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Ergo

09-Apr-2020

As India enters the last week of the 21-day nation-wide lockdown, there is still uncertainty of what lies ahead. It is possible that the lockdown may only be gradually eased.

These testing times have thrown all businesses and manufacturing activities in a state of disarray. Malls and retail outlets are reeling under pressure of high rentals despite having shut shop. Hospitality sector is seeing an unprecedented low. Industries such as automobile, real estate, FMCG have come to grinding halt. Supply chains stand disrupted and there is no visibility on when the Indian economy will stabilise.

With the present situation at hand, all business houses large and small alike, are looking at saving costs. The cascading impact of the pandemic on the financial system has nudged transacting parties to re-examine their contractual positions.

Nation-wide lockdown is not a common phenomenon. It has certainly prevented most parties from fulfilling their obligations under their contracts.

With this background, we examine how the present situation leading to suspension of business affects the real estate sector in general and arrangements of leases, licenses and sale agreements in particular.

STATUTORY PROTECTION OR REMEDY UNDER CONTRACT?

Many wonder what would come to the rescue in the current lock down situation due to pandemic, which has forced closure of business. Would it be the law or the contract? Many are treating this as an event of Force Majeure or Act of God and are seeking to suspend their respective obligations under their contracts.

Force Majeure is a French term which means “Superior force”. Under both Indian and English context, force majeure does not simply mean anything that is outside the control of the parties to a contract. The meaning, and applicability of force majeure, would depend on the respective contracts, and the events envisaged therein by both the parties.

Act of God as is interpreted by the Courts in India, covers only scenarios which are due to natural forces free from human intervention, such as lightening, storm etc and are unexpected and no reasonable human foresight could be presumed to anticipate the occurrence or presume to provide against it.

Section 32 of the Indian Contract Act, 1872 (Contract Act) furnishes the statutory basis for force majeure. Section 56 of the Contact Act also deals with the common law doctrine of frustration of a contract. Doctrine of Frustration applies when an unforeseen event not attributable to any party, subsequent to execution of a contract, is beyond the control of parties and makes it impossible to perform the contract and is so fundamental that it strikes to the root of the contract.

REAL ESTATE CONTRACTS

In the Real Estate sector, the contracts regulating the transfer and use of immovable property are generally in the nature of agreements for sale, sale deeds, development agreements, lease deeds and leave and license agreements. The impact of Force Majeure event is considered on some of the aforesaid contracts as under:

LEASE

It is a settled position of law that with respect to leases, the provisions of the Contract Act do not apply, as the special law governing leases is the Transfer of Property Act, 1882 (TOP Act)[1]. Therefore, the protection available under Section 56 of the Contract Act relating to frustration of a contract would not apply in case of a lease already created in favour of a lessee as a lease being a transfer all the legal incidents of a transfer including transfer of risk will come into play.

Section 108 of the TOP Act only covers a situation when the property is destroyed or is rendered substantially and permanently unfit for the purposes for which it was let on account of fire, tempest or floor, or violent of any army or of a mob or other irresistible force. In such an event, the lease is terminable at the option of the lessee. The parties however are at liberty to mutually agree in their respective lease deeds the events or conditions which would be regarded as a force majeure event and the consequences thereof.

Therefore, if a lease deed envisages a force majeure event, then the parties would be confined to the scope of the definition of force majeure as provided in their lease deeds. It may not be open to parties to import additional events or seek protection which Section 108 of the TOP Act provides.

Hence, it is important to review each and every lease deed to ascertain (i) whether there is a force majeure clause; and the (ii) consequences on occurrence of a force majeure event, whether such force majeure clause envisages a termination or suspension of rights and obligations.

In the event a lease deed is completely silent on force majeure or consequences of the lessee being unable to use the premises for the purpose of which it is let out, then the Parties would have to examine if they fall within the four corners of Section 108 of the TOP Act.

AGREEMENTS TO LEASE AND LEAVE AND LICENSE AGREEMENTS

In case of agreements to lease and leave and license agreements, the position in law is different from what governs lease deeds.

An agreement to lease, is merely an executory contract and no right in immovable property is created. The governing legislation will thus be the Contract Act and not the TOP Act. As for a license, the same is governed by the Easements Act, 1882 and thus the provisions of TOP Act do not apply.

Where an agreement to lease or a leave and license agreement contemplates occurrence of “force majeure” and provides for consequences, then the provisions of the Agreement would prevail as provisions of Section 56 of the Contract Act cannot be attracted. This principle has been recently laid down by the Supreme Court in Energy Watchdog v CERC & Ors.[2] Therefore, if the contractual provision does not cover a situation such as the present pandemic, then the parties will have to perform the contract or face the consequences for breach of contract.

RERA AGREEMENTS AND VALIDITY OF RERA CERTIFICATE

Impact of the present scenario will have to be assessed by real estate developers on two fronts – (i) validity of the RERA Registration and (ii) delivery timeline committed to allottees.

The Real Estate (Regulation and Development) Act, 2016 (RERA) under Section 6, provides for extension of the project registration due to occurrence of “force majeure” events, which are defined to mean “ case of war, flood, drought, fire, cyclone, earthquake or any other calamity caused by nature affecting the regular development of the real estate project”. Given the restrictive definition of “force majeure” under RERA, developers cannot reach out to RERA Authorities in this situation, to seek extension of the project registration.

That said, in reasonable circumstances where there is no default on the part of the developer, the RERA Authority has under the provisions of RERA, the discretion to extend the project registration period for a period not exceeding one year.

Further, following the above, Maharashtra RERA Authority has vide its circular dated 2 April 2020 and Karnataka RERA Authority vide its circular dated 6 April 2020, extended the registration of all real estate projects by a period of three months, in cases where registration is expiring after 15 March 2020. Further, Maharashtra RERA Authority and Karnataka RERA Authority, have also extended the timelines for compliance of the RERA Act by a period of three months. This will shield the developer from breaching the end date under its project registration certificate.

Vis-à-vis allottees in a real estate project, developers will have to look at their individual RERA Agreements executed with the allottees to ascertain whether events which are beyond the control of the developer give rights to a developer to extend the timelines of handing over possession of units in the project (provided such flexibility is allowed under the model form agreements provided by each State).

PROCEDURAL COMPLIANCE

Most of the agreements contain clauses which require the person suffering from force majeure to intimate the counter party in writing within prescribed timelines.

Parties are advised not to overlook the procedure prescribed in the agreements under the impression that pandemic by its very nature being a worldwide phenomenon and recognised as such by the WHO. The requirement of intimating the counter party in accordance with the contract can be dispensed with.

In order to be completely compliant of the provisions of the agreement, it would be prudent to follow the intimation requirement such that if the matter were to reach the doors of the court, no loop holes or technicalities should defeat the rights persons affected by such force majeure events.

CONCLUSION

The law relating to “doctrine of frustration” and force majeure” has evolved over time, however, the present Covid-19 pandemic will play a major role in the manner in which contracts would be written going forward.

Where agreements lack clarity, it remains to be seen how courts weigh “business continuity” against “access to premises” in adjudicating matters related to suspension of obligations of transacting parties in leases / leave and license arrangements.

As parties attempts to mitigate their burden, they will have to turn to their respective contracts to assess how far such mitigation is possible.

Devendra Deshmukh (Partner) Harsh Parikh (Partner) Abhiraj Gandhi (Principal Associate)


[1] Raja Dhruv Dev Chand v Raja Harmohinder Singh and Anr., AIR 1968 SC 1024

[2] 2017 14 SCC 80

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