The Real Estate sector in India has been experiencing a downturn for quite some time. Severe liquidity crunch has plagued this sector and so have policy reforms, legislations and structural changes. These issues were merely the tip of the iceberg, as the Covid – 19 virus opened up a new front for the real estate sector.
Propelled by the burgeoning crisis, the Confederation of Real Estate Developers Association of India (“CREDAI”) requested the Ministry of Housing and Urban Affairs to include Covid -19 as a condition of force majeure under Section 6 of the Real Estate (Regulation and Development) Act, 2016 (“RERA”) and that loans by real estate developers should not be classified as Non-Performing Assets in case of default on interest or principal repayment.
Force Majeure under RERA
Section 6 of RERA provides that if an event of force majeure (i.e. a case of war, flood, drought, fire, cyclone, earthquake or any other calamity caused by nature affecting the regular development of the real estate project) occurs, then on an application made by the promoter, the authority after considering the facts of the particular case (including that there was no default on the part of the promoter) can extend the registration for not more than one year.
It can be argued that Covid – 19 could possibly be included in “any other calamity caused by nature” in the explanation to the section. It is pertinent to note that Ministry of Finance, Department of Expenditure Procurement and Policy decision vide its office memorandum dated 19th February, 2020 clarified that the disruption of the supply chain as result of the spread of corona virus should be considered as a case of “natural calamity” and force majeure clause may be invoked.
The above section merely enjoins a delay in the performance of the contract and does not release the developer from its contractual obligations. The above section also makes it abundantly clear that facts of each case would be considered separately, and decisions taken. The period of extension in the case of Covid – 19 could possibly be not more that 3 to 4 months.
Various remedial steps taken by statutory and regulatory authorities to alleviate the difficulties of the Real Estate Sector
Ø The Maharashtra Real Estate Regulatory Authority vide an Order dated 2nd April, 2020 inter alia relying on section 6 of RERA, extended the period of validity for registration of MahaRERA Registered projects where completion date, revised completion date or extended completion date expires on or after 15th March 2020 by three months. Further, the time limits of all the statutory compliances, which were due in March / April / May was also extended to June 30, 2020.
Ø The Karnataka Real Estate Regulatory Authority vide a circular dated 4th April, 2020 extended the period of validity for registration of K-RERA Registered projects where completion date (including revised completion date) expires on or after 15th March 2020 by three months. Further, the time limits of all the statutory compliances, which were due in March / April / May was also extended to June 30, 2020.
Ø The Uttar Pradesh Real Estate Regulatory Authority on 14th April, 2020 has decided to extend by three months the date of completion of the projects where the date of completion is between March 15, 2020 and December 31, 2020.
Ø The Reserve Bank of India (“RBI”) vide a press release dated 27th March, 2020 has directed all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies and micro-finance institutions) to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. Further, in respect of working capital facilities sanctioned in the form of cash credit/overdraft, lending institutions have been permitted to allow a deferment of three months on payment of interest in respect of all such facilities outstanding as on March 1, 2020. It has also been clarified that moratorium/deferment provided will not result in asset classification downgrade.
As per the statement of the Governor (RBI) dated 17th April, 2020, it has been decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm will exclude the moratorium period. Further, the RBI allowed non-bank financial companies to extend the date for commencement of commercial operations (DCCO) for loans given to commercial real estate by additional one year, over and above the one-year extension permitted in normal course, without considering it as restructuring. Banks had been directed to provide similar relief earlier.
Ø The Securities Exchange Board of India vide a circular dated 23rd March, 2020 has extended the due date for regulatory filings and compliances for Real Estate Investment Trusts and Infrastructure Investment Trusts for the period ending March 31, 2020 by one month over and above the timelines, prescribed under SEBI (Infrastructure Investment Trusts) Regulations, 2014 (InvIT Regulations) and SEBI (Real estate Investment Trusts) Regulations, 2014 (REIT Regulations) and circulars issued thereunder.
Relaxation on Construction activities
By an Order dated 15th April, 2020, the Ministry of Home Affairs has issued detailed guidelines for allowing certain additional activities to be undertaken from 20th Aril, 2020 in non – containment zones (containment zones are required to be demarcated by the respective States and Union Territories) across India, subject to all preparatory arrangements with regard to social distancing being implemented. One of these additional activities include certain construction activities which are as follows:
Ø Construction of roads, irrigation projects, buildings and all kinds of industrial projects, including MSMEs, in rural areas, i.e., outside the limits of municipal corporations and municipalities; and all kinds of projects in industrial estates.
Ø Construction of renewable energy projects.
Ø Continuation of works in construction projects, within the limits of municipal corporations and municipalities, where workers are available on site and no workers are required to be brought in from outside (in situ construction).
Each State and Union Territory in the country will decide in which areas and to what extent the above activities can be allowed. However, this may relieve some pressure from the real estate sector. It remains to be seen whether real estate hotspots like Mumbai, Delhi and Bangalore will be permitted to allow construction activities considering that they are Covid-19 hotspots as well.
As can be seen from the above discussion, the situation with respect to Covid -19 is dynamic, and the real estate sector paradigm is bound to change as a result. Therefore, we will keep you updated in case of any further decisions, measures, notifications by the Government and other authorities with respect to the real estate sector.
We trust that the above update is helpful for you. If you require any further clarifications, please feel free to contact us.
Zerick Dastur <email@example.com>