On-going crisis in the Real Estate Sector

Today, it goes without saying, what the real estate sector in the Indian economy is going through?This is the talk of the town being discussed in every householdand during short coffee breaks in offices. The consumersin the economy have devoted their substantial savings in building a security for themselves by investing in the real sector. On the other side it is worthwhile to mention, the amount of contribution made by the real estate sector in the form of taxes running in thousands of crores,  direct employment and indirect employment to crores of people. There are already various factors contributing to the crisis faced by the developers in the real estate sector which displays the builders and developers as a evildoer in public eyes. Making it short, these are the few factors which has led to the crisis;

Factors for crisis:

  • PRINT MEDIA
  • BANKING SECTOR- HIGH LENDING RATES
  • GOVERNMENT POLICY
  • DISRUPTED ELEMENTS IN THE SOCIETY
  • COURT DECISIONS


Effect of COVID-19

  1. Incapacity of Buyers to Fulfilits Obligations
    Before proceeding with the heading, it is important to understand the unprecedented human toll, COVID-19 virus has triggered into deep economic crisis. The Impact can be bigger than any other economy failure experienced before. It is where the GDP of the country has seen a marginal decrease as never experienced before in the past decades. In the present situation, the entire corporate and every segment of the society has taken a back step. As we know, with the immediate LOCK DOWN by the Government resulting in shut down of country, making everything standstill, has made it difficult for every segment to maintain their household vis-à-vis for companies to function and even maintain their employee and staff.

    But regardless of directions by the Ministry of Home Affairs, we have seen lay-offs, retrenchment, compulsory retirement etc. being floated in the employment status of every sector in the economy. Therefore, as a result of which, it has become impossible for any buyer to fulfil its part of the obligation under the builder buyers agreement or Agreement to sell etc. Moreover, with the burden of unemployment, the Government here has failed to show any signs of relief to this particular sector of society for releasing any financial burden. Incapacitated with the burden to choose between running the household expenses or to fulfil its part of the financial obligations, the generic law of nature attracts, whereby the basic necessity of clothing, food and shelter is always kept at priority. Thus, here with the explanation, the entire cycle of finance breaks resulting in with the next topic that I am about to share.
  2. Delay in Projects
    As discussed above, the real estate sector was already going through a tough phase, where this LOCK DOWN situation due to COVID-19 virus makes it worsened and more alarming. As we know, with the rising financial burden and downfall in the economy, the major issues in relation to delay in project arises out of the incapacity of the buyer to full its part of the obligation under the agreement. I have already elaborated on the incapacity aspect above, we can proceed further to understand the delay it will bring in completion of the ongoing projects  and other factors attributable for the delay.

    Every project is raised with its only motive to be delivered in the time bound manner. Time is the essence of every such contracts. With the process of raising a project, the journey begins from acquisition to delivery of flats/plots/built-up units etc. to their respective allottee/buyer. The repercussions of the LOCK DOWN has made a full stop to the real estate sector whereby the buyers are not in a position to proceed with the promised finances. The money received from the buyers in parts are eventually invested in the project alongwith the other finances attained by the developers from banks , financial institutions etc. In a normal trend seen in projects, before the completion, that is at the initial stages of the project, it is only 30% of the total inventory of the project is likely to be booked with the advances and rest is to be developed by the developers on the finances attained from banks, financial institutions etc. vis-à-vis results in completion of the project. Now in the present LOCKDOWN, entire cycle has come on halt. Importantly, it is the trust of the buyer that need not be shaken in these tough times and every development shall be informed to every buyer from time to time to keep the relationship healthy.
    Therefore, pace of construction at property projects due to the ongoing lockdown will mean delays and also affect sales.
  3. Compulsory payment to workers under MHA Guidelines
    As per the Order No. 40-3/2020-DM-I(A) by Ministry of Home Affairs, GOI dated 29.03.2020, the Chairperson of National Executive Committee made it mandatory for all the employers, be it in the Industry or in the shops and commercial establishment shall make payment of wages of their worker at their work places , on the due date without deductions for the period their establishments are under closure during the lockdown under the powers conferred under Section 10 (2)(I) of the Disaster Management Act(DMA), 2005. And as per Section 58 of the DMA, if any offence under the act is committed by the a company Then every person in charge of and responsible to the company for the conduct of the business as well as the Company shall be deemed to be guilty and be liable to be proceeded against and punished accordingly. Therefore, the development of projects heavily depends on migrant workers, wherein salary has to be paid by the developers/builders irrespective of the work or inflow of payments by the companies.
  4. Other factors:
    Reverse migration of labours.
    There will be marginal reduction of available labour force for execution of project including disturbance in chains such as raw material etc..
    Considering that the lockdown ends, there is no surety of migrant labours to be back at work in cities.
    Depressed pricing of the project.
    Lack in number of staff member to regulate the management of the projects.
    Escalation in prices of raw material such as cement, steel etc..
  5. Legal Implications
    Considering all the factors and a standstill status of the real estate anatomy, the consumer as well as the developer/builder is incurring irreparable losses. But , presently the developer/builder have far more reasons to worry considering that consumers have majorly held a position of sympathy and in many cases rightly so. However, the presently the situation is beyond the control of humankind and it has its own legal implications in the Real Estate sector as discussed below:
    Real Estate (Regulatory and Development) Act, 2016 (RERA):- The statute of RERA was enacted to promote and regulate the real estate sector and ensure sale of real estate projects etc. in transparent manner. The Section 3 of the Act provides that the projects which are ongoing on 25.03.2016 and for which competition certificate has not been issued, the project should be registered under RERA within 3 months from 25.03.2016.
    Now, the application for registration of projects (considering an ongoing project) requires to be filed under Section 4 of the Act, wherein under Section 4(2)(l)(C), the applicant i.e. the promoter or authorised person is required to submit a declaration supported by affidavit stating “ the time period within which he undertakes to complete the project… as the case may be

As per Section 5 (3) of the Act, the registration granted by the Authority shall be valid for a period declared by the promoter under Section 4(2)(l)(C) for completion of the project. Therefore, the project is registered for a period equal to the period declared by promoter to complete the project.

While, Section 6 of the Act grants extension of registration due to Force Majeure. RERA has in all its intent included Force Majeure as a ground to extend the period of registration in case of ‘Act of god’. The Section states that the registration granted under Section 5 may be extended for not more than one year, if :

  • Application by promoter is made for extension with fees due to force majeure
  • Without default of promoter
  • Based on facts of each case

The explanation to Section 6 defines the expression “Force Majeure” as war, flood, drought, fire, cyclone, earthquake or any other calamity caused by nature affecting the regular development of the real estate.

Therefore, RERA has made Force majeure as relief to the builder/promoter by extending the time to complete the project by extending the registration. COVID-19 situation is clearly a calamity by nature affecting the development of projects for reasons discussed above. On interpretation, the builders clearly have the extended time for the projects on application to RERA.

  • Consumer Forums (NCDRC, SCDRC, DCDRC)- Usually allConsumer Forums are inclined towardsinterpretations whichare read in favour of the consumersmaking the Developer stand at disadvantageous position. However, considering the present situation, it is fair and just that every builder buyer agreement be interpreted in wider sense to accommodate the plight of the builder wherein the factors responsible for the building of projects are effected beyond the control of the promoter/builder.
    The Consumer Protection Act protects the interest of consumers. A complaint can be filed for reasons give under Section 2 (c) wherein against a Developer/promoter, it can be filed on ‘Deficiency of service’ for non-competition of projects.
    Therefore, considering the present situation of COVID-19 and delay in completion of project for reasons discussed above during this situation cannot be termed as deficiency of service. As per Section 2 (g) of the Act ‘Deficiency’ is defined as “Fault”, “ imperfection”, “shortcoming”, ”inadequacy” in the quality, nature and manner of performance which is required to be maintained as per the contract or in regard to services. However, the Act of god cannot be a fault or shortcomings of a builder. This cannot be interpreted as a deficiency in law.
  • National Company Law Tribunal- The Insolvency and Bankruptcy Code, 2016was enacted to consolidate law relating to reorganisation and insolvency resolution of corporate persons etc. availability of credit and balance the interest of all the stakeholders etc,. The relevant provisions of the Act are Section 7 and Section 9. As per Section 6 of the Act, a financial creditor, an operational creditor or the corporate debtor may initiate corporate insolvency resolution process respect of a corporate debtor who commits a default.
    Section 7 read with Section 5 (7) deals with the initiation of corporate insolvency resolution process by financial creditor. And Section 9 read with Section 5 (20) deals with the initiation of corporate insolvency resolution process by operational creditor.

In regard to the Real Estate, the financial creditors are like allottee/buyers/financial institutions and operational creditors are like suppliers/any other to whom operational debt is owed. Section 2 (12) of the Act defines “Default” read with Section 6 of the Act as “non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor/corporate debtor”.

Considering the present situation, the NCLT should take a reformative approach in such times and leniently deal with the insolvency process against the Developer/ promoter.

  • Exemption by the Reserve Bank of India to the Builders/promoters
    The RBI notified a COVID-19 Regulatory Package RBI/2019-20/186 dated 27.03.2020 wherein regulatory measures were announced to mitigate the burden of debt servicing brought about by disruptions on account of COVID and to ensure continuity of viable businesses. The same are as follows:
  • The notification permitted all lending institutions such as commercial banks, NBFCs to grant a moratorium of three months on payment of all instalments falling due between 01.03.2020 and 31.05.2020. the repayment schedule for such loans as also the residual tenor will be shifted across the board by three months after the moratorium period. The interest shall continue to accrue on the outstanding portion of the term loan during the moratorium period.
  • In regard to the working capital facilities sanction in form of cash/overdraft, the lending institutions are permitted to defer the recovery of interest applied during the period 01.03.2020 upto 31.05.2020
  • Latest Amendment in Insolvency and Bankruptcy Code, 2016
    The Ministry of Corporate Affairs notified an amendment in March, 2020 in Section 4 of the Act wherein one crore rupees has been set as the minimum amount of default for the purpose of the Section. The Section previously provided that Insolvency resolution and liquidation for corporate debtors shall apply where minimum amount of the default is one lakh. However after amendment this amount has been increased to one crore. Considering all the above factors and legal implications, the Builder and the buyers are suffering at the hands of the present situation , therefore a reformative approach is the need of the hour towards the balance of equity.
Author Information
Rohit Gupta
Author: Rohit Gupta
Advocate

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