The real estate developers had a sigh of relief when the Government of India heeded to their demands for declaring Coronavirus hit construction under Force Majeure. The Union Finance Minister Nirmala Sitharaman assured the sector to issue an advisory to States and Union Territories and their regulatory authorities to extend the registration and completion date Suo-Moto by six months for all registered projects expiring on or after March 25, 2020 without individual applications.
Some of the highlights of the government declaring Coronavirus as Force Majeure are:
Treat Covid-19 as an event of Force Majeure under RERA
Regulatory authorities may extend this for another period of up to three months, if needed
Issue fresh “Project Registration Certificates” automatically with revised timelines
Extend timelines for various statutory compliances under RERA concurrently
The Government thinks that these measures will de-stress real estate developers and facilitate completion of projects without adding any unbearable fiscal burden on the developers. The built environment of the Indian real estate, as expected, hails the government decision.
Anshuman Magazine, Chairman & CEO – India, South East Asia, Middle East & Africa, categorically says that the announcement to treat COVID-19 as an event of ‘Force Majeure’ and as an ‘Act of God’, and permission to extend project completion timelines and other statutory compliances under RERA by six months is a positive step for the developer community.
“It will enable them to deliver projects to the end consumer under the new timeline. In addition to this, the announcement of liquidity measures for NBFCs and HFCs is also an encouraging step and will provide much needed relief to the sector,” says Magazine.
Kaushal Agarwal, Chairman, The Guardians Real Estate Advisory also believes the invoking of Force Majeure clause for registered real estate projects will protect the interest of developers, by extending the completion timeline by a duration of six months under RERA automatically.
“The same was much required, as a lot many developers could face challenges of aligning construction workers and labourers for the next few months as a result of their migration. The 25% TDS reduction will benefit existing homebuyers as it will leave additional money in their hands,” says Agarwal.
The demand to declare Coronavirus as Force Majeure has been legitimate and in sync with the law of natural justice. After all, the developers had no choice but to halt the construction. Many of them could not even keep the labour force together and reverse migration added to their woes. The supply chain hurdles and import from the China have further affected the execution capabilities of these developers.
The home buyers’ demand balance
The home buyers are today a worrying lot and demand balance of justice. They categorically question whether the invocation of Force Majeure could be a one-sided affair in the Builder Buyer Agreement. At a time when the home buyers are left in uncertainty with regard to the jobs and salary cuts, there has been absolutely no relief for them under the Force Majeure. They are hence demanding “Frustration of Contract” to be enforced to balance the liability of both the builder and the buyer.
Under the doctrine of Frustration of Contract, impossibility of a party to perform its obligations under a contract is linked to occurrence of an event/circumstance subsequent to the execution of a contract, which was not contemplated at the time of execution of the contract.
If performance of an act becomes impossible or unlawful, after a contract has been executed, and such impossibility is due to an event which the party undertaking the performance could not prevent, then such contract itself becomes void or one can say that the contract becomes frustrated. It is pertinent to note here that frustration is the happening of an act outside the contract and such act makes the completion of performance of a contract impossible.
Under the Contract Act, the doctrine of frustration of contract is envisaged in Section 56, which states that an agreement to do an act impossible in itself is void. On a plain reading of Section 56 of the Contract Act, it is evident that the section envisages some impossibility or unlawfulness of the performance of the act, which the parties had not contemplated at the time when they entered into the contract.
The home buyers are hence demanding that when the repayment of the loan is an impossibility, even if outside the purview of the contract, they need the protection of Frustration of Contract.
A vast majority of the home buyers are hence demanding the following options under Frustration of Contract:
Exit from purchased house without forfeiture or penalty
EMI moratorium without any added interest burden
Restructuring of the loan to make EMI lower
However, the empirical experience suggests that the courts in India have held that the word ‘impossibility’ used in Section 56 of the Contract Act must be interpreted in a practical form and not in its literal sense. Thus, a contract would come under the purview of Section 56 of the Contract Act even if it is not an absolute impossibility, but the contract has fundamentally changed, which the parties had not contemplated at the time of the agreement. This principal has been upheld in Satyabrata Ghose versus Mugneeram Bangur & Co & Anr (AIR 1954 SC 44).
The concept of restitution as set out in the Contract Act also states that when an agreement is discovered to be void, such as in case of a contract getting frustrated, the person who has received any advantage under such agreement is ‘bound’ to restore it or to make compensation for it, from whom he received it. Thus, one of the consequences of frustration of a contract is restitution whereby parties are to be put in the same position they were if the contract had never been executed. In today’s housing market with no appreciation the only advantage that the buyer might have received would be Income Tax benefits on home loans.
In conclusion, prima facie it seems that even though the COVID-19 lockdown has been officially defined as the Force Majeure, the stage is set for Indian real estate market to see a flood of litigations, as both the parties (builder & buyer) may not come to a workable understanding in the wake of non-payment. Of course, in such events, the courts and arbitrators will have to evaluate and decide each dispute on individual merits, which would be based on the terms of the contract, the intent of the parties, and steps taken to mitigate.
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
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