Neerav Merchant and Dhruv Somayajula
The COVID-19 pandemic has not spared any industry or business, least of all India’s real estate sector, which was struggling even before the pandemic hit. The large-scale exodus of migrant workers from large cities to their villages has caused additional stress in the real estate sector, as it relies heavily on migrant labour.
Moreover, NBFC funding for realty projects has dried up completely, which has resulted in a severe cash crunch for many developers. With labour and funds both being in short supply and coupled with the onslaught of successive lockdowns, developers are unable to complete under construction projects.
Hence, the real estate industry has requested the government to provide relief measures under the Real Estate (Regulation and Development) Act, 2016 against any penalties that might be levied for failure to complete a project on time.
Under the RERA, all real estate projects have to be registered with the respective state’s Real Estate Regulatory Authorities, and Section 6 of the RERA provides for an extension of the registration of a project due to a force majeure event for a period not exceeding one year.
On May 13, the Ministry of Housing and Urban Affairs published an advisory, under which it declared the COVID-19 pandemic as a force majeure event under Section 6, and advised the Authorities to extend the registration and completion date for real estate projects by six months. The Advisory highlighted that the RERA envisions any natural calamity affecting the regular development of a real estate project as a force majeure event.
As per the Advisory, all real estate projects whose completion dates were falling on or after March 25 qualified for the reissuance of the revised project registration certificate from the respective Authorities.
Based on this, the Authorities were advised to issue fresh project registration certificates and revise the timelines for each affected real estate project, as well as extend the timelines for meeting statutory compliances under the RERA.
In addition, the Authorities were also advised to grant a further extension of the project completion date by three months for affected real estate projects, if required, after assessing the COVID-19 pandemic situation in that state. In addition, if a promoter needs an additional extension (over and above that granted under the Advisory), then the promoter can apply for it citing force majeure under Section 6 of the RERA; however, the period of further extension is at the discretion of the Authority.
Several state Authorities have issued directions in line with the Advisory, granting an extension to the validity of projects to account for the force majeure period of six months.
The state Authorities have also issued revised project registration certificates with revised timelines for these affected projects. A few severely impacted states such as Maharashtra, Karnataka, Haryana, and Tamil Nadu have extended the time limit for statutory compliances applicable to the promoter under RERA during the entire force majeure period.
The Maharashtra Authority has gone a step ahead and imposed a moratorium on interest payable by a promoter on any refund or compensation payable to a homebuyer during the force majeure period. Additionally, the Maharashtra Authority has extended the compliance requirements of the promoter with respect to registration of sale documents, transfer of title, or statutory periodic filings with the Authority for the duration of the force majeure period.
Now, each model agreement of sale contains embedded obligations of the promoter to transfer the title and give possession of the apartment, and that of the homebuyer to pay the purchase consideration at various stages of construction. This raises a few important questions.
Does the Advisory or the corresponding directions issued by the state Authorities override the obligations of the promoter vis-à-vis homebuyers under the state specific model agreements of sale which contain a force majeure clause?
In the states where the force majeure clause in agreements of sale does not specifically provide for a pandemic event or where there is no force majeure clause, does the Advisory or the corresponding directions issued by the state Authorities import into the agreement a force majeure clause, thereby staying the obligations of the promoter and the homebuyers?
The answers to both the foregoing questions will be open to interpretation under Indian contract law, on a case-to-case basis. Although, the developers have got a reprieve due to the Advisory, not much respite was given to the homebuyers as regards their payment of installment obligation under the agreement of sale.
However, it is still unclear whether the six or extended month period will be sufficient for developers to continue construction, as the effect of the pandemic continues in various parts of India. A lot will depend on whether migrant workers return to construction sites, the availability of liquidity for the promoters, delays due to the monsoons. More likely than not, it seems that real estate projects will not be completed even after the extension of timelines.
From the homebuyers’ perspective, the advisory and state-specific directions serve as a measure to prevent unnecessary litigation or incur additional expenses in engaging another entity to complete the development of the project under the RERA.
The only concern is about the EMIs of homebuyers, which will commence from September 1, once the Reserve Bank of India (RBI)’s moratorium on payment of instalments on term loans expires on August 31. It is recommended that the RBI and the Ministry of Housing and Urban Affairs act in tandem, such that any extension of the Advisory by the Ministry is coupled with an extension of the RBI’s moratorium.
In any event, considering that the homebuyers do not benefit much from the Advisory, it is advisable for the homebuyers to request the promoters for revision of their agreements and sale deeds to modify: (i) the due date of possession, (ii) the payment of instalments, (iii) waiver of interest on delayed payments, (iv) seeking interest on delays in delivering homes after expiry of the force majeure period, and (v) any other fact-specific details.
The authors are partner and associate at Majmudar & Partners