COVID 19 – Understanding The ‘Force’

As India enters an extended nation-wide lockdown, there is still uncertainty of what lies ahead even though partial relief is given for construction activities to commence from 20 April 2020, for projects in rural areas and those situated within a Municipal Corporation, where workers and laborers are already staying on the site. Malls and retail outlets are reeling under the pressure of high rentals despite having shut shop. The hospitality sector is seeing an unprecedented low There is no visibility on when the Indian economy will stabilize. The cascading impact of the pandemic on the financial system has nudged transacting parties to re-examine their contractual positions. It is essential to examine how the present situation leading to the suspension of business has affected certain real estate contracts.

Many wonder if provisions of law or their contract would come to their rescue in the current situation, which has forced the closure of the business. Many are treating this as an event of force majeure or act of God and are seeking to suspend their respective obligations under their contracts.

Force Majeure is a French term that means “Superior force”. Act of God as is interpreted by Indian Courts only covers scenarios that are due to natural forces such as earthquakes, floods, etc, free from human intervention. Force majeure does not simply mean occurrences outside the control of the parties to a contract. The meaning, and applicability of force majeure, would depend on respective contracts, and the events envisaged therein by both the parties.

Section 32 and 56 of the Indian Contract Act, 1872 (Contract Act) lay down the statutory basis for force majeure and doctrine of frustration, respectively. The doctrine of frustration applies when an unforeseen event not attributable to any party occurs subsequent to the execution of a contract and is so fundamental that it strikes to the root of the contract, making performance under it impossible.

It is a settled position of law that the provisions of the Contract Act do not apply to a lease, as the same is governed by the Transfer of Property Act, 1882 (TOPA). Therefore, the protection available under Section 56 of the Contract Act relating to the frustration of a contract would not apply to a lease.

Section 108 of TOPA provides the freedom to parties to cover events in the lease deed which would constitute force majeure. In the event, the lease deed is silent on the force majeure aspects, then Section 108 comes into play which only covers a situation when the property is destroyed or is rendered substantially and permanently unfit for the purposes for which it was let on account of fire, tempest or flood, or violence of an army or of a mob or other irresistible force. Therefore, whether the present pandemic would constitute a force majeure event, would depend on the terms of the lease deed executed between parties.

However, in case of agreements to lease (i.e. where a lease is not granted but agreed to be granted at a later date) and leave and license agreements, the position in law is different.

As an agreement to lease, is merely an executory contract and no right in immovable property is created, it is thus governed by the Contract Act and not TOPA. As for leave and license, the same is governed by the Easements Act, 1882 and thus the provisions of TOPA do not apply.

Indian judiciary has laid down the principle that where an agreement to lease or leave and license agreement contemplates the occurrence of “force majeure” and provides for consequences, the provisions of the agreement would prevail over the provisions of Contract Act. Thus, if the contractual provisions do not cover a situation such as the present pandemic, then the parties will have to perform the contract or face the consequences for its breach.

Real estate developers with respect to under-construction projects will have to assess the impact of the present situation on the validity of RERA Registration and delivery timeline committed to allottees.

The Real Estate (Regulation and Development) Act, 2016 (RERA) under Section 6, provides for the 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 cannot take cover under RERA Authorities to seek an extension of project registration.

That said, developers can breathe a sigh of relief as Maharashtra, Karnataka and TN RERA Authorities have extended registration of all real estate projects by their circulars. Further, these authorities have also extended the timelines for RERA compliances.

Vis-à-vis allottees in a real estate project, developers will have to look at individual RERA Agreements with the allottees to ascertain whether events beyond the control of the developer entitle a developer to extend timelines for handing over possession of units in the project (provided such flexibility is allowed under the model form agreements provided by each State).

Although law relating to “doctrine of frustration” and “force majeure” has evolved over time, the present Covid-19 pandemic will play a major role in shaping contracts going forward.

Where agreements lack clarity, it remains to be seen how courts weigh “business continuity” against “access to premises” in adjudicating matters related to the suspension of obligations of transacting parties in leases/leave and license arrangements.

As parties attempt to mitigate their burden, they will have to turn to their respective contracts to assess how far such mitigation is possible. That said, to make business sense, parties should look to at an amicable resolution rather than taking matters to court.