Introduction
Robert Lee Frost, an American poet and Pulitzer Prize winner, had once said that “home is the place where, when you have to go there, they have to take you in”. However, this does not seem to be the case for the home-buyers in India in any near future. They presently, only wonder that for how long period has their welcome in much-wished abodes is protracted by the several legislative acts and novel pandemic COVID-19.
Home is a basic yearning and regardless of the ticket size, almost all of us end up spending a large chunk of either our savings or commit a substantial part of our future income to the loans and interest payments. However, despite due payments by the home-buyers and complete financing of the projects by them, the completion of the projects and handing over of possession has been delayed for years by the developers. Thereafter, the home-buyers were often stranded in availed legal remedies before the Consumer Forums under the Consumer Protection Act, 1986. Subsequently, to alleviate the miseries of the home-buyers, the legislature enacted the Real Estate Regulation Act, 2016 (“RERA”) as a special statute for regulating the real estate sector. It commissioned the Real Estate Regulatory Authority as the supervisory and regulatory body. Inter-alia, RERA regulated the funds raised for the project[1] and provided a remedy of return of the amount paid along with compensation where the possession of the project has been delayed by the developers.[2]
To further relive the home-buyers from the miseries of delay, they were included as financial creditors under the Insolvency and Bankruptcy Code, 2016 vide the amendment in the year 2018, namely, the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. As a consequence of this, an individual home-buyer could file an application before the National Company Law Tribunal (“the Tribunal”) for the defaults of the Corporate Debtor (“Real Estate Developer”). The remedy under the Code assured the home-buyers an efficient revival of Real Estate Developers and if not, the entity would be liquidated and the debts of the home-buyers along with other creditors would be distributed. The remedy for its efficiency turned to be most-favoured remedy by the home-buyers who had been suffering for years by then under different forums across the country.
However, recently, first, the fidget and half-baked amendments by the Government in the Insolvency and Bankruptcy Code, 2016 (“the Code”) before the breaking of COVID-19 and during the COVID-19 and second, force-majeure, halting the work on pending real estate projects with no hope of revival in near future, has impeded the hopes of home-buyers for any timely delivery of possessions of their under-construction homes.
In the present article, the author examines these legislative policies and the impact of COVID-19 on the home-buyers and the pending real estate projects.
Legislative policies
Before the Pandemic: As above-stated, the Code provided an efficient remedy to the home-buyers vis-à-vis other remedies under the Consumer Protection Act, 1986, Real Estate Regulation Act, 2016 and criminal prosecutions for breach of trust and cheating under the Indian Penal Code, 1860 (collectively referred as “existing remedies”).
However, on 28.12.2019, the Government had promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019. The Ordinance had been approved by the Parliament on 13.03.2020, just before the lockdown, vide passing of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 (“IBC Amendment, 2020”) with effect from 28.12.2019. Section 3 of the IBC Amendment Act, 2020 amended section 7 of the Code by imposing a limitation to applying for initiation of the Corporate Insolvency Resolution Process (“CIRP”) against the defaulting Corporate Debtor. It mandated that the allottees shall be 100 or 10% of the total allottees, whichever is less, of the “same real estate project” to initiate the CIRP.
Further, the amendment was given retrospective applicability and thus, pending applications, which had not been yet admitted by the Tribunal had to be “modified” in terms of the amendment within a period of one month. If the parties failed to modify their applications within given time, such applications were to be deemed as withdrawn. It is also pertinent to note that the minimum threshold for allottees has been mandated when there exists no public record of such allottees to assist the process of consolidation and meet the newly imposed threshold.
This put the remedies to the home-buyers under the Code to a virtual suspension since 28.12.2019 as since then the home-buyers were merely engaged in consolidating other allottees and keep their applications alive. Now, the COVID-19 has taken the baton of misery for an indefinite time.
During the pandemic: In the wake of the pandemic, one, the government has vide notification dated 24.03.2020 under section 4 of the Code, raised the amount of default under section 4 of the Code from Rs. 1 lakh to a high amount of Rs. 1 crore for the financial creditors, the operational creditors and the corporate applicants.[3] Thus, the allottees have been grind again along with other creditors. The home-buyers who wish to approach the Tribunal will now need to have a default of Rs. 1 crore which is significantly high vis-à-vis earlier amount of Rs. 1 lakh.
The miseries are further supplemented by the fact that neither does the notification clarify whether the raised amount will continue to apply even after the pandemic nor does it clarify whether the amendment will or will not apply to the pending applications. If the amendment is deemed to have retrospective applicability and/or continued after the lockdown, the agony of home-buyers can be well-anticipated.
Additionally, it should be marked that the home-buyers had in the writ petition, titled, Manish Kumar v. Union of India & Anr[4] challenged the constitutional vires of section 3 of the Ordinance. However, given the increased “default” threshold, even if the Supreme Court of India in the pending writ petition, holds the above-imposed minimum threshold in terms of the number of allottees as unconstitutional, this increased default threshold, particularly, if continued post-pandemic, will severely shackle the remedy of the individual homebuyers, as often an individual homebuyer may not have a high debt of one crore rupees against a Real Estate Developer.
Two, the Government has recently suspended the initiation of fresh insolvency proceedings under section 7, section 9, and section 10 of the Code, up to one year, depending on the circumstances. It may be noted that the remedy for the home-buyers under the Code had been virtually suspended on 28.12.2019. As afore-said, before the pandemic, the home-buyers were merely engaged in consolidating other allottees and modifying their pending applications. Now, a blanket suspension on fresh initiation of insolvency proceedings, despite the debt having no relation with the pandemic is merely excessive. Further, excluding COVID-19 related debt from the definition of “default” makes suspension nearly redundant. It merely ostracizes the creditors, including home-buyers of their remedy under the Code, even though their debt may not have any relation with the pandemic.
Thus, at present, as may be noted, any relief under the purported efficacious legislation i.e. speedy revival of the corporate debtors(s) and thereafter the liquidation, appears abysmal for already distressed home-buyers. They are facing the brunt on both the fronts, i.e. delivery of possession by the real estate developers and delivery of remedy/justice by the Courts. It must be remembered that delay in possessions by the builders and delay in remedy before the existing forums were the principal causes for their inclusion under the Code. However, these amendments, at least, inadvertently, elongates the proceedings under the Code and compels the home-buyers to resort back to the original remedies.
Force majeure
The force-majeure are conditions wherein when the performance of the contract for a party becomes too onerous or impossible, a party is excused from the performance of the contract either permanently, i.e. if the time was the essence of the contract, or, till the period force majeure conditions subsist. Such events are unforeseeable and unavoidable despite the best efforts of a party.[5]
When a contract has a force majeure clause, section 32 of the Indian Contract Act, 1872 can be invoked by such party and when a contract does not have a force majeure clause section 56 of the Indian Contract Act, 1872 can be invoked. Further, RERA defines force majeure for extension of timelines of the real estate project as “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”.[6]
The Builder-Buyer Agreements often have these force majeure clauses. The current situation befits the invocation of these force majeure clauses by the Builders. However, to note, on 13.05.2020, the Union Finance Minister Mrs. Nirmala Sitharaman, has finally declared to treat pandemic COVID-19 as a force majeure for the real estate projects. The declaration has excused a delay of six months and it may be further extended for 3 months by the regulatory authorities, for the projects which were due to be completed on or after 25.03.2020. Thus, the invocation of these clauses by the builders has now been statutorily ratified by the Government vide above-noted declaration.
Howsoever, inadvertent, unavoidable, and reasonable, this extension of projects in light of the pandemic may be, it adds salt to the wounds of the home-buyers. The projects will now be further delayed for at least six to nine months. Further, it must be noted that the notification provides for a general extension of projects. If a builder further wants to seek an extension he can seek an additional time of maximum one year, by individually applying under the RERA.[7]
Given the grinding halt in activities, seeking further extensions by the Real Estate Developers after the expiry of six to nine months is highly likely for several reasons. One, the happening of reverse migration, meaning the migrant labourers, which forms a major chunk of the workforce in real estate projects, have migrated to back to their hometowns. Thus, the real estate developers may face an acute shortage of the manual workforce until the situation normalises. Two, the supply chains of the construction material have been disrupted due to the lockdown. Three, the paying capacity of the home-buyers has also crunched and defaults in instalments can be well-anticipated due to loss in income and job insecurity. Four, defaults in payment of instalments will hike the burden on the real estate developers as the revival of work will incur escalated costs. Default in payment will dwindle the hope of efficient revival of the work. Additionally, the COVID-19 appears nearing no cessation anytime soon. The opening of the real estate sector to normalcy will be one of the last on the priority list, considering their non-essential nature at such time.
It may be noted here that the above-said declaration by the Finance Minister though provides relief to the Real Estate Developers, but does not expressly provide any relief to the home-buyers, except for a possibility of timely delivery of projects, in which the Developers have majority failed. It does not excuse the home-buyers from non-payment of the instalment for this interim period if any becomes due. The notification is akin to a moratorium on the right of the buyers whereby the home-buyers cannot cancel or make any claim for delay in delivery of possession. Instead, they will have to continue bear rents, EMI’s and interest thereon.
Alternatives
Inter-alia, other sectors like transport, entertainment, retail, agriculture, aviation, etc. the real estate sector is also majorly hit by the pandemic COVID-19. However, for the real estate sector, the legislative policies have further flustered the miseries of the home-buyers, particularly, when there were alternatives available. These alternatives may be briefly noted as follows:
One, the legislature could have made the IBC Amendment Act, 2020 applicable only to the future applications under the Code. Further, instead of increasing the threshold in terms of the number, the legislature could have increased the default amount because to this date, there exists no public data to assist the home-buyers in consolidating other allottees. It can be only hoped that the Government will take some measures towards the same during the suspension period. Moreover, the government could have increased the penalty for malicious applications under section 65 of the Code instead of the increased threshold in terms of numbers.
Two, instead of blanket suspension of the insolvency proceedings, the Government could have instead suspended only the fresh proceedings for those creditors or home-buyers whose default arise due to the pandemic. A precise definition of “default” arising because of the pandemic is not possible and in such circumstances, the Tribunal who would sit with both eyes open and would not turn Nelson’s eye to the defences raised by the Developers was best suitable to be left to admit the insolvency proceedings as per facts and circumstances of a case.[8]
Concluding Remarks
Thus, as may be noted from the above discussion, the suffering for the home-buyers was implanted on 28.12.2019 with the promulgation of the Ordinance. The COVID-19 has extended the same to an indefinite time.
In closing, it may be only hoped that the government will give some relaxations for the home-buyers under the Code, given their sufferings all through. The future notification or the amendments, like suspension of triggering of the insolvency proceedings may be applied only to future application i.e. applications whose default is made on or after 25.03.2020, instead of a blanket suspension of fresh proceedings. The Courts should duly check that builders already in default do not cover or find an escape along with bona-fide defaulters.
Similarly, the RERA authorities should while exercising the powers of extensions under the Code, may suo motu direct the Builders to excuse the default of the home-buyers in payment of instalments during the said period. Further, the Real Estate Developers should not be allowed to invoke penalty clauses for such defaults like charging of heavy interest or putting such home-buyer in the default list.
[1] Section 4(2)(l)(D), Real Estate Regulation Authority, 2016.
[2] Section 18, Real Estate Regulation Authority, 2016.
[3] S.O. 1205 (E), Notification, Ministry of Corporate Affairs.
[4] Manish Kumar v. Union of India, Writ Petition (C) 26 of 2020.
[5] Section 56, Indian Contract Act, 1872.
[6] Section 6, Real Estate Regulation Act, 2016.
[7] Section 6, Real Estate Regulation Authority, 2016.
[8] Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors., para. 56, Writ Petition (C) No. 43 of 2019.
[The article has been authored by th founding editor of Litigating Hand and first appeared on Taxmann.]