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Coronavirus impact | Will Force Majeure come to rescue of builders, homebuyers

While real estate developers will be struggling to comply with completion dates approved by RERA, homebuyers too would be unsure when they would get physical possession of their homes


Vivek Kohli | Neetika Bajaj

The real estate sector has been struggling to come to terms with the impact of the adverse market conditions, not to mention the recent changes in legislation. And now, it is also facing the brunt of the lockdown caused by the coronavirus outbreak.

Undoubtedly, the sudden outbreak of coronavirus, supplemented by the extreme measures adopted by the various governments, clearly indicate that the nature, extent and reach of the COVID-19, was completely unforeseeable and was, indeed, unforeseen; there is no standard template of response to this kind of a contagious disease, and the societal risk outweighs any individual or entity level risk.

As much as what is required of us presently is “not to act” – i.e., isolate ourselves – to break the chain and consequentially, arrest the spread of the virus. As a result, this has, on a vast scale, disrupted the functioning of the developer, homebuyers and other stakeholders in the real estate sector.

At the moment, real estate will be going through various predicament, inter-alia, such as unavailability of raw materials; unavailability of labour; suspension of construction work and restriction on the cash flow in the projects.

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Since it is established that the outbreak of a novel virus COVID-19 has immensely impacted the sector, it is important to analyse the repercussions on the real estate developers.

Real estate developers function in a framework where time is the essence as they are mandated to complete their real estate project(s) within a defined timeframe. As a result of the ongoing lockdown, the construction and development of these project(s) have been forced to come to a halt.

Additionally, the developer will be struggling to comply with completion date approved by the Real Estate Regulatory Authority due to the complete lockdown all across India. Moreover, supply and demand of essential construction materials, along with transportation and labour costs would also be affected, meaning thereby that the project / per-unit costs are likely to take a massive hit.

The homebuyers are also left with uncertainty and fear as they will now have no clarity on the actual physical possession of their respective unit in the project.

Moreover, they will also be facing serious cash flow issues to make payments to the developer coupled with EMIs payable to the banks against the home loans availed by them. It is understandable that delay in completion of the project would further add to their burden, especially those putting up in rental accommodations.

What is Force Majeure

Force Majeure is a contractual provision in terms of which a party is entitled to suspend the performance of the contract or is entirely excused from its performance, of course, upon the occurrence of specified events beyond a party's control. The basis of this doctrine is to save the performing party from consequences of breach arising from an event over which it has no control. It is, therefore, an exception for breach of contract.

What constitutes a Force Majeure event

The crucial elements that need to be satisfied for an event to qualify as a Force Majeure are: it should be an “unforeseen” event; its occurrence could not have been prevented, and there should be a direct link between the occurrence of the event and consequent impossibility to perform under the contract.

Subsequent to the enactment of the Real Estate (Regulation & Development) Act, 2016, the Real Estate Sector is now being regulated by the Act. All real estate projects are being monitored by the Real Estate Regulatory Authority(s) established under the Act.

The Real Estate Regulatory Authority is empowered to provide a completion date of a project after due application of mind and active decision-making process and provide RERA registration of the projects.

Thus, it is imperative for the regulatory authority to declare such period, which affected the developer from carrying out the construction work in the project, as “Force Majeure” and consequently extend the date of the RERA registration and/or completion date of the projects to allow reliefs to the developers and to pre-empt from committing various violations under the Act.

The banks and financial institutions shall also declare such affected period as Force Majeure to provide relief to both developers and homebuyers by extending the term of the loan and waive the interest component till such Force Majeure prevails. This will maintain cash flow in the real estate sector, which presently is at standstill and/or is rapidly declining due to outbreak of the coronavirus.

Simultaneously, the developer and the homebuyers shall also not impose and/or accrue any penalty and/or interest on the delay in payments or in delay in possession of the units during such period of Force Majeure.

The authors are a senior partner, and senior associate, respectively
Moneycontrol Contributor
first published: May 4, 2020 11:34 am

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