Force Majeure Clause: Meaning, Clause in RERA and Impact on Homebuyers

Uncertainty is the only certainty there is, And knowing how to live with insecurity, Is the only security. - John Allen Paulos

Like the rest of the world, India is also reeling from the effects of the Coronavirus pandemic as its effect has reached commerce and business alike. The real-estate sector is one of the largest sectors hit due to this. Loads of projects are being delayed due to the large-scale epidemic nature of this virus, and the reverse migration of labourers to their hometowns. 

The Indian Contract Act, of 1872 has a list of situations in which the ‘Doctrine of frustration’ may excuse performance but it is rarely in the investor’s interests since the situations mentioned are general and do not pertain to the case in question. In order to correct this shortcoming, the Force Majeure Clause came into existence. From a contractual perspective, the Force Majeure Clause alters parties’ obligations in the event of natural or extraordinary situations like a cyclone, natural fire/wildfire, flood, war, earthquake, tsunami or drought.

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Force majeure, under RERA Act, means situations where natural disasters like cyclone, natural fire/wildfire, flood, war, earthquake, tsunami, drought, or any other nature-caused calamity, which affected the regular operation of a real estate project. 

In case of a Force Majeure event, under the Real Estate (Regulation and Development) Act, 2016 (RERA Act), section-6 talks about the force majeure condition, where it gives a detailed description about how the registration which is given by the Real Estate Regulatory Authority (RERA), could be extended, in case a promoter applies for the same purpose. 

The most important aspect that needs focus here is, the point that states ‘any other nature-caused calamity’. Therefore, naturally, Covid-19 also comes under this category. In May 2020, the Government announced an extension of the registration period by nine months along with complete waiving of interest for the late hand-over of possessions. The ministry also provided an extension of the validity of the registration and the completion date, suo-moto, by six months, for all real estate projects registered under RERA Act, which were expiring on March 25, 2020.

What Does Force Majeure Mean?

The word Force Majeure means superior force in French. The term force majeure is described in Black’s Law Dictionary as “an event or effect that can neither be predicted nor managed/avoided.” According to law, this term basically refers to unforeseeable circumstances which make any project commercially impossible and prevents people from performing their contractual obligations. 

The aftermath of large-scale disasters like Hurricane Katrina in 2005 and Covid-19 recently, which is still going on, there arises a need to carefully plan for unexpected situations by negotiating meeting contracts. This might include things like - in case of an emergency, a cancellation of a meeting will be possible without any liabilities, in the form of cancellation fees or whether the meeting can continue in the event of low attendance. Once these factors are cleared and well-understood, this will arise as a key tool in order to mitigate risks in challenging situations. A carefully negotiated Force majeure clause will provide power and flexibility to you during emergencies and tackle the situation in a way to minimize loss for all parties associated. 

The concerned parties can draw up a carefully negotiated Force majeure clause to be able to be more flexible during times of crisis. This can be done in presence of or without the assistance of legal counsels. Now the question arises what exactly falls under the purview of ‘unforeseeable circumstances”? Often called an ‘Act of God’ clause these provisions natural disasters like hurricanes, floods, storms, terrorism, labour strikes and medical epidemics and outbreaks like COVID-19 recently i.e. situations in which we have no control.  But there usually lies a catch in court-rooms such that they strictly follow the exact events listed and do not provide any breather for any similar event to what is listed when they assess the performance of a party. Thus it’s imperative to take into consideration things like local weather, limitations, risks et cetera at the project location.

Force Majeure Clause

The Indian Contract Act or the common law does not exactly have the provisions for what to do in case of unforeseeable circumstances and this might lead to a huge loss for all parties involved in a project. Common law contains doctrines of “impracticability” and “frustration of purpose” which rarely helps the investor’s cause. Therefore, nowadays it is always advisable to include a force majeure clause in the contract. 

Often called the ‘Act of God’ clause, this provisions natural disasters like hurricanes, floods, storms, terrorism, labour strikes and medical epidemics and outbreaks like COVID-19 recently i.e. situations in which we have no control.  But there usually lies a catch in courts such that they stringently follow the exact events listed and do not provide any breather for any similar event to what is listed when they assess the performance of a party. Thus, it’s imperative to take into consideration things like local weather, limitations, risks et cetera at the project location.  Therefore, it’s advisable for meeting planners to draw up a carefully negotiated force majeure clause in order to achieve more flexibility during emergency situations. 

Force Majeure Clause in RERA

The whole world is reeling under the effect of the COVID-19 and India is no exception. On 13^th May, 2020 Indian Ministry of Housing and Urban Affairs issued an advisory to all states and UTs to invoke the force majeure clause by increasing the registration period of all real estate projects by six months. Invoking of the Force Majeure clause under the Indian Contract Act will benefit the developer in the following ways:

• Extending the period of registration by six months automatically with an option to extend by additional three months based on the discretion of the regulatory authority.
• Waiver of fees for this period
• A time limit to comply will automatically be the same as the time of the force majeure
• This Force Majeure period will be treated as a period of moratorium, to calculate interest for delayed completion and possession of the project. Now, this has been extended to homebuyers.
• Dates of possession of properties that are mentioned in the registered agreements for sale and new registration of agreements for sale are extended.
•  Extension of dates for certain other compliances such as the transfer of title

The RERA 2016 Act only mentions extending the registration due to Force Majeure but all other entitlements that come from this will have to be specifically drafted by the State Regulatory Authorities. 

But, while this may be a boon for developers and investors, the Force Majeure Clause has little to offer to those who are buying a home. 

How Will The Force Majeure Clause Impact Homebuyers?

According to a survey by Track2Realty, 92% of homebuyers have no problem with the Government regulations regarding the extension of registration periods to builders by six months but they are feeling left out in a lurch. The Indian buyer sure understands that the lockdown due to Covid19 was something nobody could expect and the extension is logical, but a considerable 54% is not convinced with the scope of an extra three months additional extension. The wide-spread sentiment is that it is only justified that the buyer also gets an equal leeway in this whole process. The point is why is the homebuyer not included?  The builder's obligation towards home- buyers, like interest on late possession of house is waived but the home buyer's EMI including interest is compounded. Are they not affected by the lockdown also?

Honestly, this sentiment is not unfounded because like the developer, the buyer has also been hit with sudden delays in possession by at least nine months in addition to the pressure of EMIs in face of salary cuts and loss of jobs. Though RBI regulations allow banks to put a six-month moratorium on the EMI payments, there is no waiver unlike for builders who do not have to pay any interest for the delay in handing over possession. The EMI will be added to the whole tenure of the term loan with compound interest.

Home buyers are now demanding consideration over restructuring of home loans, so that they can be helped with the deferment of EMIs, without undertaking any additional costs. They are demanding an exit clause that does not include any penalty, in events of Force Majeure. This came into the light since many running projects were already delayed due to the impact of pandemic. 

Can Buyers Cite The Force Majeure Clause for Non-Payment of EMIs?

No. In the face of the Corona pandemic, the Government has put out a series of notifications regarding the complete waiving of interests for the builders but is largely silent on this unjust exclusion of the middle-class mass from this safety net.  Delays in projects are not the only thing that worries buyers. The middle class is facing salary cuts and job losses with home loan interest adding into the burden. The government has announced EMI moratorium spanning for six months for buyers but they ultimately would have to pay extra if they choose the moratorium. The Indian middle class do not want a total EMI waiver but to burden them with a compounded interest is simply an extreme lack of consideration for the masses. The force majeure relief should have been applied to the buyers too since builders are not the only one crippled by the pandemic. But what would seem like a bummer for borrowers, a job loss because of unprecedented circumstances cannot be cited for not paying EMI. Basically, this clause definitely relieves the corporate sector but has created additional burden on the common man who, when unable to pay EMIs will cripple the investors too. An order of balance between the buyer and the developer is the need of the hour.

The Government of India has declared the Coronavirus as a Force Majeure event and has definitely provided relief to investors and real estate companies. With the new mandate, all interests have been waived but on the other hand due to late possession, the middle class is reeling under the rent pressure in addition to threats of job loss and salary cuts. Though banks are holding a 6-month moratorium, the amount has to be ultimately paid with compounded interest. Everyone has been affected by the Coronavirus and the Government needs to realize that the common man also needs some breather in order to not get overly burdened. Too much pressure on the middle class will mean inability to pay EMIs which will cripple the investors anyway. Surveys show that the common man wants leeway into this real estate setup, especially in cases like the force majeure clause which will create a balance. For more information, please visit NoBroker legal services by clicking below.

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