Tremendous increase in the spread of coronavirus created havoc on macro-economic and social factors as various governments declared lockdown for their country to limit the extent of the novel coronavirus. The COVID-19 has created a potential impact on almost all the businesses across the nation and amongst which one of the major stalled businesses in India is of the real estate sector. The real estate sector is one of the top contributors to the economic growth of our nation. The real estate sector in India was already in a slump position due to regulatory changes and subdued demand leading to a cash flow gap and increasing liquidity crunch. Adding to such challenges, now post COVID-19 there will be a major issue of including but not limited to labour, material supply chain, high inventory overhang and weak affordability which would lead to delay in completion of under-construction projects or already stalled real estate projects across the nation. Since lockdown had a cascading effect on migrant labourers which led them to return to their home states and amidst the fear of this pandemic looming large labourers would take time to come back to work. Thereby, resulting in a shortage of labour and delaying of the real estate projects. Consequently, developers would also not be willing to launch any new project.
In the current market scenario where, residential projects are already generating negative cash flow, it will be more challenging for developers since possible markdowns have to be factored in. Also, for the coming quarter, there would be less of face to face meetings and visits of clients at the project site and besides this, there are a lot of factors affecting sales in real estate sector such as salary cuts, laying off of employees, gloomy market sentiments making investors and buyers unwilling to purchase any property. As a result of which diminish sales would be observed. Presently, the sales and marketing team of real estate companies are also on hold and dates for the final deals have been pushed to the future. Apart from, residential projects, coronavirus is impacting commercial spaces largely. Due to uncertainty and ambiguity amidst this pandemic, even the corporates would postpone taking up any commercial spaces.
There are various other issues revolving around the fact that the real estate sector is facing a massive hit on account of the global economic crisis. At the moment, there are a lot of contracts or agreements which are in existence such as joint development agreements, lease agreements, sale agreements etc. but the effect of novel coronavirus on such contracts/agreements is huge. This has led to the rise of questions relating to “force majeure”. In common market practice, all contracts/agreements contain the “force majeure” clause but the scope of such force majeure clause depends on various aspects. “Force majeure” in a general sense means due to any acts of God such as fire, flood, war, etc. parties are unable to perform their part as it is reasonably beyond their control. This clause also acts as a protection for parties in case of exceptional unforeseen circumstances. However, there is no clarity regarding the impact of this pandemic COVID-19 falling under a force majeure clause which has created uncertainty in the whole real estate sector. Consequently, there would also be a fall in investments specifically those done through Real Estate Investment Trusts (REITs) since because of uncertainty, investors would take some time before investing in their future strategies.
Another, major consideration amidst this pandemic COVID-19 in context of “force majeure clause” is relating to commercial leases, if this pandemic COVID-19 is treated as force majeure event then it would allow lessees particularly, for commercial leases to not make payment of lease rent or defer such payments payable under an existing lease agreement. Besides this, it would also be seen by parties to the prevailing contract as a means to renegotiate existing terms under the contract or they might even choose it as an option to terminate such prevailing contracts if such contracts provide for the clause of termination. As a market practice, force majeure is generally understood as not to defer the performance of the contract and should be performed to the extent it is reasonably possible to perform such an act. If it is not reasonably under control to perform act under the contract then in light of such circumstances, performance can be suspended until the time of existence of the force majeure. In furtherance to this, in eyes of Section 56 of Indian Contract Act, 1872 which states about the doctrine of frustration describing impossibility to perform the contract due to unavoidable events, interpretation of COVID-19 under force majeure has shown its inclination towards Section 56 of Indian Contract Act. However, restrictions if any, forming part of terms and conditions of the existing contract would have to be considered and thus, it can be said that it would depend upon contract to contract basis. Accordingly, in such scenario parties should mutually decide about their remedies.
As of now, though analyzing long term consequences of COVID-19 on real estate is difficult due to prevailing uncertainty about the longevity of this crisis. Even so, the government has taken certain steps to deal with forthcoming issues. Maharashtra and Karnataka RERA have issued guidelines providing extension in timelines for project execution and statutory compliances to reduce regulatory risks in case of short-term disruptions. Further, the Maharashtra industries department has allowed industries to defer payment of lease rentals. In Furtherance to this, CREDAI has asked for certain policy relief from the Ministry of Housing and Urban Affairs such as loans obtained by real estate developers not be classified as NPA if there is a default in payment of interest or the principal amount.
The business of real estate has at all times been centered on delineated and ascertained risk factors. There were already various challenges being faced in dealing with real estate laws and practices. Parties were wishing to clarify their duties and remedies because of the constantly advancing government requirements. Nonetheless, in addition to this, the economic cynicism would be one of the chief adversaries to the development of real estate due to this novel coronavirus. The advisory issued by the government to avoid social activities is certainly going to impact real estate however, digital launches might uplift the developers’ confidence and help in revival of the real estate sector. Developers not under too much liquidity pressure would still be in a better position to handle the risk including low collections and hindrances in project execution as they would be able to absorb cash flow disruptions arising from prolonged outbreak. Further, in terms of the prevailing uncertainty, Judicial Interpretation in respect of contracts concerning unanticipated happenings with varied and nuanced approaches are vastly based upon the nature of the contract and the language of terms and conditions under the contract. Thus, in relation to real estate, it is pragmatic for parties to contracts to thoroughly analyze their contracts from legal parameters to protect the parties on any side of the performance, distribute risk prudently and if required, to protect the sanctity of the contract, the parties can consider devising a plan for the renegotiation of terms of the contract.