Is COVID-19 a Force Majeure event?

Force Majeure is a provision under RERA to aid developers in case conditions beyond their control hamper the timely delivery of real estate projects. In the current environment, it is essential to analyse whether the COVID-19 outbreak will be deemed a force majeure event or not.  

Force Majeure, also known as casus fortuitous in Latin, means ‘unavoidable accident, chance occurrence’. It is a contractual provision in Section 6, Extension of Registration under the Real Estate (Regulation and Development) Act, 2016 (RERA). According to this, the promoter of a real estate project may be granted an extension of registration of the said project for a maximum period of one year, if force Majeure conditions are met.

One of the significant woes of property buyers in India has been the delay in handing over of a project by developers according to the stated timeline. This delay was one of the key reasons behind the introduction of RERA, 2016. The Act binds a promotor to the stated timeline for project delivery and takes strict action in cases of delays in the same. These actions also include the revocation of the concerned project’s registration, as stated in section 7 and 8 of RERA, 2016.

RERA includes the Force Majeure provision to give the promoter additional time to complete a project, over the project delivery date, as stated in the affidavit submitted to the RERA authority while applying for registration. The promoter might need an extension to complete the project, the delivery of which might have been delayed due to reasons beyond control.

Nayan Raheja, Executive Director, Raheja Developers, says, “The RERA authority can approve the extension of registration in cases of Force Majeure such as flood, war, drought, earthquake or any natural calamity, that affects the development of the project. The authority might also extend the registration for one year if it feels the reasons for extension are reasonable.”

What is the aftermath of a Force Majeure event?

Suppose a natural calamity like a flood or war takes place, and this leads to a delay in handing over possession of a realty project. As per the builder-buyer agreement, the buyer has to let the promoter apply for an extension under the concerned Real Estate Regulatory Authority, for giving possession of the apartment. However, in case it is not possible for the project to be completed, the allotment shall be terminated under Force Majeure. The information regarding the termination has to be communicated to the buyer at least 30 days before such a conclusion is reached. The promoter then has to refund the entire amount paid by the buyer, within 45 days from this date of termination.

The promoter will be free of contractual obligations after the full refund of money to the buyer is undertaken, and the buyer cannot have any subsequent claims against the promoter.

Nimish Gupta, MD, RICS, South Asia shares his thoughts on the requirement of contingencies and full preparedness for impending unexpected occurrences in the real estate sector as a consequence of the COVID-19 lockdown and pandemic:

How does Force Majeure play out in times of COVID-19 pandemic?

India’s real estate sector, which was struggling to regain its health amidst a liquidity crisis, has witnessed another blow in the form of the COVID-19 pandemic. The virus has disrupted the functioning of developers, buyers and key stakeholders of the industry.

To curtail the spread of the virus, the Government has put many restrictions, including a nation-wide lockdown. This has led to the complete halt of construction work, shortage of raw materials due to supply chain disruptions, and shortage of workforce.

The economic slowdown coupled with the work-from-home directive has increased uncertainty among buyers as well, on whether they will have adequate cash flow to pay-back their home loans or to make payments to developers for new/current purchases.

As per the Confederation of Real Estate Developers’ Associations of India (CREDAI), the real estate industry has been directly affected since property buyers have reduced means to honour their financial obligations against purchases made. When buyers do not make payments to developers, the latter cannot fulfil their principal and interest payments to banks or provide timely delivery of projects to buyers. Therefore, COVID-19 should be declared as a Force Majeure within Section 6 of RERA. Exemption from penal charges and project completion time should be extended by a year through the extension of project registration.

Lack of clarity regarding the fulfilment of the builder-buyer agreement and demand for ‘Force Majeure’ may open the doors of multiple litigations in the coming future.

Is there a precedent of outbreaks being covered under Force Majeure?

The epidemic outbreaks of Ebola and Severe Acute Respiratory Syndrome (SARS) are two events which have come close to initiating an international crisis as the one COVID-19 has currently caused. Ebola, which was active mostly in regions of West Africa, had led the courts in that region to rule it as a Force Majeure event. Whereas the major impact of SARS was in China and its courts also ruled that such an outbreak triggered a Force Majeure event.

In conclusion, considering that the current viral outbreak has led to a worldwide situation far worse than the one created by Ebola and SARS, it can be cautiously indicated that the COVID-19 may be listed as a Force Majeure event in India. Although, each case will have to be assessed on its own merits and it will be interesting to observe how this acts out in Indian courts of law.