COVID-19: The rising prominence of Force Majeure under RERA

The slow-balisation of world economies due to the COVID-19 outbreak has frozen funds, immobilized citizens and put a halt to the growth of several industries. The real estate sector has not been spared, owing to lack of labor availability due to vast numbers of the same migrating back to their hometowns, and declining asset prices, thus decreasing the purchasing power of customers.

The resilience of this sector shall be put through a test as projects, most of which might get delayed with construction activities stopping during the lockdown period. In such a scenario, when developers and other real estate players are desperately reviewing their contracts to invoke a provision that absolves them legally from non-performance of their obligations under the same contract, the provision of Force Majeure gains prominence.

Under the Real Estate (Regulation and Development) Act, 2016 (RERA Act), section-6 describes the force majeure condition and explains that the registration is given by the concerned Real Estate Regulatory Authority (RERA), could be extended, in case a promoter applies for the same purpose, albeit backed by a Force Majeure event. Force majeure, under RERA Act, means an instance of a flood, war, fire, cyclone, drought, earthquake or any other nature-caused calamity, which affected the regular operation of a real estate project. The point to be noted is the ‘any other nature-caused calamity’.

In the cases, where an agreement includes the clause of Force Majeure, the promoter has to make clear the scope of the same clause, to ascertain, if the term pandemic/epidemic or something alike, is included therein. After the promoter triggers the clause of Force Majeure, if included in the agreement with an allottee, the current crisis would not frustrate the entire contract or absolve the promoter of delivering the promised units. Still, it will only grant the promoter some extra time to fulfill the agreement. Therefore, the duration of such an extension would depend upon the impact of the novel Coronavirus on the real estate project.

Once a promoter achieves the milestones of construction which are linked with payments, an allottee shall not be asked to pay any more instalments. For the milestones which have been completed, it is not likely that an allottee would be granted an exemption by the promoter.
Whereas, if such an agreement does not include the Force Majeure provision and there arises a failure to deliver possession by the promoter, the respective allottee has the right to withdraw from the real estate project, under section-18 of the RERA Act.

In cases like these, the promoter has to return the capital received by him/her with respect to the concerned property in addition to interest and suitable compensation. On the other hand, if the allottee does not intend to withdraw from the real estate project, then the promoter has to pay interest to the allottee for each month that the respective property gets delivered to the said allottee.

In such instances, where a contract does not include provisions dealing with the results of certain supervening events, the doctrine of frustration, as given in section-56 of the Indian Contract Act, 1872, could be applied. The same section, among other things, provides that a contract to do an act if after the contract is already made, becomes impossible to do, due to an event over which the promisor had no control and could not prevent the same, the contract becomes void.

Nevertheless, in the present circumstances, parties might not be keen to go down this path, as the route of frustration ultimately leads to the termination of the contract in its entirety, and the promoter may instead be wanting temporary relief, from the performance of their obligations under the concerned contract.

Usually, the invocation of section-6 of the RERA Act is not automatic, and promoters have to submit an application for the same purpose to the concerned Real Estate Regulatory Authority. However, the Ministry of Finance, Government of India, has taken cognizance of the novel Coronavirus as an event of Force Majeure, thus providing much-needed relief to real estate companies in India. The ministry also gave an extension to the validity of the registration and the completion date, suo-moto, by six months, for all real estate projects registered under RERA Act, which were expiring on March 25, 2020.

Even if this announcement may not wholly save the real estate sector from the financial distress it currently finds itself in, the said sector will be able to gather up some resources for the much bigger battles that wait going forward, since the purchasing power of homebuyers is hit severely by the viral outbreak, and purchasing a home has dropped to a lower point on their list of priorities. Given the ongoing crisis, which none of the contracting parties could have predicted, the Central Government considering COVID-19 as a Force Majeure event, is a step in the right direction.

On similar lines, the Singapore Government had, on April 7, 2020, cleared the COVID-19 (Temporary Measures) Act 2020, to provide measures of a temporary nature, as well as to deal with any other matters with regards to the COVID-19 outbreak. This Act, coming into force on April 8, 2020, provides for among other things temporary relief in case of the inability to perform a contract, in addition to extra relief, if unable to complete a supply or a construction contract.

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