The current outbreak of the novel Coronavirus (COVID-19) is the most crucial time witnessed by the world lately, in global history. As the clock struck midnight on 25 March 2020, India was officially ordered to be on a ‘complete national lockdown’. Kunaal Shah (lawyer and partner at Trilegal Mumbai) explains why COVID-19 should now be categorised as a ‘force majeure event’ and what the legal consequences are under Indian law.
Mr Shah, how does the outbreak of COVID-19 currently affect the real estate sector in India?
Shah: In the already struggling real estate sector, COVID-19 has come as a killer blow, in turn, shaking not only the human health but also the economic health of the nation. COVID-19 has massively derailed the seamless functioning of developers, homebuyers and other concerned stakeholders of the real estate market.
Can you please give an example?
Shah: COVID-19 has aggravated the persisting liquidity crunch in the real estate sector. The various restrictions imposed by the Indian Government to curb the pandemic has left the developers stranded, consequently facing multiple issues, including stalling of construction work, shortage or non-availability of man-power and raw materials due to lock-downs across the nation coupled with uncertainty haunting potential commercial transactions and business operations.
Are there any other negative effects?
Shah: The uncertainty around the COVID-19 outbreak has had a direct impact on not just under-construction properties but also on the commercial lease arrangements – especially the ones executed by foreign entities in India, co-working spaces, brands/franchisees and other start-up entities in India. Parties to such commercial leases are battling with challenges to honour their contractual obligations under respective leases owing to decreased retail traffic due to ‘social distancing’ mandates.
What are the consequences legally?
Shah: Developers have been asking to declare ‘COVID-19’ as a part of the definition of ‘force majeure’ under the Real Estate (Regulation and Development) Act, 2016 and other relevant applicable laws, to seek extension of timelines in relation to project completion and repayment of loans. In addition, the lessees of commercial lease arrangements are revisiting their lease documents and weighing the risk around invocation of the ‘force majeure’ clause to either suspend rent payments or exercise termination rights on account of force majeure, if permitted by the contract.
What does ‘force majeure’ mean under Indian law?
Shah: Provision of force majeure and frustration of contract ‘Force Majeure’, as a concept, is applicable across all industries and sectors and as such, its applicability and ingredients remain unchanged for contracts governing the real estate sector. Through our analysis of a plethora of Indian judgments, the key ingredients for invoking a ‘force majeure’ provision, include the following:
– Occurrence of an event which affects a party’s ability to perform a contract, either in entirety or in a timely manner
– Occurrence of event which is beyond reasonable control of parties;
– Events which albeit may not render an act to be literally impossible but make an act impracticable and useless in terms of the object and purpose of the contract; and
– Difficulty in performance of any obligation under a contract is not sufficient for invocation of a force majeure provision.
Which remedies are available in case of a ‘force majeure’ event?
Shah: Either a termination of the contract in its entirety owing to frustration of the same or temporary suspension of performance of the parties under such contract by seeking extension of timelines with appropriate and necessary relaxations to the affected party. Considering the ingredients of a ‘force majeure’ event and the fact that COVID-19 has world-wide led to a situation which is far worse than SARS and Ebola, in our view it should be conclusively categorised as a ‘force majeure event’.
What should be done in India with regard to ‘force majeure’ due to COVID-19?
Shah: In order to address the uncertainty and in light of the present situation of ‘crisis’ caused by COVID-19, in our opinion, the Indian Government should proactively weigh the actual as well as the probable damage of COVID-19 on the economic health of the nation and adopt requisite cues from the fiscal safety-nets devised by other nations of the world like China and Italy to revive the ongoing economic downturn.
What should the Indian Government consider?
Shah: Recommendations vis-à-vis banks/financial institutions Introduction of ‘anti COVID-19’ real estate rescue funds with a long-term horizon to aid banks and NBFCs which are already facing acute liquidity crunch owing to non-repayment of construction finance availed by developers along with other high NPA related issues. The contributors to such funds should include a broad spectrum of players in the real estate market such as governmental instrumentalities, sovereign funds, pension funds, insurance companies and other long-term investors.
What do you propose to the Indian Government?
Shah: The Indian government should recommend developers and also homebuyers to implement a moratorium for servicing of debts for a minimum period of 3 (three) months in relation to real estate projects. In addition, there should be an automatic extension of timelines for payment of consideration by homebuyers under existing builder-buyer agreements. Moreover, automatic extensions and granting of grace period to developers for completion of all ongoing real estate projects are advisable. Last but not least a reduction in the tax brackets and statutory levies such as income tax, GST, property tax and stamp duty should be applicable to both developers and homebuyers. Some of these economic rescues are already in the process of being implemented in other countries affected by the pandemic such as Italy, China, Spain and India should leave no stone unturned to proactively implement robust and effective measures to tackle and save the Indian real estate sector from the current crisis.
