[Rishabh and Rakesh are students at National University of Study and Research in Law, Ranchi.]
The nation-wide lockdown has led to the halting of ongoing real estate projects around the country. The Ministry of Housing and Urban Affairs (MOHUA) in its Office Memorandum dated 13 May 2020 (Advisory) has declared the current pandemic as a force majeure event for the purposes of Real Estate (Regulation and Development) Act 2016 (RERA) and extended the timelines for registration and completion of real estate projects. Primarily, the Advisory provides extension of registration of real estate projects due to the force majeure under Section 6 of RERA. Although Section 6 provides only for extension of registration dates in case of a force majeure event, various state authorities have also extended the completion dates of real estate projects in the process. Though the step is a major relief to the real estate sector, extension of compliances such as delivery of possession are still dependent upon the scope of force majeure under individual contracts and state Model Agreements of Sale (MAS) which incorporate independent force majeure clauses.
Moreover, the relief measures in the office memorandum fail to take into account other mitigating factors such as liquidity crunch and difficulty in the procurement of raw materials which will ultimately cause an increased delay in the possession of projects. Additionally, the migration of workers involved in the construction activities from the urban areas has resulted in an acute shortage of the labor required for completing the projects, consequently delaying the delivery of possession. Due to non-uniform scope of a force majeure clause in individual contracts and MAS, extension of delivery dates in view of the pandemic would be difficult. Such non-uniform scope affects the government’s measure to extend the timelines under RERA. Additionally, delaying the date for delivery of possession could trigger the right to refund under Section 18 of RERA. The Advisory does not explicitly grant extension of delivery dates nor does the scope of force majeure under Section 6 incorporate the aspect of delivery of possession.
The article ventures into such predicaments and analyzes application of the right under Section 18 in case of delay attributable to the pandemic and the subsequent scope of force majeure clauses in several MAS.
Legal Application of Section 18
The promoter under Section 18 of RERA is subjected to a liability for non-completion or his inability to transfer / deliver possession in accordance with the terms of the agreement of sale or due discontinuance of his business. Suspension of construction activities due to the nationwide lockdown cannot be regarded as discontinuance of business under Section 18. Moreover, in the absence of an explicit extension of delivery dates, promoters / developers are still bound to honor the terms of the agreement, and any default will be regulated by provisions agreed therein.
Section 18, however, suffers from a streak of divergent interpretation by different RERA authorities wherein refund has been refused to be granted because, in case of a delayed possession, refund may itself undermine the potential completion of the project. On the contrary, authorities have also relied on the literal interpretation of the provision and granted refunds in cases of delay in transfer / delivery of possession (Naveen Kumar S v. Sitansu Sekhar Behura, [Complaint No. CMP/180904/0001222, Order dated January 2, 2019]). Further, in the context of such divergent views, it would be difficult to entrust the RERA authorities with determination of the question relating to delivery dates in light of the force majeure clauses in relevant builder-buyer agreements or individual contracts.
Though the completion dates are extended, there seems to be no change in the transfer of possession under respective builder-buyer agreements. Delay in possession would also be a relevant factor in light of the current pandemic, as the reduced workforce and the nation-wide lockdown could render delay in the possession of the flat / building. In such situations, the allottees may want to withdraw from real estate projects and resort to their right to refund under Section 18 for delay in transfer of possession. Since the applicability of COVID-19 as force majeure is restricted to Section 6 of the Act, it would be interesting to note how the individual agreements and model agreements along with state regulations have defined the scope of force majeure clauses in context of the COVID-19 situation.
Implications of Force Majeure Clauses in the Agreement
A standard builder-buyer agreement often incorporates force majeure clauses which exempt the builder’s liability in cases of default. The allottees barely have any other option than to accept these clauses which are mostly arbitrary. Therefore, in order to ensure fairness several State RERA authorities have notified MAS. However, the scope and application of force majeure clauses under these MAS for delay in possession varies as per respective state regulations. For instance, we primarily take into consideration the regulations notified by Uttar Pradesh RERA authority (UP RERA) and Haryana RERA authority since force majeure clauses in regulations notified by these authorities form two distinctive category; the first one restricts force majeure events to natural calamities, and the second one extends its scope by including government policy or decision. Also, the force majeure clauses in regulations notified by other RERA authorities fall in either of the categories. Altogether, these regulations provide for a framework for determining the scope of force majeure clauses and its consequent applicability to the COVID-19 situation.
Clause 7.6 of MAS annexed under the UPRERA Rules, which is a restatement of Section 18 of RERA, exempts promoter from paying refunds and compensation where failure to complete project or delay in deliver of possession is caused by force majeure conditions. For the purpose of the agreement, a force majeure condition is defined to include ‘any other calamity caused by nature affecting the regular development of the real state project’. Thus, allottees may not be able to exercise their right under Section 18 as the present COVID-19 situation, in a Ministry of Finance notification, has been clarified to be treated as a ‘natural calamity’.
Further, Clause 7.1 of MAS allows a promoter extension of time for delivery of possession in cases where the completion of the project is delayed due to force majeure conditions.
The Haryana Real Estate (Regulation and Development) Rules 2017 provides a wider application of force majeure clauses under its MAS. The compensation clause in the MAS, provided under Annexure ‘A’ of the above Rules, recognizes court orders, government policy / guidelines and decisions as valid exceptions along with force majeure clauses. A promoter who fails to perform as per MAS is exempted from any liability under Section18 if such failure is the result of government policy, guidelines and decision. Since the nationwide lockdown was implemented via order of the Central Government as a policy decision to stop the spread of COVID-19, claiming compensation under the MAS would be difficult.
Consonance with other RERA Authorities
The two distinctive categories, one being a natural calamity and the other being a government decision, envisaged in the above-mentioned regulations can be validly used for regulating the delay in possession due to COVID-19 as a force majeure. Other RERA authorities seem to fall in either of the categories while explaining the scope of the force majeure clauses. For example, Karnataka and Rajasthan rules are similar to the UPRERA format of force majeure clause; while Maharashtra MAS is more on the lines of Haryana RERA. However, the promoter and the allottees can modify the terms of the agreement as per their convenience. The nature of clause agreed between them in the final agreement, will be decisive. Thus, it is pertinent that the relief in the real estate sector shall include the uniform application of COVID-19 as a force majeure. Otherwise, the divergent application could lead to consequences jeopardizing the projects and stake of the allottees.
Delay in transfer of possession in light of Section 18 of RERA is a relevant factor while providing relief to the real estate sector. Taking into account the non-suspension of such statutory right to refund available to the allottees in case of delay, the pandemic could have a catastrophic result. Further, the non-uniform nature of the force majeure clauses in the buyer-builder agreements and the model agreements of sale could potentially restrict the application of COVID-19 situation as a force majeure event. This may rejuvenate the right to refund under Section 18 and jeopardize the completion of projects. It is advisable that a legislative clarification may be provided in relation to such rights available to the allottees. A legislative action regulating the delivery of possession affected due to the pandemic has to be a factor while facilitating any further relief measures.