In Conversation with Devendra Deshmukh, Partner (Real Estate) at Khaitan & Co on Force Majeure in Real Estate in the Backdrop of COVID-19 Pandemic

Mr Devendra Deshmukh is a partner at Khaitan & Co., in its real estate practice. In this conversation with Nihar Chitre, he enlightens us on “force majeure in real estate in the backdrop of COVID-19 Pandemic.”  

  1. Hello sir, Thank you for the interview. I request you to kindly introduce yourself to the readers.

I am Devendra Deshmukh, a Partner at Khaitan & Co., in its real estate practice. I am an Advocate registered with the Bar Council of Maharashtra and Goa since 2005 and I am also a Solicitor, admitted as a Member of the Bombay Incorporated Law Society since 2007. I am also a Solicitor (non-practicing), England and Wales.

As a Partner at Khaitan & Co., I primarily advice and guide clients on a wide range of real estate transactions and I am actively involved in examining and advising on title of properties and issuing title opinions and undertaking title diligence exercises for properties within and outside Maharashtra. I assists clients with transfer/development transactions and in the process, help with drafting, negotiation and finalisation of documentation such as development agreements, joint development agreements, redevelopment agreements, agreements for sale/lease, sale/lease deeds, licence agreements (for commercial, industrial and residential properties).

  1. On 13-5-2020, the Ministry of Housing and Urban Affairs (the “Ministry”) issued an advisory to the State Governments to invoke the force majeure clause under S. 6 of the Real Estate (Regulation and Development) Act, 2016 (“RERA”) and to extend the timelines for (i) completion of the real estate projects which has been delayed due to pandemic caused by Covid-19; and (ii) for various statutory compliances (“RERA Advisory”) under the provisions of RERA. Can you please tell our readers whether the invocation of “doctrine of force majeure” in this situation would have on future contracts considering the wider interpretation it has got now?

The present situation has had a cascading effect on the various contracts and arrangements that the real estate developers have entered into ― mitigating/remedial measures were possible and have been taken only in respect of some of them. Besides agreements with allottees, arrangements that have taken a beating on account of this present situation cover the entire lifecycle of a real estate project ― ranging from construction contracts, arrangements with offshore vendors, revenue linked arrangements with sole selling agencies, etc. That said, we can consider the impact of the present scenario on the following two fronts ― (i) validity of RERA registration; and (ii) delivery timelines 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 have been unable to reach out to RERA authorities in this situation, to seek extension of the project registration.

In light of the above, the RERA advisory has come as a huge relief to developers of real estate projects. States such as Maharashtra, Tamil Nadu, Karnataka were quick to act on the RERA advisory. The Maharashtra RERA authority (circular dated 2-4-2020) and the Karnataka RERA authority (circular dated 6-4-2020) led the way and extended the registration of all real estate projects by a period of 3 (three) months, in cases where registration was expiring after 15-3-2020. Further, these RERA authorities also extended the timelines for compliances under RERA. Many other states have followed suit. Moves such as these will shield developers from breaching the end date under their project registration certificates.

However, 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).

  1. Recently, in Ramanand v. Girish Soni, 2020 SCC OnLine Del 635, the Delhi High Court clarified that in lease contracts, it is Section 108 of the Transfer of Property Act, 1882 only in the absence of a contractual stipulation on force majeure, that too when there is a destruction of the premises or when premises are rendered substantially and permanently unfit for the purpose for which it was let. Please provide your comments on the same.

In its judgment, the Delhi High Court has clarified the legal position on whether the present Covid-19 pandemic and resultant lockdown would entitle tenants to claim waiver from payment or suspension of rent.

In the petition, the petitioners contended that on account of the nationwide lockdown, there has been a complete disruption of business activities of the petitioners. The petitioners claimed that this is a force majeure event beyond their control and accordingly, they are entitled to a waiver of the monthly rent payment or at least a partial relief in terms of suspension, postponement, or part payment of the amount.

In addition to the clarity provided on the applicability of Section 32 of the Contract Act, 1882 (Contract Act), the High Court has reiterated the well-established position on the non-applicability of Section 56 of the Contract Act to arrangements of lease and other similarly situated contracts (which are in the nature of executed contracts) as opposed to executory contracts. It is well settled that Section 56 of the Contract Act does not apply to cases in which there is a completed transfer (Raja Dhruv Dev Chand v. Raja Harmohinder Singh (1968) 3 SCR 339).

The Delhi High Court has also clarified that Section 108 of the Transfer of Property Act (“TOP Act”), which embodies the “doctrine of frustration”, will govern tenancies and leases in the absence of force majeure clauses in lease deeds. Recourse can be had to Section 108 of TOP Act for treating the lease as void at the option of the lessee. Relying on several Supreme Court rulings, the Delhi High Court held that Section 108 of TOP Act would apply only in the absence of a contractual stipulation on force majeure, that too, when there is complete destruction of the premises or it is rendered substantially and permanently unfit for the purpose for which it was let. Temporary inability to use the premises by a tenant due to the lockdown would not entitle the tenant to avoid the lease under Section 108 of TOP Act or for that matter, even suspend payment of rent. It was held that under no circumstances can one take recourse to Section 108 of TOP Act to make a case for suspension of rent.

  1. How has the current event impacted leave and licence contracts? Would force majeure be applicable in these contracts too? Kindly explain the legal position.

An arrangement of leave and licence is governed by the provisions of the Easements Act, 1882 and thus the provisions of TOP Act do not apply.

Simply put, where an agreement of leave and licence contemplates occurrence of “force majeure” events and provides for consequences, then the provisions of the agreement would prevail and rein supreme. 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.

  1. Can force majeure clause rescue the contractors/developers from their contractual liability under construction contracts? What steps have contractors taken or would you advise the developers/contractors?

The present situation induced by the pandemic is a unique one, and contracts from the pre-Covid-19 era may possibly not cover rights and obligations of parties on occurrences of situations like the present one.

If a contract does not cover a like situation as an event of force majeure and one which permits parties to alter the manner in which the contract would work itself out, then in the absence of such provisions in the contract, the transacting parties cannot take recourse to the provisions of Section 32 of the Contract Act, 1872.

It has been observed that while parties have dissected their contracts to assess possibility of reliefs on account of force majeure situations, often the procedural compliances set out in contracts have been misread or due attention has not been given.

Most of the agreements contain clauses which require the person suffering from force majeure to intimate the counterparty in writing within prescribed timelines. Parties are advised not to overlook the procedure prescribed in contracts under the impression that the pandemic by its very nature is recognised as a worldwide phenomenon and the requirement of intimating the counter party in accordance with the contract can be dispensed with.

In order to be completely compliant of contractual provisions, it would be prudent to follow the intimation requirement such that in case of there being a dispute, technicalities should not defeat the rights persons affected by force majeure events.

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