Raman Kumar, a homebuyer, had booked a 2BHK-plus-study unit located along the Yamuna Expressway in 2019 after being informed that the apartment would be handed over within six months. In January 2020, just before the project’s RERA timeline for completion was about to expire, he received a letter from the developer informing him that the house was ready and that he should pay up the balance amount. Then the lockdown happened.
Now almost two lockdowns later, Kumar continues to pay rent of Rs 25,000 and an EMI of Rs 20,000. He is dreading the fact that project completion timelines may be extended by RERA authorities again. And if that were to happen, not only would possession get delayed, he would also have to shell out additional interest on his home loan for the extra months.
Following the second wave of COVID-19, real estate developers in Uttar Pradesh have written to the UP Real Estate Regulatory Authority and asked for more time to complete the projects, saying that several of their construction workers have tested positive making it difficult for them to adhere to the construction schedule.
They have also said that all government offices have stopped processing files related to the real estate sector in view of the pandemic.
“In view of the situation and the inability of developers to carry out construction and the liquidity crisis due to which compliance with the RERA orders is impossible, we request you to kindly grant 6 months automatic time extension for compliance of various orders issued by UPRERA; Grant 6 months automatic time extension for completion of various projects of developers registered with UPRERA; and for 6 months’ time extension for submission of various returns and documents. This will give the developers breathing space to re-organise construction activities and find resources to comply with various orders of RERA,” Naredco UP has said in their letter to the chairman of UPRERA.
Balwinder Kumar, member, UPRERA, told Moneycontrol that the authority may take into account the request by developers and may consider extending relief on a case-to-case basis. “We are also monitoring the progress of the projects,” he said.
Experts say that if an extension is granted on account of the second wave, it may lead to several projects getting delayed by more than a year and that may have monetary implications on both developers and homebuyers as no financial safeguards or moratoria are available this time around.
It should be remembered that on May 13, 2020, Finance Minister Nirmala Sitharaman had said that the deadline for the completion of real estate projects would be extended by up to six months in the face of the COVID-19 and that it should be treated as a ‘Force Majeure’ event under the Real Estate Regulatory Act (RERA) 2016. This announcement was followed up by the Centre issuing an advisory to all states and union territories to treat the pandemic as an ‘act of God’ and suo motu extend the completion dates of projects.
Here’s how delivery timeline extensions will impact builders and buyers
The extension in timelines certainly provides relief to real estate builders in the completion of projects as no cases can be registered against them for the period nor will they be liable to pay any penalties to the authority or the homebuyers.
Builders have claimed that an extension will aid in smoothening the operations as construction projects are facing labour scarcity issues due to reverse migration and supply chain issues with respect to timely availability of key raw materials such as cement and steel.
Experts said that the first extension granted by RERA authorities in 2020 helped save most ongoing projects from going into default due to delay in completion because of total work stoppage during the lockdown. But this time around, there is no ban on construction activities provided labour is available in situ.
However, as far as homebuyers are concerned, an extension does not seem to offer any immediate relief in the form of interest/EMI waivers to buyers except that the measure “safeguards their interests to get delivery of their homes with a delay of few months.”
A buyer will no longer be able to exercise his right to cancel the booking.
The extension is akin to granting immunity to the builder and putting a moratorium on the rights of a buyer to make any claims for delay. There should ideally have been a provision for an equal amount of respite for buyers who are unable to pay EMIs or interest for these six months, says a lawyer.
They will have to bear another six months of delay in possession of the apartment as also the additional liability of paying rent for six months. This would mean almost a one- year delay as a six-month extension was also offered during the first wave.
Under the income tax law, homebuyers are entitled to a deduction on certain interest payments. These are available to the buyer provided he has received possession of the unit. This would now be delayed once again, says a tax expert.
Homebuyers say that if the force majeure benefit is extended to builders, similar benefits should also be granted to them.
“While the force majeure benefit is extended to builders, in the same way homebuyers should also be taken care of suitably. The interest component of the loan should be waived as homebuyers are now facing job cuts, lack of job security and over and above that they have to pay rent,” said Abhay Upadhyay, president Forum for People’s Collective Efforts and member, Central Advisory Council, RERA, MoHUA, of Forum for People’s Collective Efforts.
“This will be a one-sided benefit. Only developers will get protection and this will erode the confidence of buyers in the real estate sector. The fact is that construction is permitted this time around and it is the responsibility of the developer to ensure that construction work continues unhindered. Besides, the pandemic had hit both buyers and developers unawares last year but it was not abrupt this time around,” he says.
“The builders should ideally bear the interest part till homebuyers get possession of his/her flat, as due to no fault of the buyer they are forced to pay both rent and EMI," he said.
The extension of the deadline for the completion of projects means extra interest burden for homebuyers, as they will have to continue servicing their home loans for this extended period as well as pay rent as their wait for home gets longer.
Last year, buyers had written to Prime Minister Narendra Modi that the Centre’s advisory asking real-estate regulators (RERA) in states and union territories to extend by at least six months the deadline for completion of projects in the face of the coronavirus outbreak is “illegal and beyond the powers under the law.”
“It has become a practice amongst the regulatory authorities to provide indiscriminate extension to real estate projects without following the requirements of the law (Section 6), which clearly stipulates that an extension can only be given ‘when there is no default on the part of developers and only on grounds of Force Majeure’, the letter had said.
An extension in project timelines will ensure that the “liability of the builders towards interest payment for delayed possession has effectively been suspended for the time period during which the extension has been granted,” explains Bhagyashree Lembhe, Associate Partner, White & Brief Advocates and Solicitors.
The homebuyers on the other hand would effectively receive their units at a fairly delayed stage. Aside from this, the value of such units could also possibly undergo changes and some may even depreciate, before the buyer may finally get possession.
However, Section 6 of the RERA Act provides for a clear-cut cap on the aggregate period of extention granted to a builder. In view of the same, whether the extension previously granted to a builder in 2020 would also be computed as a part of the one-year aggregate period (provided under Section 6 of the RERA Act), remains to be seen.
“If applied in the strict sense, builders who may have previously been granted an aggregate extension of one year, may now be exposed to payment of interest for delay in handing over possession and such delay could run into several months,” she says.
How will construction finance get impacted?
There were a series of steps that the government took after the first wave of COVID-19 to support banks and borrowers.
In 2020, the RBI announced a moratorium for home loan borrowers for three months between March 1, 2020, and May 31, 2020. This was again extended up to August 31, 2020. A one-time restructuring for loans was also allowed on select accounts.
The Centre also decided to allow waiver of interest on interest in eight specified categories, for loans up to Rs 2 crores. However, the SC bench did not find any rationale behind the move and on March 23, 2021, the apex court directed that there should be no charging of compound interest, interest on interest or penal interest on the installments that were due during the loan moratorium period from March to August 2020 on any borrower, irrespective of the loan amount. In case interest has already been collected, it should either refunded to the borrower or adjusted towards the next installments.
In 2020, financially stressed companies in danger of being pushed into bankruptcy got a breather after the Centre decided to suspend the operation of the Insolvency and Bankruptcy Code (IBC). In March this year, the one-year ban on creditor action against defaulters ended. This protection is no longer available during the second wave which means that a flood of new insolvency filings is likely to hit bankruptcy courts.
On May 5, 2021, to offer support to the economy, RBI Governor Shaktikanta Das said the apex bank would ‘continue to monitor the emerging situation and deploy all instruments at its command’.
On May 10, 2021, a petition has been moved before the Supreme Court seeking directions to grant interest-free moratorium period for term loan and deferment on loan installment payments for a period of six months or till the COVID situation improves.
Against this backdrop, experts say that both buyers and builders do not have the same protections that were granted when the first wave of the pandemic hit the country.
“In the current scenario, one is only looking at a possibility of RERA granting an extension in project completion timelines without any protections in place. Unlike the first wave, there is no corresponding moratorium and no cashflow assistance to make interest payments. Cashflows are limited and internal accruals have come to a halt. EMIs are to be paid both by homebuyers as well as the developers who have to service their term loans. Unlike last year, there is no policy in place to restructure loans,” says Amit Goenka, MD and Ceo, Nisus Finance.
Unlike the first wave, in case there is a delay in repayment, the developer entity will be declared a defaulter and his ratings downgraded. Interest payments will reduce the viability of the real estate projects.
“There is a margin erosion of almost 10 percent on real estate projects. Input costs have gone up post the lockdown by 20-25 percent,” he said.
“No financial institution will consider another restructuring. This will lead to non-performing assets building up and more insolvency cases. Therefore, RERA authorities, before granting extension should keep in mind that there are no protections available,” he told Moneycontrol.
Also, while a six-month extension in project delivery timelines will reduce the demand for refunds from homebuyers, it will not guarantee protection from being declared a defaulter if the developer fails to service bank loans.
“The current lockdown does not prohibit construction work if labour is available on site which was not the case during the first wave. If an extension is granted this time around, the developer will have to try and complete the project by creating onsite facilities and accelerate cashflows. Buyer sentiment will remain positive only if there is work happening on ground. Also, banks will disburse funds only when they see project milestones being met,” he added.
Legal experts are of the view that an extension in project timelines can “definitely impact construction finance because of unforeseen delays, disruption of supplies,” said AP Singh, partner, MV Kini, a law firm.
Girish Rawat, Partner, L&L Partners, says that financing in the real estate sector is generally linked with construction milestones, and any material delays in achieving such milestones due to lockdown restrictions would temporarily impact the ability of the developer to draw funds from project lenders.
“However, there are new players or special purpose funds like SWAMIH and few other investors who underwrite the entire debt component of the project cost and not dependent on sales collections milestones to fund the project. Such projects may be able to sail through such temporary setbacks and get back to track as soon as such restrictions are lifted,” he said.
Construction finance has been adversely affected in the past one year.
“There has been a considerably sharp decline in the demand for new units or the sale/resale of ready units. Effectively, the promoters who have been unable to sell their units are on the brink of bankruptcy. This trend has made the banks and financial institutions wary about providing financial assistance to the sector,” adds Lembhe.