Real Estate

Force Majeure Invoked

The world is in stasis with the Novel Coronavirus (COVID-19) infecting millions of people the 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 the COVID-19 pretext has immobilized citizens, and 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 when 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 in 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 of 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 an extension of time to hand over the possession of the units forming part of the real estate project if so provided by the contract. The duration of such an 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 that 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 hand over 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 may be 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 the 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 an 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 in 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 the 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, 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’.

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Tags: force majeure clause in contract, define force majeure, litigation mediation, force majeure event, force majeure clause, force majeure, pre litigation mediation

How to Avoid Landlord-Tenant Disputes

Mere announcements in the absence of government ordinances for deference of rent do not legally absolve tenants from rental dues.

The transmission of a virus with flu-like symptoms has pushed world economies to an unprecedented standstill. Stock market crashes, mass unemployment, and disruptions hinting a recession – are only the tip of the iceberg and its underlying repercussions are likely to unfold with time.

To combat an impending economic depression and prevent a wave of homelessness, the government has announced several rent relief measures looking out for tenants’ interests and essentially placing a period on the rental incomes of landlords. Recently, Delhi’s CM Arvind Kejriwal requested the landlords to forgive rent for the next 3 months and further went on to state that the government will pay rent if tenants fail to do so.

Following suit, the Uttar Pradesh government also issued a magisterial order to imprison or fine landlords who fail to postpone rent collection by a month. Furthermore, owing to the lockdown, the Maharashtra Housing Department advised landlords to defer rent for at least THREE MONTHS and not evict tenants for non-payment.

However, mere announcements in the absence of government ordinances for deference of rent do not legally absolve tenants from rental dues. This circular is advisory in nature and should not be misconstrued as absolute or legally enforceable by tenants in Maharashtra. The rationale behind the order was to provide some breather to tenants unable to pay rents during a crisis.

Landlords with deep pockets such as the Lodha Group announced a full waiver for over 200 commercial tenants until normalcy returns. However, not all landlords can afford rental waivers or deferrals, especially senior citizens whose survival largely depends on rental incomes. So for the lack of respite by the government, landlords continue to make mortgage payments, electricity and water charges, insurance, maintenance, property taxes, etc.

Realizing this, the RBI announced a 3-month EMI holiday on various loan types but such forbearance programs only defer mortgage payments. The interest continues to accrue on the outstanding loan amount, rather than completely waiving off or discounting it. Unfortunately, commercial lessees may not directly benefit from these orders as many banks have the prerogative of formulating relief packages and evaluate applications to determine who can avail the facility.

In the absence of any clarity by the government on rental obligations under commercial lease agreements, businesses are left struggling with zero sales coupled with salary and rental obligations. Amid the pandemic, the much forgotten ‘Force Majeure’ provision in contracts and leases has gained traction and attention.

The commercial tenants could invoke the ‘force majeure’ to absolve them from rental payments during “an event beyond the parties’ control”. However, force majeure events are not exhaustively laid out under the law, and the applicability of this provision depends on the language of the rental agreement and the interpretation of the courts. Therefore, the parties must renegotiate the terms of the agreement to provide breathing room to both parties.

A question that may arise is whether a Lessee can invoke the Doctrine of Frustration in the absence of a Force Majeure Clause for Non-Payment of Lease Rent? Typically, the Doctrine is invoked in circumstances where the purpose of their contract is held to be frustrated under Section 56 of the Indian Contract Act.

However, the Supreme Court in Raja Dhruv Dev Chand v Raja Harmohinder Singh, observed “Authorities in the courts in India have generally taken the view that Section 56 of the Contract Act is not applicable when the rights and obligations of the parties arise under a transfer of property under a lease’’.

Thus, it is unlikely that a lessee can claim frustration of contract in the absence of a Force Majeure clause under a lease agreement and seek a waiver of lease rental as a consequence of a Force Majeure event.

However, most tenancy agreements don’t have the provision of ‘force majeure’ and cannot invoke the doctrine of frustration and so unless announcements are backed by ordinances, the uncertainty of its enforceability remains.

Regardless of government efforts, individual circumstances could lead to foreclosure proceedings across the country. Fortunately, the Supreme Court held, “A tenant cannot be arbitrarily evicted by using the provisions of the SARFAESI Act as that would amount to usurping the statutory rights of protection given to the tenant.”

Thus, in the event of a landlord’s failure to repay the loan, Section 35 of the SARFAESI Act cannot be used to bulldoze the statutory rights conferred on the tenant by the Maharashtra Rent Control Act, 1999.

The customary strained landlord-tenant relationships are further distressed with the lack of clarity in Central and state government announcements bringing fore questions of eligibility and applicability of relief measures. Until the air clears (pun intended), Indians will continue to rely on legislations that hugely favors tenants in rental disputes, leaving landlords grappling to survive the crisis without any respite.

In the interim, as parties await clarification from the government, it is advisable to facilitate a shared objective of contractual performance through collaboration and provide a win-win solution to all until normalcy returns.

 

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Tags: commercial tenant disputes, supply chain disruptions, commercial real estate sector, supply disruption, tenant disputes, landlord tenant dispute, landlord and tenant disputes, landlord dispute

A Homebuyer’s Tri-lemma: An Analysis of Provisions

If we look into the remedies available under the Consumer Protection Act, 1986 (CPA) and the Real Estate (Regulation and Development) Act, 2016 (RERA) along with IBC, 2016. 

Real Estate (Regulation and Development) Act, 2016 (RERA) seeks to provide uniform laws throughout the country, for protecting the interest of home buyers and seeks to increase transparency in the functioning of construction companies and reduce the chances of default or misappropriation of funds by Builders.

Consumer Protection Act, 1986 (CPA) was enacted to provide speedy Redressal mechanism to “CONSUMERS” who alleged Unfair Trade Practice or Deficiency with respect to Goods or Services – home buyers were also included within the purview of the Act by interpreting the word “Services” under the Act to include construction. 

Further, the Insolvency and Bankruptcy Code, 2016 (IBC) – one of the most effective mechanisms for timely recovery of monies and revival of sick companies – also included the Allottees of a project and deemed them as Financial Creditors within the meaning of the Act thereby providing an alternative remedy to victimized homebuyers in India.

RERA, CPA and IBC – friend or foe?

In the M/s M3M India Pvt. Ltd. vs. Dr Dinesh Sharma and Anr. case, judgment was passed by Delhi High Court while deciding a batch of petitions moved by several real estate companies against an order passed by the National Consumer Disputes Redressal Commission (NCDRC). The question for consideration was whether proceedings under the CPA 1986 can be commenced by homebuyers against developers after the commencement of RERA 2016.

While passing the judgment, the High Court placed reliance on the recent Supreme Court judgment in Pioneer Urban Land and Infrastructure Ltd & Anr vs. Union of India & Ors, (2019) – also known as the Flat Buyer’s case – wherein it was held that that remedies given to allottees of flats are concurrent and they are in a position to avail remedies under the CPA, RERA as well trigger the IBC. 

It was observed that the provisions of RERA were not intended to be exclusive, but to run parallel with other remedies and the High Court followed suit in the M3M India case.

While dismissing a large number writ petitions filed by the developers, the Court in Pioneer upheld the following:

• The IBC amendment is constitutionally valid by virtue of which ‘Allottees’ were brought within the ambit of Financial Creditors 
• The amendment act does not infringe Articles 14, 19(1)(g) read with Article 19(6)  or 300-A of the Constitution of India.
• Remedies to the Allottees under various statutes such as the RERA, the Consumer protection act, and the IBA are concurrent.
• In case of conflict between the RERA and the IBC, the IBC would prevail.
• Allottees were always subsumed within the definition of Section 5(8)(f) and the explanation and deeming fiction added by the Amendment act was only explanatory in nature.

Looking at the aforesaid it appears like a clear knockout punch for errant Real Estate developers and a massive victory for the consumers at large. Having said that, here is a snapshot of the various remedies a homebuyer has and some pointers for consideration:

Particulars	RERA	CPA	IBC
Who can file	A Purchaser, Home Buyer or prospective purchaser/Home Buyer offered flat can file Complaint irrespective of the fact that such person is Corporate Entity or Individual.	A Consumer who satisfies the requirement under Section 2(d) of CPA can file a CPA complaint. Typically, an Individual who enters into agreement for purchase of Flat can file complaints when he purchases the same for his individual use and residence.	Since by recent amendment in August 2018, the Allottee of Project is considered a Financial Creditor, any person whether an Individual or Corporate Entity can file an Insolvency Application under Section 7 of IBC.
Case Timeline	RERA takes a few months to years for redressal of grievances depending on the State.	Redressal of grievances or adjudication of a dispute takes an average of 5 to 6 years by Consumer Forums.	IBC takes about 6 Months to a year for adjudication of Insolvency Application by Adjudicating Authority.
Accessibility	There are 1 – 2 RERA offices in each state which has constituted the Authority under the Act.Maharashtra has offices in Mumbai, Pune and Nagpur.	District Forums are established in every district of the State. The State Commission presides in the capital of each state and sometimes has benches in other parts of the State. National Commission presides at Delhi and has circuit benches in various parts of the Country which are rotating.	NCLT has 16 benches all over India. NCLT is typically constituted for each state and presides at one place in the state or one NCLT is commonly empowered and is having jurisdiction over two states.
Execution/Reliefs provided	RERA typically exercise its power by way of an order to impose fine, deregister the project, include the promoter in list of defaulters, direct completion of project in manner provided in consultation with State Government and pass appropriate orders incidental thereto.	The Consumer Forum has the power to execute its own orders. This makes execution of orders also an expeditious affair in comparison to regular suits or execution of orders passed by various Courts/Quasi-Judicial Forums. Also since scope of Consumer Act is limited, the relief and consequently is execution is comparatively an expeditious affair.	Once, NCLT admits the Insolvency Application, IRP comes into the picture to manage the affairs of the Company and in case of failure of Corporate Insolvency Resolution Process (“CIRP”) (In case of Developer being a Corporate Entity), Liquidation would be commenced. NCLT monitors the entire process and time to time, various reports are required to be filed with NCLT.

Key Observations & Analysis:

a. If a person is a consumer and seeks performance of statutory obligation or compensation in respect thereof, then Consumer Forum is a better and effective remedy especially in case where the Developer has financial ability to pay. Also he may file a complaint with RERA to blacklist developers and other reliefs which RERA can provide but consumer forum cannot.

b. If a person is not a consumer, then RERA would be a more appropriate remedy.

c. If a person is not a consumer and seeks specific performance of statutory obligations from Developer, his only remedy would be to file a regular suit. However, for compensation and other reliefs he may approach RERA.

d. If Person, whether consumer or not, is seeking only the return of his money, especially when the developer’s financial position is deteriorating, then the Insolvency Application before NCLT would be an appropriate remedy more so when its redevelopment of property that does not involve many flat in sale components.

e. Also the more the project is closer to the verge of completion, RERA would be a more effective remedy especially if Flat Purchaser/Home Buyer desires to obtain a Flat and vice-versa coupled with the consideration that RERA can also provide compensatory reliefs.

f. Insolvency can always be availed as an alternative remedy when a Flat Purchaser feels that the financial position of Developer is deteriorating and Developer will not be able to complete the project and return the money with interest to be able to prevent further deterioration. It will help to obtain recovery of the maximum amount of money invested along with Interest. Completion of the project may take several years due to various practical difficulties that may arise in the completion of the project. Also execution of order for payment of money will not have any fruitful result if Developer does not have financial ability to pay it.

g. In terms of execution, Insolvency since being processed to liquidate the assets of an entity or person will be a more lucrative remedy in case there is a high probability that Developer may not be in position to return the money invested. Consumer Forum since having power to enforce their own orders also provide great remedy in case where builder has completed construction but delayed possession or not complied with statutory obligation to obtain reliefs in respect of both.

h. The Flat Purchaser/Home Buyer can always initiate criminal proceedings against Developer against fraud or other criminal offences or acts committed by it.

Conclusion

From the recent judgments passed by the High Court, the Supreme Court and even the authorities under RERA, CPA and IBC, the judicial sentiment seems to favor the home buyer. From a conjoint reading of the judgment of the Supreme Court in the case of Pioneer (supra) or the Court in the case of Messrs M3M (supra), the judiciary has armed an aggrieved home buyer with a host of remedies to seek relief against a developer and bring you a step closer to owning your dream home!

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Tags: analysis of provisions under ibc, analysis of provisions under cpa 2016, Homebuyer’s Tri-lemma, homebuyers tri lemma, analysis of provisions under cpa, analysis of provisions under rera, provisions under cpa, provisions under rera, provisions under ibc, provisions under ibc 2016