Home buyers seek equal protection under real estate’s force majeure clause

While home buyers largely have no problem with the government allowing real estate developers to extended project deadlines by six months through the force majeure clause, they feel that it is a one-sided declaration that has left home buyers in the lurch, finds a survey by Track2Realty

The good news is that Indian home buyers do understand that the lockdown following the Coronavirus pandemic, was neither in the hands of the builders, nor could it have been anticipated. Hence, they have no objection to the ‘force majeure’ clause being invoked. However, they maintain that the government’s declaration of force majeure, is not in accordance with the law of natural justice, unless they get equal leeway in the housing market.

 

Home buyers accept invocation of force majeure clause

As many as 92% of Indians understand that the unprecedented Coronavirus pandemic and the subsequent lockdown, leaves the authorities with no choice but to call it a force majeure event. A large share of the home buyers (71% of the respondents), even accept that an extension of six months on timelines is logical, as the lockdown has severely affected the supply chain of builders. However, as many as 54% are not convinced, with the proposed additional extension of three months.

 

Force majeure definition

 

Law of natural justice in real estate

As many as 88% also question whether the one-sided suo-moto declaration of force majeure, for the extension of construction timelines, is in accordance with the law of natural justice. Most of these home buyers feel that contractual obligations and legal relationships have to be equally liable to both the parties. They point out that the buyer has been hit by project delays and macroeconomic impact, for no fault of his. Hence, they would like to see the government balance the liability of the home buyers and make the contractual obligations of the home buyers equally flexible.

 

COVID-19 impact: What do home buyers want?

Doctrine of ‘Frustration of Contract’

56% of existing home buyers are even questioning whether they could get some legal protection under the doctrine of ‘Frustration of Contract’, as defined in Section 56 of the Contract Act. Rajeev Malhotra, a retired defence personnel has even contacted his lawyer for the same. He says, “If a defined legal provision could be applied for the developers, then, the law also defines certain safeguards for the other party (i.e., the home buyers), if they cannot fulfil the contractual obligations in the changed circumstances.”

 

EMI deferment and loan restructuring

With many home buyers facing the prospect of salary cuts or job losses, the liability to pay both, the EMI and rent, may become unbearable. While their demands vary, as many as 90% categorically say that they would like to see how much the government is sensitive to their problems. In seeking natural justice, 84% of the buyers said they would like to see their EMIs deferred by a tenure equal the force majeure period, without any added interest burden. Sneh Lata, an advertising professional, points out to the reports of loan restructuring for real estate developers and questions why it is being done only to smoothen the supply side. Her sentiments are echoed by 74% of home buyers across the country, who maintain that loan restructuring for buyers could be an effective hedge, after having weathered salary cuts and/or job losses.

See also: How to pay home loan EMIs in case of job loss due to the Coronavirus pandemic?

 

Exit option without penalty

Lastly, as many as 68% of buyers would like to see a comprehensive policy, for the buyers to exit from their bookings without any fiscal penalty, if they are unable to continue with the home loan burden. In cases where not more than 20% payment has been made for the house, as many as 86% buyers would like to see such an exit option.

 

Force majeure for real estate should be applied selectively

Force majeure should not be applicable on projects that have been stalled for a long time

No less than 62% buyers have objected to the timeline extension benefits under force majeure being granted to those projects, where construction was anyway stopped even before the lockdown. Instead, they would like to see construction timelines being extended on a case-to-case basis, rather than a suo-moto extension to all projects.

 

Applicability of force majeure should be based on the project’s execution stage

70% home buyers even question the rationale behind the blanket timeline extension to all projects. While construction has been hit in projects that were going on at full pace, there are many projects at the initial stages of launch. In some cases, construction may have not even started and the lockdown has not affected these projects’ execution cycle. Buyers are, hence, questioning the rationale behind force majeure for such projects.

 

Customer engagement missing

As many as 64% home buyers suggest that the government’s decision to invoke force majeure, should have been done in consultation with buyers’ representatives. A majority of them (54%) even believe that customer engagement would have led to a better balance between the interests of the builders and the buyers.

(The writer is CEO, Track2Realty)

 


Coronavirus pandemic a force majeure event: What this means

While developers have welcomed the finance minister’s announcement, to term the Coronavirus pandemic as a force majeure event for the real estate sector, we look at whether the move will bring any relief whatsoever to home buyers or merely exacerbate their woes

May 22, 2020: The government has provided a major relief to real estate developers, by heeding to their demand for invoking the force majeure clause for Coronavirus-hit constructions. Union finance minister Nirmala Sitharaman assured the sector that the government would issue an advisory to states and union territories and their regulatory authorities, to extend the registration and completion date suo-moto by six months, for all registered projects expiring on or after March 25, 2020, without individual applications.

 

Some of the highlights of the government declaring the Coronavirus pandemic as force majeure are:

  • Treat COVID-19 as an event of force majeure under the RERA.
  • Regulatory authorities may extend this for another period of up to three months, if needed.
  • Issue fresh ‘Project Registration Certificates’ automatically, with revised timelines.
  • Extend timelines for various statutory compliances under RERA, concurrently.

 

The government thinks that these measures will de-stress the real estate sector and facilitate the completion of projects, without adding an unbearable fiscal burden on developers.

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Force majeure for real estate: How it helps developers

Anshuman Magazine, chairman and CEO – India, South-East Asia, Middle-East and Africa, CBRE, categorically says that the announcement to treat COVID-19 as an event of ‘force majeure’ and as an ‘act of God’ and the permission to extend project completion timelines and other statutory 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. In addition to this, the announcement of liquidity measures for NBFCs and HFCs is also an encouraging step and will provide much-needed relief to the sector,” says Magazine.

Kaushal Agarwal, chairman, The Guardians Real Estate Advisory, also believes that the invoking of the force majeure clause for registered real estate projects, will protect the interest of developers, by extending the completion timeline by a duration of six months under RERA automatically. “The same was much required, as many developers could face challenges of aligning construction workers and labourers for the next few months, as a result of their migration. The 25% TDS reduction will benefit existing home buyers, as it will leave additional money in their hands,” says Agarwal.

The demand, to declare the Coronavirus pandemic as a force majeure event came, as developers were left with no choice but to halt construction. Many of them could not even keep the labour force together and reverse migration added to their woes. The supply chain hurdles and disruption in imports from China, further affected the execution capabilities of these developers.

 

Home buyers demand invoking of ‘Frustration of Contract’

Frustration of contract definition

 

Home buyers, however, are questioning whether the invocation of force majeure could be a one-sided affair in the builder-buyer agreement. At a time when they are faced with uncertainty over jobs and salary cuts, there has been no relief for them under the force majeure clause. They are, hence, demanding that ‘Frustration of Contract’ be enforced, to balance the liability of both, the builder and the buyer.

Under the doctrine of Frustration of Contract, impossibility of a party to perform its obligations under a contract, is linked to the occurrence of an event/circumstance subsequent to the execution of a contract, which was not contemplated at the time of execution of the contract. If the execution of an act becomes impossible, after the contract has been executed, due to any event that could not have been prevented by the party undertaking the performance, then, such contract itself becomes void or ‘frustrated’. The ‘frustration’ here, is an act outside the contract, which makes the completion of the contract impossible. The doctrine of frustration of contract is envisaged under Section 56 of the Contract Act, which states that an agreement to do an act impossible in itself, is void. It is evident that Section 56 envisages an impossibility in the performance of the contract, which the parties had not contemplated, when they entered into the contract.

Home buyers are, hence, demanding that when the repayment of the loan is an impossibility, even if it is outside the purview of the contract, they need the protection of ‘Frustration of Contract’. A vast majority of the home buyers are demanding the following options under Frustration of Contract:

  • Exit from the house purchase, without forfeiture or penalty.
  • EMI moratorium without any added interest burden.
  • Restructuring of the loan to make the EMI lower.

The courts have held that the word ‘impossibility’ in Section 56 of the Contract Act, must not be interpreted in its literal sense, but rather in a practical form and. Thus, Section 56 would be applicable, even if it is not an absolute impossibility but if the contract has undergone a change that the parties had not contemplated while entering into the agreement. This was upheld in the Satyabrata Ghose versus Mugneeram Bangur & Co & Anr (AIR 1954 SC 44) case.

The concept of restitution as set out in the Contract Act, also states that when an agreement is voided, such as in the case of frustration of contract, the person who has received any advantage under the agreement is ‘bound’ to restore the advantage, or compensate for it. Thus, the parties should be restored to a position they were in, if the contract had never been executed. In today’s housing market with no appreciation, the only advantage that the buyer might have received, would be income tax benefits on home loans.

Even though the COVID-19 lockdown has been officially defined as a force majeure, the stage is set for the Indian real estate market to see a flood of litigations, as both the parties (builders and buyers) may not come to a workable understanding, in the wake of non-payment. In such cases, the courts and arbitrators will have to evaluate and decide each dispute on its individual merits, which would be based on the terms of the contract, the intent of the parties and steps taken to mitigate.

(The writer is CEO, Track2Realty)

 

FAQs

How will the force majeure clause help real estate?

Using the force majeure clause suo-moto, state RERAs can extend registrations and completion dates, if these were falling after March 25, 2020, by up to 6 months.

What is the penalty under RERA for delayed projects?

If the builder fails to meet the specified project deadline, he may be asked to pay a penalty of up to 10% of the entire project cost.

 

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