Real Estate in Pandemic

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Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, More generally buildings or housing in general.

The Real Estate sector was already facing severe crisis since last three years, and the Lockdown will further adversely impact the industry. Prior to outbreak of this Pandemic and imposition of the Lockdown, barring residential sector, other sectors such as commercial leasing, logistic parks, co-working and co-living had shown remarkable growth in terms of development and strategic investment. The national lockdown to curb the spread of the novel coronavirus pandemic has stalled all businesses in India, barring essential services.

The sector, according to analysts and company executives, faces problems of three kinds: Labour Financial Demand The sector has been facing a liquidity crunch since payment defaults by IL&FS Group in 2018, leading to a pile-up of unsold apartments. That, coupled with an economic slowdown, stalled a nascent recovery in the sector from the disruption caused by Prime Minister Narendra Modi’s cash ban and a stricter housing law. Finance Minister Nirmala Sitharaman announced the creation of a fund to provide financing to many stalled housing projects. Here are three factors, which according to analysts and company executives, that are impacting the industry the most.

Labour Issues

“The human resource is largely still at construction sites, and instead of keeping them in a ‘lockdown’ situation, giving them some activity will also keep them occupied—as also help avoid major economic losses as a result of stoppage of work at sites,” Niranjan Hiranandani, president of National Real Estate Development Council, said in a statement. Irfan Razack, Chairman and managing director of Prestige Estate Projects Ltd., concurred. He said that a small component of migrant labour among major property developers have gone back home, adding that a labour shortage won’t impact work. Anuj Khetan, director of the margins if workers stay on payrolls, and how would companies get back the contract workers who have migrated back to their hometowns in the absence of work
Anuj Khetan, director of the Mumbai-based Vijay Khetan Group, said, geography plays a major role as most migrant workers come from Uttar Pradesh and Bihar. “Since trains have stopped running and state borders are sealed, migrant workers aren’t able to return. Hence, getting the labour back would not be a major issue once the lockdown is over.”
Other companies said they’re providing shelter and food for the labourers stuck at the sites. “We have created a shelter for around 2,000 of our workers at various projects and discouraged them to travel back home during the lockdown by ensuring adequate food, water and sanitary supply at these shelters,” Kamal Khetan, chairman and managing director of Mumbai-based Sunteck Realty Ltd., told Bloom

Real Estate Legal Issues Due to Coronavirus –

Force majeure and the law of frustration: Force majeure clauses allow for parties to get out of certain obligations in the event of unforeseen or uncontrollable events, but just how the clauses are worded is critical. Leases generally don’t contain force majeure clauses allowing parties to end the lease, unlike development agreements or construction contracts, which often do. Instead, if prevented from occupying their premises, tenants may look to the doctrine of frustration provided under Section 56 of the Indian Contract Act, 1872 to see if that can help get them out of their lease obligations.

However, frustration is a high bar: a contract will be frustrated if the circumstances are changed after the contract is made, that renders it impossible to perform any obligation or the obligation is radically different to that originally envisaged when the contract was made.

In the cases of Dhruv Dev Chand v. Harmohinder Singh[1], and Sushila Devi v. Hari Singh[2], the Supreme Court has held that the doctrine of frustration can be applied to leases. In lieu of real estate, lease frustrations by a tenant are bound to be reason with regard to coronavirus in India. This is because, during this period, a tenant is unable to occupy and/or use the premises (which seems the likely scenario at the moment).

Suspension and/ or Withholding of rent: Most leases don’t allow the tenant to suspend and/or withhold rent regardless of the circumstances. In such situations, it would be prudent to communicate the concern with the lessor before such a decision is taken, in order to avoid future disputes.

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Insurance: It’s unlikely that most tenants will have business interruption insurance that will cover this scenario. Tenants may have procured business interruption policies, but this is usually linked to property damage. Non-damage business interruption cover (which might cover the impact of an epidemic) is available in the insurance market, but not commonly bought. In India, the government has termed coronavirus a “notified disaster”. Fulfilling the formal requirements of many insurance policies, it has provided a ray of hope to those who have business interruption cover. They may now be able to claim under it, depending on the specific terms of their policy.

In India, only in the most exceptional cases will the courts enforce keep-open covenants by ordering specific performance. Where theoretically claiming the damage by landlords is hasslefree if a tenant breaches its keep-open covenant, it will be difficult for a landlord to substantiate its loss. It is particularly difficult if there are no turn-over rent provisions in the lease. For example, how do you value a drop in footfall? The remedy available for a landlord is “specific performance”. This is a court order obliging the tenant to re-open the premises and recommence trading.

Landlord duties amidst Legal Issues Due to Coronavirus

We expect that a court would view the compliance-with-statute clause as taking precedence over the keep-open provisions in the lease. This may, however, give rise to a further dispute as to whether a landlord should expect to continue to receive rental income under the lease provisions as rent suspension clauses (not very common in regular leases) will normally apply only in the event of any material damage and destruction to the premises. It is likely that landlords will be able to enforce rental provisions: one could argue that the tenant’s business could continue to trade online, or it could implement agile working policies. But it remains to be seen how courts would treat this should any tenant dispute the matter.Nevertheless, in a confirmed case of coronavirus COVID-19, measures will primarily be dictated by the government, and the best approach to comply with health and safety obligations will be to follow these dictations.

Occupier’s liability amidst Legal Issues Due to Coronavirus: A landlord may be in control of whole or any part of the premise and so he automatically is liable to take the requisite measures concerning any person, be it invited/uninvited entering the premise. It is unlikely that any additional liabilities will result from such legislation.

Way forward

Even after the Lockdown is relaxed, the real estate industry will continue to face challenges as business may not be as seamless as it was earlier due to various factors, including social distancing, shortage in supply chain of essentials or non-essential commodities and goods, non-availability of construction raw materials or migrant workers. Further, there is a high possibility that different Courts in India may view the impact of the Pandemic on contractual obligations of parties differently, thereby creating further conflicts and adversities.

Considering the above, the Central Government should consider modifying the DMA, to address the conflict which may arise on account of the parties inability to perform their obligations because of the P and balancing the interest of all stakeholders. The Government may also consider appointing a special authority to assess if non-performance of a contract by a party was directly or indirectly linked to the Pandemic.

The industry is expecting a reasonable relaxation and extension of time in regulatory compliances, including fast track approval process to reduce project costs. Developers are hopeful that the government would reduce the statutory / development charges, premiums, GST and stamp duty and also provide input tax credit benefit to the sector for atleast one year to tide over the existing cash crunch. The three months moratorium to be provided by banks to developers and apartment purchasers, as well as extension provided by RERA to developers beyond three months, is being sought to be further extended for a reasonable period.

Image from https://profinanceblog.com/real-estate-and-covid-19-how-to-make-a-house-sale-during-the-pandemic.html

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