Covid-19: A force majeure for real estate

Venkatraman Balaraman, COO, Rustomjee Group, says real estate is the second largest employer of skilled and unskilled labour and is heavily dependent on the migrant population

Venkatraman Balaraman.
Venkatraman Balaraman.

World over economies are struggling to cope with the crippling impact of the coronavirus pandemic. Lockdowns, self-quarantines and isolation protocols have been enforced or recommended by governments globally. With non-essential services and sectors being closed, unemployment rife and businesses transitioning to digital platforms while still being ‘humanitarian’ and continuing with salaries to staff, it is not difficult to see that we are on the brink of an economic collapse.

In India, the migrant labour issue has further compounded the problems of containing the pandemic. At the same time, the immense exodus of migrant labourers from Tier I and II cities back to their native villages has brought to the fore the level of dependency that several sectors have on the hitherto ready supply of migrant labour. Real estate is the second largest employer of skilled and unskilled labour in the country and is heavily dependent on the migrant population. While construction activity has come to a virtual standstill in the lockdown period, the question now remains that even when the economy and non-essential sectors are reopened, how will the supply chain disruptions of labor, goods and materials used in construction projects be addressed? The situation that real estate sector is going through due to the Covid-19 pandemic can only be construed to be a force majeure.

Force majeure is a contractual concept that refers to an event or effect that cannot be anticipated or controlled. Contracting parties typically negotiate the scope of force majeure clauses to determine when a party will be excused of their performance, whether deadlines will be extended, and how the parties will allocate increased costs resulting from force majeure events. Force majeure clauses are fairly common in commercial development and construction contracts, including joint venture and financing documents. If the contract lacks a force majeure provision, or if the provision fails to address a particular event, such as a pandemic, specific default rules may apply depending on the jurisdiction, governing law and industry.

Real estate developers would be well advised to review their contracts with respect to force majeure. This would include reviewing all the provisions for force majeure in the contract; paying close attention to timing of any required notices of Force Majeure events; understanding the effects and limitations of a force majeure provision (e.g., extensions of time, exclusions of costs, caps on delays).

Moreover, developers should set up a monitoring system to keep track of COVID-19 outbreaks in the project area. They should also assess any associated supply chain disruptions, labor impacts, or governmental actions such as quarantines or travel restrictions. Keeping a check on project delays and/or increased costs will assist in reevaluating construction budgets and schedules. Further, some insurance policies do cover the force majeure events and that could go a long way in keeping liabilities to a minimum. The most common effect or implication of invoking a force majeure provision is to excuse a party’s performance for the duration of the force majeure event and to extend contractual deadlines by the duration of the event. As a result, force majeure related cost increases for the project may be split between the developer and its passive investors. It would be prudent to consult a legal expert to get a clear idea of the contingencies and liabilities involved in the contract.

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Sept 2020
01 Sep 2020