On May 13, Finance Minister Nirmala Sitharaman 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.
While this will certainly provide relief to real estate builders in 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, it 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.”
RERA was brought in to regulate the real sector in 2017, with states allowed to draw up their own rules under a broad framework laid out by the Centre.
Why was this necessary
There are as many as 51,850 real estate projects registered under RERA across the country and it was felt that submission of individual applications by builders for extension of project timelines and processing them individually was not feasible. With this order, as and when issued by the respective states, all projects in such states get an extension.
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It would help developers as the construction activity has been adversely hit due to the ongoing lockdown. It would give some elbow room to projects as they gradually restart operations once the lockdown restrictions are eased.
It will aid in smoothening the operations as construction projects would have to grapple with issues related to adequate availability of labour due to reverse migration and supply chain issues with respect to timely availability of key raw materials such as cement, steel.
This would save most ongoing projects from going into default due to delay in completion because of total work stoppage during the lockdown.
They will now get a six-month suo-moto extension for project registration and completion of projects (with scope for a further three-month extension).
No individual applications from real estate developers will be needed to get this extension. Regulatory Authorities will issue fresh ‘Project Registration Certificates’ with revised timelines for such projects. All timelines for compliances will get changed concurrently.
RERA provisions invoked in the Central advisory
The ministry of housing and urban affairs (MoHUA) issued an advisory to all RERA authorities to treat the pandemic COVID-19 as ‘force majeure’ being a natural calamity, as it is adversely affecting the regular development of the real estate projects and automatically extend registration of RERA-registered projects, which were due on or after March 25, by six months ad further period of upto three months, if the situation in a particular state or any part thereof needs special consideration in view of the pandemic.
According to the advisory issued by the Centre, Regulatory Authorities may, in pursuance of section 37 of RERA read with other enabling provisions, in their respective jurisdictions issue following orders/directions to the effect that 'notwithstanding anything contained to the contrary and by virtue of powers conferred under section 37 read with section 34 (f)of the RERA, the registration or extension thereto under Section 5, 6, 7 (3) of the RERA or rules thereunder, all registered projects under jurisdiction of regulatory authority for which the completion date or revised completion date or extended completion date as per registration expires on or after 25th March, 2020.”
Section 37 of RERA states that the authority can issue such directions from time to time to the promoters or allottees or real estate agents, as the case may be, as it may consider necessary and such directions shall be binding on all concerned.
Section 34 defines the functions of the Authority to include registration and regulation of real estate projects and real estate agents registered under the Act and part (f) states that its role is to ensure compliance of the obligations cast upon the promoters, the allottees and the real estate agents under this Act and the rules and regulations.
Section 5 of RERA empowers the Authority to grant registration to a real estate project within 30 days and provide a registration number,
Section 6 of RERA states that the registration granted to a builder may be extended by the Authority if it receives an application from the builder due to force majeure. The Authority can also extend the registration in ‘reasonable circumstances,’ provided there is no default on the part of the promoter, for the period as it considers necessary, which shall, in aggregate, not exceed a period of one year:
This section also defines ‘force majeure’ to 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.
Section 7 (3) of RERA says that the Authority instead of revoking the registration under sub-section (1), permit it to remain in force subject to such further terms and conditions as it thinks fit to impose in the interest of the allottees, and any such terms and conditions so imposed shall be binding upon the promoter.
Legal experts say the advisory sent out to the states and union territories has sought to utilize both Section 6, Section 34(f) and Section 37 under which RERA authorities have general powers to issue directions. All states would now issue individual orders.
“It is expected that RERAs across states will exercise their power under Section 37 Section 34 (f) and wherein they will change the completion date prescribed in the registration certificate issued to the builders under Section 5. The completion dates will be changed by default. The builder will not have to apply individually. In case, the realtor requires a further extension under Section 6, that too may be considered in addition to this timeline,” says Sunil Tyagi, the senior partner and co-founder of Zeus Law.
“By exercising their power under Section 37, the authorities are expected to change the date of completion prescribed under Section 5 and in the registration certificate itself. If the registration certificate had December 2020 as the completion date, it would now read June 2021,” he explains.
However, if the developer requires a further extension, he would have to apply for it under Section 6 separately.
“This is a general extension granted by invoking section 37. This will be over and above the one-year extension permitted under section 6. After six months, the builder can approach the authority and seek an individual extension of six months on grounds of any other force majeure. That would be for another force majeure event besides this force majeure which is COVID-19,” he says.Some Authorities have already extended deadlines by 3-6 months
Madhya Pradesh has extended by six months the completion deadline of registered projects that were to be completed on or after March 15.
Rajive Kumar, chairman, UP RERA told Moneycontrol that for now six months force majeure extension and attendant consequences will apply. Theoretically, authorities that have already extended the timelines would now have to extend the period further.
Soon after the Centre issued its advisory to state RERAs, the Rajasthan Real Estate Regulatory Authority issued an order extending by a year the deadline of projects registered before March 19, 2020, waiving off the fee for the extended period.
However, the fee prescribed by RERA on August 16, 2019, will have to be paid, the order said.
It clearly stated that "Being on the ground of force majeure, the aforesaid extension will be in addition to the extension already granted or that may be granted to a project under the First Proviso to section 6 or under section 8 of the Act."
As per the order, developers will be able to divide projects into more than one phase and amend building plans so that the interests of the allottees are not affected. All changes will require the nod of at least two-thirds of the allottees, the order said.What does the advisory mean for builders
The ministry statement had said that in the absence of urgent remedial regulatory measures under Real Estate (Regulation and Development) Act, 2016 (RERA), there is also a possibility of many real estate projects getting stalled leading to litigation etc. This may ultimately result in non-delivery of flats to the homebuyers, who have invested their lifetime savings for their dream homes.
“It is vital to take remedial measures now to ensure that COVID-19 does not lead to a complete breakdown of the real estate sector. In the prevailing circumstances, the primary objective is to address the concerns of homebuyers by ensuring suitable regulatory relief to the real estate projects so as to create a win-win situation for all the stakeholders – it will enable developers to complete the projects so that home buyers get the delivery of their booked houses within the revised timeline,” it said.
Builders have welcomed the government’s decision. Sanjay Dutt, MD & CEO - Tata Realty and Infrastructure Limited, said that the Government’s decision to treat the COVID-19 period as an event of force majeure to extend the registration and completion date by six months for all registered real estate projects will alleviate a great amount of stress on the developers… Due to the lockdown, migrant labourers have been displaced and all construction work came to a grinding halt.
The announcement to treat COVID-19 as an event of ‘Force Majeure’ and as an ‘Act of God’, and permission to extend project completion timelines and other statuary compliances under RERA by six months is a positive step for the developer community. It will enable them to deliver projects to the end consumer under the new timeline, said Anshuman Magazine, chairman and CEO India, South East Asia, Middle East and Africa.
Some lawyers say that this de facto extension of timelines by six months would mean that all the penalties that might ensue as per the builder’s original timelines will no longer have to be paid. “There will be no liabilities (penalties) to be paid to either buyers or the authorities,” says a legal expert.What does it mean for buyers?The government, in its statement, said that the extension of the timelines will protect the interest of homebuyers as they will get the property, though delayed by six months.
“This measure will save the projects and enable the developers to complete the projects within the revised time lines thereby safeguarding the interest of home buyers as it will ensure delivery of their booked flats/homes within the revised timeline. Delay of a few months is certainly better than not getting booked houses at all,” the ministry statement has said.
Homebuyers, however, will have to bear another six months of delay in possession of the apartment. He would have to bear the additional liability of paying rent for six months.
“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,” says a tax expert.
It was to offset such liabilities, that a compensation provision was provided under RERA. Under Section 19 (4), an allottee is entitled to claim the refund of amount paid along with interest at a rate as may be prescribed and compensation provided under the Act.
This would not hold for the next six months, says a legal expert, adding in that respect relief would now only be available and limited to builders and not homebuyers. A buyer will no longer be able to exercise his right to cancel the booking.
“This 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,” he says.
Homebuyers say that if the force majeure benefit is extended to builders, similar benefits should also be granted to them too.
“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 MS Shankar, general Secretary, Forum for People’s Collective Efforts.
“The builders should bear the interest part till homebuyers gets possession of his/her flat, as due to no fault of the buyer they are forced to pay both rent and EMI. If the project gets completed as per RERA completion date, the financial impact on the homebuyer will be only EMI not rent. Hence, the RERA Authorities, while utilising their discretion to extend the project, should direct the builders suo-motu to compensate the interest part of the EMI till possession of the flat is granted," he said.
He also said that the extension of project completion should be for the actual lockdown period.
Other legal experts are of the view that the government's advisory seeks to provide respite to both buyers and builders.
“The payment plan for most buyers is construction linked. If there is no construction activity on site for three months, there will be no demand for payment from the builder to the buyer for that period. The buyer would indirectly be getting relief. For a Rs 1 crore loan, if the bank has disbursed only Rs 40 lakh to the developer for four floors that have been completed, the buyer’s EMI would be restricted to Rs 40 lakh only. Banks may continue charging interest for the amount that has been disbursed,” says the lawyer.Also, the relief granted to builders is only for construction timelines and not on the financial front. “They would have to continue servicing their financial obligations to their lender,” he says.