Covid-19: Basic Legal Homework for Developers

Covid-19: Basic Legal Homework for Developers
Mar 2020 , by , in Interviews

Cascading Defaults:

Just when we thought things can’t get any worse in the realty world, Covid-19 broke out. Recent news has revealed an alarming default of 65% in instalment payments by home buyers. Retailers in various malls have stopped paying rent on the grounds of force majeure. Add to this, the wage bill that all employers have been notified to bear, during the compulsory shut-downs.   With revenues of the developers down to a trickle, defaults in project finance availed by them is imminent.

In a double whammy of sorts, share prices have also plunged. Lenders may, therefore, seek fresh securities from the developers to top up the depleted collateral shares offered as pledge.

 

How Rera Can Help Developers:

The Real Estate Regulation & Development Act, 2016 (Rera) is not just meant to protect the flat purchasers. Its primary role is to ensure a healthy real estate sector. For this purpose, under Section 19 (6) of Rera, a flat purchaser is bound to pay the price as per the terms of the agreement for sale, municipal taxes, maintenance charges etc. etc. Failure to honour such monetary payments attracts interest under Sub-Section (7) of Section 19. It may be noted that the speedy dispute resolution machinery available to the flat purchasers, under Rera, is equally available to the developers.

 

Pressurizing the homebuyers, however, may not be an ideal solution. A more pragmatic approach would suggest renegotiating the terms in view of the drastically changed circumstances.  It may lead to a win -win situation for both.

 

No Redressal for Mall Owners:

So far as the mall owners are concerned there is little to soothe their woes. Those tenants whose lock-in period has expired may immediately break the leave and license agreement or lease, and seek refund of the security deposit. Moreover, in Maharashtra, should a mall owner seek eviction of the retailer / licensee on whatever grounds, he is bound to approach the Small Causes Court. For refund of the Security Deposit, however, the retailer can invoke the arbitration clause that most leave and license agreements contain.

 

The tenants that are presently locked-in, have made out a strong case for waiver of rent on the grounds of force majeure. A ground that others too may soon adopt.

 

Force Majeure & Misconceptions:

Simply put, force majeure is an event beyond the control of the parties to a contract. Often, it is translated as an act of God. However, several misconceptions have cropped up in the wake of the panic created by Covid- 19. A few examples are discussed below:

  • Not all obligations are waived off upon the occurrence of a force majeure event. The affected party can seek exemption of only those obligations, performance of which is not possible on account of the force majeure event. Further, the indulgence sought by the affected party cannot be in the nature of a carte blanche. Waiver only to the extent of the hardship caused by the event can be claimed.

 

  • Force majeure need not necessarily lead to a severance of contractual relations. It only means suspension of contractual obligations during the subsistence of the force majeure event.

 

For reasons aforesaid, all flat purchase agreements provide for extension of construction timelines in in case of cement shortages, riot, earthquakes etc. Covid-19 shall be construed as one such event.  Furthermore, no liquidated damages are payable by the affected party.

 

The defence of force majeure for default in payment obligations may not be tenable. Therefore, in case a developer has delivered his part of the bargain, then it is highly unlikely that the flat purchaser can avoid monetary commitments on account of force majeure.

 

Sources of Funding:

The arguments discussed above, regarding payment obligations of flat purchasers, may be used by the lenders against the developers. Given the liquidity crunch, most lenders are under as much pressure as the developers. Indian real estate cannot look at foreign investment for their funding requirements.   Those who had floated Real Estate Investment Trusts (Reits) may be teensy weensy bit more relieved.

 

Leading builders have sought sops like 0% stamp duty for six months, deferment of tax payment by a year, reduction in premia payable to the municipality by 50%. The government may not be in a position to concede to these demands. Nevertheless, obviously there is a lot of homework to be done; from finding out viable solutions with errant buyers, measuring the quantum of damage for a successful plea of force majeure, to looking at most viable source of funding, and a few more.

 

To conclude, when the going gets tough, the tough gets going. But how far? That we will wait and watch.

 

Divya Malcolm is a Partner at Kochhar & Co., Advocates and Legal Consultants.  The views expressed in this article are her own and not that of the firm.

 

 

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