Force Majeure: Can It Save Sinking Indian Real Estate?

Force Majeure
Force Majeure

The devastating impact of coronavirus is everywhere. Be it life or business or faith, nothing is left untouched by this deadly virus in a way that was totally unforeseen. In these unprecedented times when businesses and operations are impacted, several contracts and obligations are being affected. 

Talking from the perspective of the real estate segment, unavailability of raw materials; unavailability of labour; suspension of construction work and restriction on the cash flow in the projects are rampant.

Force Majeure, a term that is being heard quite often, has gained more relevance in the present times. Force majeure is a French term that literally means “greater force.” But what exactly does this clause mean and where it is relevant?

What Is Force Majeure

Force Majeure is a clause that is included in contracts to remove liability for natural and unavoidable catastrophes. Until now, it used to refer to an event for which no party can be held accountable. The term includes both acts of nature ( floods and hurricanes) and acts of people (e.g., riots, strikes and wars).

The basis of this clause is to save the performing party from consequences of breach arising from an event over which either party has no control. It is, therefore, an exception for breach of contract.

 Force Majeure In India And COVID-19

In the Indian context, the Ministry of Finance, Government of India, by virtue of its Office Memorandum dated 19 February 2020, has declared that the spread of Covid-19 falls within the definition of ‘Act of God’ as a ‘natural calamity’. 

It was clarified that considering disruption of the supply chains due to spread of Covid-19, it should be considered as ‘natural calamity’ and force majeure clauses may accordingly be invoked. 

How Force Majeure Affects Real Estate 

Real estate registration authority, RERA, which now regulates the realty segment also has a Force Majeure clause. Force majeure clause in RERA lays down the unforeseen circumstances under which a builder may not be able to fulfill conditions as per the contract signed with the home buyers. RERA has stated the circumstances of such as war, flood, drought, fire, cyclone, earthquake or any other natural calamity under force majeure.

Under Force Majeure circumstances, if a developer is affected from carrying out the construction work in the project, the clause will consequently extend the date of the RERA registration and/or completion date of the projects to allow reliefs to the developers and to pre-empt from committing various violations under the Act.

Secondly, both buyers and developers who are under the term loans from a bank can seek similar relief. The banks and financial institutions shall also declare such affected periods as Force Majeure to provide relief to both developers and homebuyers by extending the term of the loan and waiving the interest component.

Technically speaking, this clause is going to save both developers as well as the buyers in these troubled times. On one hand, the clause saves the developers from bringing litigation from delayed delivery, the buyers also get to shield themselves if they happen to miss any loan EMIs.

However, the pandemic and this clause have its own drawbacks. Invocation of Force Majeure will hamper the budding REIT scene in India.  Force Majeure will allow the lessees to not make payments or defer payments under the existing lease agreements for the income generating properties, which are part of the REITs structure. Such disruption in income generation will eventually impact REITs and its unit holders.
Additionally, many firms are looking for this calamity to renegotiate the terms of the existing contracts or are using it as an easy tool to terminate the agreement by interpreting it as a force majeure event.

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