The Novel Coronavirus (COVID-19) has hit populations around the world and has resulted in many restrictions, including free movement of people. It has brought the world to a grinding halt and has severely impacted the ability of businesses throughout the world to fulfil contractual obligations and sustain operations.
The World Health Organization has declared COVID-19 a pandemic on 11th March 2020.1
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.
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.
For real estate promoters, in addition to their contractual obligations vis-à-vis their allottees, there are certain statutory obligations imposed by the Real Estate (Regulation and Development) Act, 2016 ("Act") which are overseen by the Real Estate Regulatory Authority of each state.
We analyse first whether the Act itself allows any relief in the present scenario for such statutory obligations and then examine the impact of the pandemic on the obligations owed by a promoter and allottee to each other.
IS THE COVID-19 PANDEMIC A FORCE MAJEURE EVENT UNDER RERA?
Section 6 of the 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 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. [Emphasis supplied]
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. 2
Invoking Section 6 of the Act is not automatic and the promoters will have to make an application to the Authority for extension.
However, certain states as listed below 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 order to aid the government efforts in controlling the damage of COVID-19 and ensure that completion of MahaRERA registered projects does not get adversely affected, the MahaRERA by its order dated 2nd April 20203 decided that:
for all MahaRERA Registered projects where completion date, revised completion date or extended completion date expires on or after 15th March 2020, the period of validity for registration of such projects shall be extended by three months.
Further, the time limits of all statutory compliances in accordance with the Real Estate (Regulation and Development) Act, 2016 and the rules and regulations made thereunder, which were due in March / April / May are extended to 30th June 2020.
The Karnataka Real Estate Authority has vide its circular dated 4th April, 20204 passed similar orders and extended the period of validity for registration of such projects by three months where completion date, revised completion date or extended completion date expires on or after 15th March 2020 and has also extended the time limits of all statutory compliances which were due in March / April / May to 30th June 2020.
By its circular dated 6th April 2020, the 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. The time limits of all statutory compliances due in March-June 2020 have also been extended to September 2020.
By Order No. 33/2020 dated 13th April 2020, the Gujarat Real Estate Authority has permitted promoters of projects having their project end dates between 1st April 2020 and 31st March 2021, to apply for a one time extension of their project end dates. The application fee for such registration extension due to the COVID-19 outbreak has also been waived.
Timelines for submission of quarterly project reports and project end compliance have also been extended by the Gujarat RERA till 7th May 2020.
The Uttar Pradesh Real Estate Regulatory Authority has issued a press release dated 14th April 2020 communicating its decision of extending by three months the date of completion of the projects which have its date of completion between 15th March 2020 and 31st December 2020.
In addition to the automatic extension of registration (where granted), it would be open for the Promoter to thereafter apply for further extension under Section 6 of the RERA Act. However, each such application would be considered on merits and the reasoning of the request for extension.
INVOKING THE FORCE MAJEURE PROVISION IN A CONTRACT: PROMOTER AND ALLOTTEE
While the Act itself makes provisions for extension of registration in case of a force majeure event, there is no such provision in the Act extending the timelines committed to an allottee for handing over possession of a unit or extending timelines for payment of purchase price by an allottee. Further, extension of registration in terms of Section 6 of the Act does not affect the terms of the agreement entered into by the Promoter and the Allottee and the commitments made in such agreements continue to bind both parties.
WHERE THE AGREEMENT CONTAINS A FORCE MAJEURE CLAUSE
In such cases 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.
The model form of agreement contained in Annexure 'A' of the Rules5 in Maharashtra, provides for a model construction of the clause dealing with delay in possession. The proviso to this clause states that the promoter is entitled to reasonable extension of time for giving delivery of apartment, if the completion is delayed on account of inter alia any notice, order, rule, notification of the Government and/or other public or competent authority/court.
In exercise of powers conferred under Section 10(2)(l) of the Disaster Management Act, 2005, vide Order dated 24.03.20206, the Ministry of Home Affairs, Government of India issued 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. 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 from that date. Hence contractually, if the force majeure clause similar to the model agreement as stated aforesaid has been adopted by the promoter then such a force majeure provision can be triggered by the promoter under Part (ii) of the said clause being "any notice, order, rule, notification of the Government and/or other public or competent authority/court".
Since this model agreement can be modified as stated aforesaid, each agreement should be looked into separately and the clauses set out therein must be analysed.
However, by an order dated 14th April, 20207, National Disaster Management Authority directed the Ministries/Departments of Government of India to continue the same measures for social distancing upto 3rd May, 2020. By and under an order dated 15th April, 20208, the Ministry of Home Affairs, has issued revised consolidated guidelines. Under these guidelines, from 20th April, 2020, work in construction projects, within the limits of municipal corporations and municipalities , where workers are available on site and no workers are required to be brought in from outside are allowed to be continued and construction of renewable energy projects, construction of roads, irrigation projects, buildings and all kinds of industrial projects, including MSMEs in rural areas and all kinds of projects in industrial estates are allowed to operate.
Accordingly, by and under an order dated 17th April, 20209, the Government of Maharashtra, has issued Consolidated Revised Guidelines, inter-alia, permitting carrying on of certain select permitted activities with effect from 20th April 2020. Under these Guidelines, continuation of works in construction projects has been permitted.
However, in view of the large number of people commuting because of the relaxation issued vide order dated 17th April, 2020, the Government of Maharashtra has passed an order dated 21st April, 202010 directing that so far as Mumbai Metropolitan Region (MMR) and Pune Metropolitan Region (PMR) area is concerned, the said order shall not apply and the position prevailing prior to the issuance of the order dated 17th April 2020 shall be reinstated. These guidelines are operative in other parts of the state.
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 extension of time to handover the possession of the units forming part of the real estate project if so provided by the contract. The duration of such 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 instalments. However, for achieved construction milestones which trigger a payment instalment by the allottee, it is highly unlikely that any sort of extension will be granted by the promoter.
WHERE THE AGREEMENT DOES NOT CONTAIN A FORCE MAJEURE CLAUSE
In all such cases, if there is a failure to handover possession on the part of the promoter, the allottee has the right to withdraw from the project under Section 18 of the 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 maybe 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 performance of its obligations under the contract.
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.
1 WHO. (2020, March 11). WHO Director-General's opening remarks at the media briefing on COVID-19 – 11 March 2020. Retrieved from who.int: https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—11-march-2020
2 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
3 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
4 KRera No.Sec.CR. 04/2019-20
5 Maharashtra Real Estate (Regulation and Development) (Registration of real estate projects, Registration of real estate agents, rates of interest and disclosures on website) Rules, 2017
6 Order No 40-3/2020-DM-I(A) dated 24.03.2020.
8 No. 40-3/2020-DM-I(A)
9 No: DMU/2020/CR.92/DisM-1 dated 17th April, 2020
10 No: DMU/2020/CR.92/DisM-1 dated 21st April, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.