Author: Tanishq Patel, B.A.LLB (H), School of Law, Jagran Lakecity University, Bhopal
The coronavirus more popularly known as COVID-19,that has spread first in China around December 2019 and this novel disease has moved from China to the rest of the world and was declared as a pandemic by the World Health Organization (WHO) on 11th March,2020.With the attack of COVID-19 outbreak that has affected the trade and industries of most the countries of the world and has broke the chain of business that are bound for commercial as well as residential area in the real estate market of India. This ongoing COVID-19 outbreak and its impact on economy has joggled prices in real estate to its lowest level till the end of May.
The real estate sector was already under going downturn over the past years and current pandemic have again affected 12-billion-dollar economy. We all are aware that Real Estate consist of 7% of the GDP of the country, it employees 15% of the labor force of India so obviously with the lock-down in the country from 2 months and still continuing and real estate has severely affected. It’s a labor-intensive industry and affects 269 industries along with it because its resources materials of different kind form iron steel to nails and to the smallest of small items which go into the building industry.
Many in the Industry are copping with some of the issue in this growing situation:
1. Construction contractors, landlords, tenants and borrowers need to assess the impact of relevant provisions related to Unavoidable delays on construction, leases and loan documents that should extend times for covenant work.
2. Real estate borrowers and lenders need to assess the potential application on existing credit facilities and term sheet for new facilities.
3. Landlords and tenants must determine how to respond to anticipated requests to provide relief to tenants and borrowers negatively affected by COVID-19.
The residential sector which is from the past is concern about the weak demand will be facing more difficulties after the lock-down or COVID-19 about the launching of new projects and will be also concerned about the ongoing projects and construction that has been incomplete due to the lock-down and due to the shortage of labors as they have left the cities in which they are working .This crisis has pulled off the end user confidence to its biggest lowest levels ever in the history, which will move the real estate purchase decisions to the apart future. The sentiment score had reestablished in the December after being in the depressed zone that is below 50 mark for two back to back quarters and after the pandemic disease this mark has been dropped to 31 in the March end and the markets of western and northern India are most impacted region.
The current lock-down in the country has brought the whole industry to deadlock position and the recovery of the industry curve will totally lean on the financial encouragement which will be passed by the government.
COVID-19 AS AN EVENT OF “FORCE MAJEURE” UNDER RERA
As the effects of the COVID-19 pandemic spread to every small and big sector of the economy of the country, construction contractors ,landlords ,tenants and borrowers are examining their construction contracts ,leases and loan document for provisions that can extend time period for the convenient performance for the delay that has been resulted from unforeseeable events and such are often referred as Force Majeure and basically includes ‘Acts of God’, fire or other causality, shortages of labor or some emergencies occurred in the country .With respect to real estate sector the clause of Force Majeure generally applies to construction contracts to face the inability of a construction contractor to complete construction within the given time frame because the contractors are unable to get the material which they are suppose to use in the construction and due to less workers to the work place. Real estate contracts, according to the RERA act, also have provision for force majeure. If the clause applies then developers can demand for the postponement of registration or in the completion deadline of their work without paying a compensation for the delay to the authority for which they are working. But the extension with respect to force Majeure can be given only for period of one year. A process is already in the place that is to be succeed in any case of Force Majeure event. The impact of misfortune is still not clear but there is lot of anxiety in the real estate sector.
BEHAVIORAL CHANGES THAT MAY OUT LIVE THE CRISIS
Real estate owners and operators across and every asset class are already considered that the coronavirus outbreak will have the long-term effect on the several industries and the necessary changes that are required for the owners are likely to be bring. The COVID-19 outbreak can bring the experience that can permanently change the affect demand for other real estate assets, such as hospitality properties and short-term leases. The depth and breath of economic impact on the real estate sector is undefinable just same as the scale of human calamity from the ongoing pandemic is yet to be seen. However, behavioral changes that will point towards significant space that is becoming outdated post coronavirus environment.
The various industries of the countries are expecting a reasonable relaxation and extension of time in regulatory compliances, including the fast track approval process to reduce project costs. Developers are vert hopeful that the government would decrease the statutory or the development charges, premiums, GST and stamp duty and also hoping for the proving of input tax credit benefit to the sector for the time period of one year for coming out from the cash problem. Banks and financial institutions should take benefit of the surplus cash to be available with them due to the reduction in the repo rate which will be be utilized for the sector to address liquidity crisis in the country. Government could also consider industries demand of re-introducing the allotment schemes with the necessary safeguards in the country.
Sensex and Nifty has dropped over by 20% in value in a few weeks and it was directly affecting the market. As sometime it goes on higher level and gets closed and sometimes it just decreased and gets closed so it has impact on exiting emerging markets.
The impact of the present situation of COVID-19 will have to be estimated by real estate developers on the two cover that are (i) Validity of RERA registration (ii)delivery timeline committed to allottees. Under the section 6 of The Real Estate Act,2016(RERA) it provides that the extension of the project registration due to the occurrence of ‘Force Majeure’ events, which are generally defined to be case of war, or any other calamity. Given definition of Force Majeure under RERA, developers cannot reach out to RERA authorities in this situation to seek extension of the project registration. Most of the agreements of RERA contain clauses in which the person or authority who is suffering from Force Majeure to assert the counter party in writing within the given mentioned timelines. The developer in the real estate project will have to look at their own individual RERA agreements accomplished with given mentioned allottees to determine whether which are ahead the control of the developer and rights to a developer to enlarge the timelines of handing over tenancy of units in the project.
PREVENTION OF REAL ESTATE POST CRISIS
We are not complaining about the real estate industry, just complaining about the whole industry gamut across the country. One foreign company used axis bank foreclosure for the purposes of taking share of his foreign company and wanted to sell off in the market after the prices had pulled up, pull it down by 50% fortunately Mumbai High Court gave us stay against such the sale subsequent and consequent that we are concerned about this fall that this could be manner in which foreign companies and foreigners would be able to take over the entire gamut of industry and business at prices which are absolutely rundown so I think there is a serious concern in terms of such a takeover taking place and hence we should recommend that the IBC code in terms of NCL case should be suspended for a period of 6 months in order to take care of this contingency which are actually going against all players into the market and actually destroys the value of all companies today listed and unlisted.
At last it can be concluded that there will be a slowdown across the country after COVID-19 crisis. The industry will face an acute working capital crisis which is essential to restart the business and keep it moving whether it is small sector or bigger sector. Government should extend the timelines for various statutory compliance under RERA. The law relating to ‘doctrine of frustration’ and ‘force majeure’ has emerged over with the time, however with respect to present scenario in the country will play a vital role in the manner in which the contracts would be written going forward with this.