We have made an attempt through this article to cover aspects including but not limited to present scenario of COVID- 19 with perspectives and effects on various aspects of the Real Estate Sector having consequential outcomes as a chain of sequence unfolding from measures adopted by Govt. of India and by state governments issuing Notifications/ Circulars/ Orders under the provisions of the Disaster Management Act, 2005 and Epidemic Diseases Act, 1897 from time to time encompassing various legal Statutes and The Reserve Bank of India issuing Circulars/ Orders/ Notifications in relation to monetary guidelines. We have also discussed its effects on Real Estate (Regulation and Development) Act, 2016 (RERA) and West Bengal Housing Industry Regulation Act 2017 (WBHIRA) and aspects of Landowners, Allotees, payments to contractors/sub-contractors and project finance.
A. Impact on Contracts which do not contain Force Majeure Clause
Where the contract does not contain any specific provision dealing with the eventuality of a force majeure event, the parties would be bound by the law relating to Force Majeure as embodied in Section 56 of the Indian Contract Act, 1872 (hereinafter referred to as “Contract Act”). Also, the Section 32 of the Contract Act spells out the provisions of contingency of contract and its impossibility to perform. In both cases of Section 32 and Section 56 of the Contract Act, the contract becomes void.
Now, as per the Indian Contract Act, 1872, the concept of Reciprocal Promises is embodied in Section 51 of Indian Contract Act, 1872 which is stated as under: –
“Promisor not bound to perform, unless reciprocal promise ready and willing to perform”.
Now as the contract becomes void, the case of restitution of contract becomes imperative.
“Obligation of person who has received advantage under void agreement, or contract that becomes void”- Sec 65 of the Act enunciates the principle of restitution applies where the parties enter into the contract with bonafide intention, however later the contract is “discovered to be void.”
In this regard apart from restitution either of the parties may be obligated for the benefits of any non-gratuitous act arising out of the contract.
“Obligation of person enjoying benefit of non-gratuitous act”- Section 70 of the Indian Contract Act contemplates an equitable principle of restitution which is intended to prevent unjust enrichment.
The parties entering into a contract are firstly bound by reciprocal promises. In the event of Force Majeure situation which is beyond contemplation of the parties while entering into a contract, the recourse can be “Waiver of Contract” or “Restitution of Contract” or “by Amicable Settlement by incorporating additional terms to the contract by way of Additional or Supplemental Agreement”.
B. Where the Contract contains Force Majeure Clause:
I. Scope of the Force Majeure Clause:
The scope of the force majeure clause would need to be closely examined on a case to case basis. Requirement of Notice and Requirement to mitigate shall take precedence in such a scenario.
Firstly, when the Document is Registered.
It is a well settled principal of law that in case a deed of Lease is registered, the governing law shall be Transfer of Property Act and the Contract Act shall not be applicable. The Supreme Court of India in its landmark judgment of Raja DhruvDev Chand Vs. Raja Harmohinder Singh has held that the provisions of the Transfer of Property Act, 1857 govern all such transactions as covered there under, and that as per section 4 of the said TP Act, the provisions of the TP Act shall be read into the Contract Act and not vice versa, meaning that the general provisions of the Contract Act will not necessarily be attracted to Lease Agreements. Section 108(B) (e) of the Transfer of Property Act, 1882 also deals with justifiable grounds to treat lease agreement as terminated at the option of the Lessee.
In a scenario, when the said Lease Agreement is a registered document having the Force Majeure Clause, the said document is an independent document, not being attracted by the provisions of the Contract Act and thus the said Force Majeure Clause can be invoked by the Queriest, provided the said clause contains/ covers of the scope of pandemic.
In such a scenario, the Querist cannot seek protection under the umbrella of the Force Majeure clause.
In such a scenario the Querist has to seek recourse borrowing the principle of Suspension of Contract due to supervening Impossibility.
The provisions of the Contract Act will attract and provisions of Transfer and Property Act won’t come in affect.
As the provisions of contract act applies in case of an unregistered lease therefore the Doctrine of Supervening impossibility shall be invoked in this scenario.
RERA and WBHIRA– Real Estate (Regulation and Development) Act, 2016 also christened as RERA which is a central statute and states are free to frame their own rules in terms of the Act. Different states have adopted the RERA and has framed ruled therein whereas West Bengal has promulgated a new act WBHIRA. Out of the several state wise RERA Authorities, the Maharashtra Real Estate Regulatory Authority has been the first in the country to step up and vide it’s Order No.: 13/2020 dated 2nd April, 2020 has revised Project Registration Validity and Extended Timeline for Statutory Compliances, in view of Covid 19 Pandemic. The State of West Bengal has also come up with E-Registration process of documents commencing from 20th April, 2020 issued through a State Government Notification.]
It has been observed in present scenario of Covid- 19, the landlords who have properties let out for commercial or residential purposes are bombarded with these repetitive requests of waiver. In this aspect it may be observed that any lease or rental is a bundle of rights like right of ingress and egress, right to use the property, possessory rights, etc. If any of these rights are abridged then the performance of reciprocal promises are hindered and consequently the contract leads to Frustration. Therefore, in case premises can’t be used for the government orders then the payment of rent shall also remain suspended for the period.
The Developers would invariably issue letters citing stoppage of all construction related activities on account of the lockdown orders issued by the Government and thus opting for shelter under the umbrella of force majeure clause. Allotees would be advised to check the application forms/allotment letters/agreement for sale executed by them for such clause and construe as to whether such force majeure clause dealt with any specific events, in particular relating to epidemics or whether the clause was general in nature. Allotees further may note that if force majeure is to be relied on by the developer, timely invoking the same in a timely manner i.e., during the ongoing period by sending a notice to the Allotees is of grave importance.
The contractor, sub-contractors and suppliers are a critical part for development of a project. However, in this critical juncture force majeure shall apply on the existing contracts with these groups of people. The contracts entered upon may remain suspended depending on case-to-case basis. However, the contractors must be aware that the services already taken and has become due and payable even before or even after the issuance of the government orders then in such a scenario the amount payable shall be disbursed as per the contractual norms. The force majeure shall not be applicable on the services already rendered. However, in case a contractor, sub-contractor or a supplier raises the issue of force majeure the same should be treated on basis of equity by the developers. But again, the same shall entirely depend on case-to-case basis.
The RBI has issued the RBI Restructuring Directions on June 7, 2019, pursuant to which, the Borrowers in respect of Commercial Real Estate Projects may approach the SCB lenders in respect of loans availed by the Borrower in respect of its Commercial Real Estate Projects up to a total period of 2 years i.e., one year plus 1 year, which is the same as for other non-infrastructure projects.
In our view, considering the widespread fallout expected due to the COVID-19 and measures for containment thereof, borrowers may make representations before the said Authority, setting out the grave financial difficulties anticipated, and requesting for relief under the section 13 of the Disaster Management Act.
All developers must be very proactive in dealing with the situation. Any inaction or even delayed action on their part may lead to serious trouble. The suggestive steps like invocation of the Force majeure with the landlords or the authorities should be taken on a war footing. Also, the notices to the prospective buyers must be issued urgently. The contracts of contractors, sub-contractors and suppliers must be reviewed and appropriate letter/ notices to be issued. If these steps are ignored then a series of consequences may bestow upon the developers. The landowners and Allotees may terminate the contracts and may sue for damages and in such a case as the plea of force majeure will not be available to the developer (as the notice for force majeure is not served) the outcome of case may negatively impact the developer. Likewise, the authorities may penalize the developers for noncompletion of the project within time and as in previously the force majeure shall not be saving grace for the developers. A lot of steps to be taken by the developers to safeguard their own interest within a short span of time to tackle the situation.
Tags: S. Jalan & Co.
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