACT OF THE PANDEMIC ON THE CONTRACTUAL OBLIGATIONS OWED BY A PROMOTER AND AN ALLOTTEE TOWARDS EACH OTHER:
While the RERA Act itself makes provisions for extension of registration period in case of a force majeure event as envisaged under Section 6 of the Act, there are no such specific provisions for extension of timelines committed to an allottee for handing over possession of a unit or extending timelines for payment of purchase price by an allottee on account of a force majeure event under the RERA Act. Therefore, the effect of COVID-19 on the proposed date of handover of possession of a unit to an allottee will, completely depend on the terms of the agreement executed between the promoter and the allottee (“Agreement”) and the inclusion of a force majeure clause in such an Agreement.
WHERE THE AGREEMENT CONTAINS A FORCE MAJEURE CLAUSE
In cases where the Agreement contains a clause for extension of timelines for handing over of possession of a unit on account of a force majeure event; such clause is to be analysed to ascertain as to whether it includes within its scope the following:
- terms epidemic/pandemic or the like; or
- any order/ circular/ notice issued by the Government or any competent authority affecting the development of the project; or
- any other reason beyond the control of the promoter which affects the development of the project.
If such circumstances are clearly included within the ambit of the relevant force majeure clause, the promoter will be entitled to an extension of time in accordance with the terms of the Agreement either on the basis that COVID-19 is clearly a pandemic/ epidemic, or on the basis that the lockdown imposed by the Government is an order/ directive by the Government and is clearly beyond the control of the promoter. It is, therefore, essential to review each Agreement carefully and specifically, the force majeure clause, to ascertain the implication of COVID-19 on the proposed handover date.
Once the promoter triggers the relevant force majeure clause in the Agreement with the allottee, it will not frustrate the entire contract or absolve the promoter of delivery of units but it will award the promoter an extension of time to perform the Agreement amid the present crises. 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 Agreement. The duration of such extension will depend on the impact of COVID-19 on the project and also as mutually agreed between the parties.
Accordingly and consequently, if the construction milestones are linked to payments, then the allottee will not be called upon to pay the further instalments until construction milestones linked to such payments are achieved by the promoter.
However, for any achieved construction milestone which triggers an instalment payment by the allottee, it is highly unlikely that any sort of extension will be granted by the promoter to the allottee there.
WHERE THE AGREEMENT DOES NOT CONTAIN A FORCE MAJEURE CLAUSE
If there is a failure to handover possession of a unit to allottee on the part of the promoter and also, the Agreement does not contain a force majeure clause or where the Agreement contains a force majeure clause but the provisions thereof do not bring within its fold the circumstances provided above, the promoter may not be able to claim extension of time for handing over the possession of the unit to the allottee.
In such cases, the promoter will be liable under Section 18 of RERA Act, i.e., at the allottee’s option, to either (a) refund to the allottee, the entire amount received by the promoter together with the prescribed interest thereon and also, pay the prescribed compensation; or (b) pay to the allottee, the prescribed interest for every month of delay in handing over possession.
Further, in events where an Agreement 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.
Most of the agreements contain clauses which require the person suffering from force majeure to intimate the counter party in writing within prescribed timelines.
Parties are advised not to overlook the procedure prescribed in the Agreement under the impression that pandemic by its very nature being a worldwide phenomenon and recognised as such by the WHO. The requirement of intimating the counter party in accordance with the contract can be dispensed with.
In order to be completely compliant of the provisions of the Agreement, it would be prudent to follow the intimation requirement such that if the matter were to reach the doors of the court, no loop holes or technicalities should defeat the rights persons affected by such force majeure events.
CONCLUSION: WHAT NEXT?
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, it would be most ideal if the government brings in a rule/notification to excuse performance of contracts during the duration of the lockdown, for certain classes of contracts.
For instance, 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.
It may come as a relief to various contracting parties if the Government of India comes up with an act in this regard which freezes the rights to enforce obligations for a specific period of time and which would apply to various classes of contracts.
Also, in the present scenario, should a promoter/ developer seek extension of the registration period as per RERA Act, the relevant RERA Authority may be more inclined to grant such extension.
On the extension of timelines for delivery of possession, whilst the principles of law will be considered in terms of force majeure clauses in the Agreements and the specific facts of the case, considering the gravity of the present situation, impact of lockdown and the detrimental effect on the economy, we would expect the relevant RERA Authority/ Courts to adopt a more balanced approach and direct resolutions to any disputes in this regard factoring equities.