Rectifying the Parallel Regime of RERA & WB-HIRA

The Supreme Court issued an important verdict on May 4, 2021, when it declared that the West Bengal Housing Industry Regulatory Act, 2017 (WB-HIRA) is “repugnant” to the Parliamentary law of Real Estate (Regulation and Development) Act, 2016 (RERA). The state law created a “parallel regime” and encroached upon the identical Central law RERA, 2016, enacted the year before, and was in direct conflict with the central legislation by lacking necessary safeguards to protect consumers.

Background

The Bench of Justices D. Y. Chandrachud and M. R. Shah in Writ Petition (C) No. 116 of 2019 [Forum for People’s Collective Efforts (FPCE) & Anr. vs. State of West Bengal & Anr.], in its 190-page judgment, struck down as unconstitutional West Bengal State law WB-HIRA meant to protect home buyers, enacted in 2017, a year after the Centre passed the RERA, stating that if Parliament had passed legislation, it was not open for states to enact similar statute.

Before Parliament enacted the RERA in 2016, state legislatures had enacted several laws to regulate the relationship between promoters and purchasers of real estate. Before the WB-HIRA, one of the laws the state legislature had enacted was the West Bengal (Regulation of Promotion of Construction and Transfer by Promoters) Act, 1993 (the “WB 1993 Act”). Upon receiving the assent of the President, the Act was published in the Calcutta Gazette, Extraordinary on March 9, 1994.

In the State of West Bengal, the Real Estate (Regulation and Development) Bill, 2016 (the “RERA Bill 2016”) was introduced and draft rules under the RERA were framed on August 18, 2016, but no further progress was made in that regard. On August 16, 2017, the motion to pass the WB-HIRA Bill was adopted in the State Legislative Assembly. The Housing Industry Regulatory Authority was established under Section 20 of the West Bengal Housing Industry Regulatory Act, 2017 to regulate and promote the housing sector, to ensure the sale of plots, apartments or buildings, as the case may be, or sale of real estate projects in an efficient and transparent manner, to protect the interests of consumers in the real estate sector and to establish a mechanism for speedy dispute redressal and for matters connected therewith or incidental thereto. The State enactment received the assent of the Governor of West Bengal and was published in the Official Gazette on October 17, 2017, and came into effect from June 1, 2018.

The WB-HIRA repealed the WB 1993 Act. The remaining provisions of WB-HIRA were enforced by a notification dated March 29, 2018, issued by the Governor of the State of West Bengal in exercise of the power conferred by sub-section (3) of section 1 of WB-HIRA. Thereafter, on June 8, 2018, the State of West Bengal framed rules under WB-HIRA.

Because the Supreme Court declared the provisions of WB-HIRA to be invalid and struck them down in the current judgment, there will be no revival of the provisions of the WB 1993 Act, which were repealed upon the enactment of WB-HIRA, because the provisions of the WB 1993 Act are repugnant to the corresponding provisions of the RERA, which were impliedly repealed upon the enactment of the RERA in 2016.

The State Legislature has encroached upon the legislative authority of Parliament and this exercise conducted by the State Legislature is unconstitutional. The valuable safeguards introduced by Parliament in the public interest and certain remedies created by Parliament were absent in WB-HIRA.

Inconsistencies with RERA

RERA is a complete and exhaustive code which regulates the contractual relationship between a builder/promoter and a buyer/consumer in the real estate sector and provides remedial measures. RERA regulates the rights and obligations between promoters and buyers of real estate, in addition to the provisions of the Indian Contract Act, 1872. The enactment, in ensuring the actual transfer of property to the buyer, furthers the objects of the Transfer of Property Act, 1882. It provides for the enforcement of contracts through remedial measures that are in addition to the remedies provided in the Consumer Protection Act, 1986 and its successor legislation of 2019. RERA, in other words, is a special statute governing the real estate sector, encompassing rights and obligations found in different central enactments.

WB-HIRA covers the identical field of regulating the contractual behaviour of promoters and buyers in real estate projects. The State law is a ‘copy and paste’ replica of the central legislation (except for certain provisions which are inconsistent with RERA) and covers the field which is occupied by the central enactment. WB-HIRA is a “virtual replica” of the Central Law. A significant and even overwhelmingly large part of WB-HIRA overlaps with the provisions of RERA, but it does not complement the central law by fortifying the rights, obligations, and remedies.

The important provisions of WB-HIRA which are inconsistent with RERA are mentioned herein below:

  1. Force majeure events – The RERA restricts force majeure events to fire, cyclone, drought, flood, war, earthquake, or any other natural calamity that hinders the development of the projects, while WB-HIRA includes “any other circumstances as may be prescribed” as an added eventuality.
  2. Planning Area – The RERA specifies that only the projects that fall within the planning areas are subject to the RERA. According to Section 2 (zh) of the RERA, a “planning area” is a planning area or a development area, a local planning area, a regional development plan area, any other area specified as such by the appropriate government or any competent authority, while the WB-HIRA does not define the term “planning area”.
  3. Garage Area – RERA defines a garage as being ‘a place within a project having a roof and walls on three sides for parking any vehicle. It does not include uncovered parking spaces such as open parking areas. On the other hand, WB-HIRA has no such restrictions in defining garage or parking spaces and only mentions spaces as sanctioned by the competent authority.
  4. Compounding of Offences – If any person is found to have violated the RERA, they can be punished under the provision in the Code of Criminal Procedure, 1973 while WB-HIRA does not have provision for the compounding of offences.

Apart from the above, the subject of the provisions of the state enactment is identical, the content is identical. In essence and substance, WB-HIRA has enacted a parallel mechanism and parallel regime which the RERA already entails. In other words, the State legislature has enacted legislation on the same subject matter as the central enactment. Not only is the subject matter identical, but the statutory provisions of WB-HIRA are nearly identical to those of RERA.

WB-HIRA, since its enforcement in the State of West Bengal, would have been applied to building projects and implemented by the authorities constituted under the law in the state. In order to avoid uncertainty and disruption in respect of actions taken in the past, recourse to the jurisdiction of this Court under Article 142 was necessary. The Court, as such, exercised its extraordinary powers under Article 142 and gave effect to its judgment striking down the provisions of WB-HIRA prospective. The Court directed that the striking down of WB-HIRA will not affect the registrations, sanctions, and permissions previously granted under the legislation prior to the date of this judgment.

Down the Road

After the repeal of the WB-HIRA, the Government of West Bengal, Housing Department, by its Notification dated July 27, 2021, framed the West Bengal Real Estate (Regulation and Development) Rules, 2021, and the rules will come into force from the date of their publication in the Official Gazette. Thereafter, by another Notification dated July 29, 2021, the Government of West Bengal, Housing Department established an Authority known as the West Bengal Real Estate Regulatory Authority with immediate effect to exercise the powers conferred on it and to perform the functions assigned to it under the RERA throughout the State of West Bengal. With a further notification dated July 30, 2021, the Government of West Bengal, Housing Department, established an Appellate Tribunal known as the West Bengal Real Estate Appellate Tribunal with immediate effect. It is a sad plight that though the authorities have been established by several notifications dated July 29, 2021 and July 30, 2021, respectively, the positions of Chairperson, Members of the Regulatory Authority, Judicial Member, and Administrative Member of the Appellate Authority are still vacant. By a notice dated July 7, 2022, the Search Committee constituted under the West Bengal Real Estate (Regulation and Development) Rules, 2021, invited eligible and willing persons for the above-mentioned position.

A time-bound and proper implementation of the real estate regulatory law RERA in the state is required. Lack of implementation of RERA has left home buyers in the lurch as neither new complaints can be filed against builders nor existing complaints already filed before the erstwhile WB-HIRA can be continued and home buyers are being subjected to even more ruthless exploitation by builders since there is no mechanism in the state at present for redressal of home buyers’ grievances.

WB-HIRA is a “virtual replica” of the Central Law. A significant and even overwhelmingly large part of WB-HIRA overlaps with the provisions of RERA, but it does not complement the central law by fortifying the rights, obligations, and remedies.

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PUFE Transaction Under IBC Vis-À-Vis Real Estate Sector

Since the implementation of the Insolvency and Bankruptcy Code, 2016, (“Code”), the Real Estate Sector has been in turmoil, with many transactions entered into by the Builder(s) undermining and jeopardising the legitimate interests of innocuous creditors. The Code encompasses a collection of transactions that the Interim Resolution Professional (“IRP”) and the liquidator appointed by the National Company Law Tribunal (“NCLT”) for companies in insolvency or liquidation should avoid, as stated below. Preference, Undervalued, Fraudulent, and Extortionate Transactions (“PUFE Transactions”) is how the group of transactions is known. Each of the aforementioned has been examined in relation to the Indian real estate sector in order to advance the conceptual nature.

Understanding PUFE Transactions

 

Preferential Transactions

The factors that may lead to transactions being classified as preferential in character are discussed in Section 43 of the Code. Thus, if specific criteria exist in a set of transactions conducted by the corporate debtor that may be preferential in character, they can only be avoided if the IRP or liquidator files an application with the NCLT.

When a court determines that a transaction was not carried out in the ordinary course of business to create a new value in the corporate debtor’s interest, but instead acted to give preferential advantage to a related party or other parties, the transaction is to be avoided under Section 44 of the Code. Its main goal was to reverse the consequences of preferential transactions by requiring the person who received the preference to refund any profit gained as a result of the preference.

 

Undervalued Transactions

An undervalued transaction occurs when a corporate debtor has the malafide intention of causing a wrongful gain to a linked party or selling assets for a cheap price in a short period of time to boost cash liquidity.

In addition, the time frame for challenging an undervalued transaction has been classified according to whether the party is linked or unrelated. As a result, an undervalued transaction with a ‘related party’ might be called into question two years prior to the start of insolvency proceedings, whilst an undervalued transaction with a ‘unrelated party’ could be called into question one year prior to the start of bankruptcy proceedings.

If the NCLT determines that the transaction was undervalued and that the Resolution Professional (“RP”) or liquidator failed to report it despite having sufficient information or opportunity, the NCLT can order the position to be restored to its pre-transaction state and order the insolvency board to initiate proceedings against the liquidator or RP.

 

Fraudulent Transactions

The Code’s scope and ambit for identifying fraudulent transactions are rather broad in order to protect creditors’ legitimate rights against the corporate debtor. The phrasing used in Section 66(1) of the Code, which deals with deceptive dealing, demonstrates the same. As a result, if the corporate debtor conducted business with the intent to defraud creditors or for any other fraudulent purpose, the NCLT can issue an order directing any individual who was knowingly a party to the corporate debtor’s business conduct to make such contributions to the corporate debtor’s assets as the NCLT deems appropriate during the insolvency process.

While Section 66(2) of the Code covers wrongful trading (i.e., conduct that is not fraudulent but falls short of the standards governing directors’ duty to behave correctly in the case of insolvency), the NLCT has the authority to impose a pecuniary penalty on the director or partner.

 

Extortionate Transactions

Extortionate transactions are covered under Section 50 of the Code, which requires the corporate debtor to make exorbitant payments to any of its creditors in the two years preceding the bankruptcy beginning date. An NCLT order may be used to prevent such transactions. If a person’s debt is in line with the law, this rule does not apply.

The two-year period before the start of bankruptcy is crucial for establishing whether a transaction is excessive.

As a result, before engaging in any transaction, contractual parties and creditors must confirm that they have evaluated the company’s most recent financial status, particularly those involving the transfer of assets or value from such a business, to identify any financial crisis indicators.

 

Analysis

Troubled businesses must be prohibited from engaging in activities that may block creditor recovery if insolvency proceedings were to be commenced. In India, where promoter groups typically control enterprises, such measures are essential. Through opaque arrangements, promoter groups may seek to move income from assets to other group companies for their own benefit. As a result, the NCLT has the jurisdiction under the Code to reverse any such transaction in order to safeguard creditors’ and other stakeholders’ interests.

The case of IDBI Bank Ltd. v. Jaypee Infratech Ltd[1]. (“IDBI”), which was confirmed by the Supreme Court in Jaypee Infratech Ltd. Interim Resolution Professional v. Axis Bank Ltd.[2], is an important precedent for PUFE Transactions.

M/s Jaiprakash Associates (“JAL”) established a special purpose firm, M/s Jaypee Infratech Ltd. (“JIL”), to manage the project design, engineering, development, and construction. JAL controlled 70 percent of JIL’s equity. Significantly, JIL encountered financial difficulties and failed to satisfy contractual deadlines for project completion and debt repayment. As a result, JIL’s account was designated non-performing by the Life Insurance Corporation (“LIC”). Since JIL’s account was deemed non-performing, its financial creditors, including IDBI, filed an application with the NCLT’s Allahabad Bench under Section 7 of the Code, which was granted, and the NCLT appointed an IRP. The IRP filed an application with the NCLT after reviewing the transactions, requesting that they be declared as PUFE Transactions.

According to the NCLT, JIL failed to strive diligently to decrease the creditors’ losses and mortgaged the land without JAL’s counter-guarantee since it completed the series of transactions while in financial distress. JIL had also failed to acquire the essential approvals for the challenged acquisition from the JLF lenders as well as the shareholders. As a result, the NCLT determined that the contested transactions occurred during the relevant period and that they were preferential transactions under Section 43 of the Code.

 

Conclusion

PUFE transactions in the real estate sector have become a threat, and the changes have proven unsuccessful in facilitating the filing of a lawsuit against infrastructure and real estate behemoths. The real estate industry in India is one of the few to have risen at an exponential rate during the previous two decades. It has drawn significant investments from many who have put their life savings into realising their ambitions of buying a home. The most sought-after investment channel, on the other hand, has lost favour owing to stagnation.

On the other hand, a careful examination of the modifications reveals that they are helpful to homebuyers. The amendment to the Code is favourable to buyers who are facing difficulties due to incomplete real estate developments. Homebuyers are affected by project delays since they invest a considerable portion of their cash in a down payment and an EMI on the loan while continuing to pay rent in their current location. This situation has now altered as a result of the recent Code modification.

References:

[1] Company Petition NO.(IB)77/ALD/2017

[2]  Civil Appeal NOS. 8512-8527 OF 2019

Photo by: Tierra Mallorca on Unsplash

PUFE transactions in the real estate sector have become a threat, and the changes have proven unsuccessful in facilitating the filing of a lawsuit against infrastructure and real estate behemoths. The real estate industry in India is one of the few to have risen at an exponential rate during the previous two decades. It has drawn significant investments from many who have put their life savings into realising their ambitions of buying a home. The most sought-after investment channel, on the other hand, has lost favour owing to stagnation.

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Thinking through Timelines: Acceptance of Rent Amounts to Waiver of Termination of Lease?

On June 24, 2022, the Supreme Court of India while deciding the matter of Sri K.M. Manjunath Vs. Sri Erappa G,[i] held that mere acceptance of rent by landlord after the expiry of lease would not amount to waiver of termination of lease.

Background

 

The dispute in this matter arose in connection with unregistered lease agreements for the lease of shop premises at Banaswadi Main Road, Bengaluru. Pursuant to the expiry of the last lease deed executed between the parties, the respondent-lessor filed a suit for ejectment before the Small Causes Court against the petitioner-lessee to obtain vacant possession of the shop premises. The Small Causes Court dismissed the suit for ejectment on the grounds that the suit was not maintainable as there was no valid termination of tenancy under section 106 of the Transfer of Property Act, 1882 (“ToP Act”) (detailed hereinbelow).

Aggrieved by the aforesaid dismissal, the respondent-lessor preferred a revision petition before the Karnataka High Court (“High Court”). Upon appreciation of the evidence on record, which inter alia consisted of unregistered lease agreements executed between the parties during the period of 1989 to 1995, the High Court noted that the duration of the lease agreements could be inferred to be for a period of 11 (eleven) months each, and thus the lease granted thereunder stood terminated by efflux of time. Hence, the petitioner-lessee was not entitled to notice under section 106 of the ToP Act. The High Court thus set aside the judgement of the Small Causes Court.

The petitioner-lessee thereafter filed a special leave petition (“Special Leave Petition”) before the Supreme Court challenging the judgment and final order of the High Court.

 

Applicable Provisions and Contentions

 

The primary contention in the matter was the applicability of section 106 of the ToP Act, which provides that where there is no written contract for the lease of immovable property, not being leased for agricultural or manufacturing purposes, the period of the lease shall be deemed to be from month to month and terminable by 15 (fifteen) days’ notice. The contention of the petitioner-lessee before the Small Causes Court was that no valid notice was served by the respondent-lessor as per this provision. On the basis of the aforesaid, the Small Causes Court ruled in favour of the petitioner-lessee. However, based on the aforementioned evidence evaluation, the High Court determined that the lease in this case stood determined by virtue of section 111(a) of the ToP Act, which provides that a lease may come to an end by efflux of time limited therein.

The Supreme Court, in the Special Leave Petition, took note of the contention of the petitioner-lessee that after the expiry of the period of the last lease agreement, the petitioner-lessee was continuing as a tenant in sufferance and had paid the rent till the date of the filing of the suit for ejectment.

 

Verdict

 

Considering the above provisions and contentions, the Supreme Court appreciated the reiteration of the High Court, based on the precedents relied upon by the High Court, that mere acceptance of the rent does not amount to a waiver of the termination of the tenancy. The Supreme Court, however, granted the request of the petitioner-lessee for a grant of time to vacate the shop premises by allotting a period of 6 (six) months from the date of its judgement to hand over the possession of the shop premises to the respondent-lessor. The aforesaid extension was granted subject to the petitioner-lessee submitting an undertaking on affidavit to pay the arrears of rent at the rate of INR 1400/- (Indian Rupees One Thousand Four Hundred only) per month for the arrears pending from the year 2017 (as determined by the High Court) and extending to the aforesaid period of 6 (six) months.

Accordingly, the Supreme Court upheld the decision of the High Court and dismissed the Special Leave Petition for being devoid of merit.

 

The Takeaway

 

The reaffirmation of the Supreme Court on non-waiver of termination in this matter reinforces the significance of capturing the duration of the lease in crystal clear terms in lease agreements. Detailing timelines for termination and notice period is just as important. As seen in the facts of the discussed case, the absence of such agreed timelines can further complicate disputes arising between the parties. Hence, customising such timelines on a case-specific basis is critical, while adopting timelines based merely on common practice is best avoided.

References: 

[i]Petition For Special Leave To Appeal (C) NO.10700 OF 2022 filed before the Supreme Court Of India, Civil Original Jurisdiction.

Image Credits: Photo by  Tierra Mallorca on Unsplash

The reaffirmation of the Supreme Court on non-waiver of termination in this matter reinforces the significance of capturing the duration of the lease in crystal clear terms in lease agreements. Detailing timelines for termination and notice period is just as important. 

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Failure to Obtain Occupancy Certificate a Deficiency in Service by Developer: A Note on the Supreme Court’s Decision

On January 11, 2022, the Supreme Court of India delivered a noteworthy decision in the case of Samruddhi Co-operative Housing Society Ltd. vs. Mumbai Mahalaxmi Construction Pvt. Ltd.,[i] by affirming that the failure of a developer to obtain an occupancy certificate would constitute a deficiency in service under the consumer protection law of India.

Relevance of Occupancy Certificate

 

Setting up one’s perfect abode for peaceful dwelling calls not only for a perfect finishes and a picturesque interior but also entails ensuring that all housing-related statutory requirements are fulfilled. One such indispensable compliance, the very mention of which causes flat owners to prick up their ears is an occupancy certificate. Under such an occupancy certificate, the local municipal authority permits the occupation of any building, as provided under local laws, which has provision for civic infrastructure such as water, sanitation and electricity.[ii]

However, a large number of flat owners across the country are far from having a perfect legally compliant abode given the failure of developers to obtain occupancy certificates in a timely manner. As a matter of practice, flat owners would take possession of their flats before obtaining the occupancy certificate and refurbishing the interiors, which, in some cases would result in a violation of statutory requirements and would further complicate the process of obtaining an occupancy certificate. In the case of old buildings, the developers are seldom approachable, and the residents are left helpless, in anticipation and burdened with extra costs for years.

 

Background of the Case

 

The flat owners in the case of Samruddhi Co-operative Housing Society Ltd. vs. Mumbai Mahalaxmi Construction Pvt. Ltd., had purchased flats from Mumbai Mahalaxmi Construction Pvt. Ltd. (“Respondent-Developer”) around the year 1993, were given possession of their flats around the year 1997, and had further constituted themselves into a co-operative housing society viz. ‘Samruddhi Co-operative Housing Society Limited’ (“Appellant-Society”). The Respondent-Developer failed to obtain the occupancy certificate for the buildings of the Appellant Society but went ahead and delivered possession of the flats. Consequently, the Appellant Society, being ineligible to obtain electricity and water supply services in the absence of the occupancy certificate, was burdened with extra taxes and charges payable to the local municipal authority, including payment of excess property tax at 25 per cent over and above the normal rate and water charges at 50 per cent over and above the normal rate.

In the year 1998, the Appellant-Society instituted a consumer complaint before the State Consumer Disputes Redressal Commission (“SCDRC”) seeking that the Respondent-Developer be directed to obtain the required occupancy certificate. The SCDRC not only issued a direction to the Respondent-Developer to obtain the required occupancy certificate within a period of 4 months but also directed the payment of INR 100,000/- towards reimbursement of the excess water charges paid by the Appellant-Society. Upon the failure of the Respondent-Developer to comply with the aforesaid directions of SCDRC, the Appellant-Society filed a complaint before the National Consumer Disputes Redressal Commission (“NCDRC”), the apex consumer dispute resolution forum in the country, in the year 2016.

The aforesaid complaint was filed on the statutory ground of ‘deficiency in service’ of the Respondent-Developer and the Appellant-Society sought payment of INR 26,073,475/- as reimbursement of excess charges and tax paid by the Appellant-Society and INR 2,000,000/- towards the mental agony and inconvenience caused to the members of the Appellant-Society. However, the NCDRC dismissed the aforesaid complaint on the grounds of being time-barred and the ineligibility of the Appellant Society to seek relief as a ‘consumer’ under Section 2(1)(d) of the governing statute i.e., the Consumer Protection Act, 1986 (“CP Act”). The Appellant-Society thereafter challenged the decision of the NCDRC before the Supreme Court.

 

Operating Law

 

In addition to dealing with the point of limitation as per the CP Act, the Supreme Court, in its analysis, considered the provision of the Maharashtra Ownership Flats (Regulation of the promotion of construction, sale, management and transfer) Act, 1963 (“MOF Act”), which was introduced to curb malpractices by developers in relation to the sale of flats on an ownership basis.

Section 3 of the MOF Act prevents a developer from allowing a flat purchaser to take possession of a flat before the completion certificate, as may be required under law, is duly obtained by the developer from the local authorities.

Section 6 of the MOF Act obligates a developer to discharge payment of all outgoings, including municipal or other taxes and water charges, until the developer transfers the flats to the flat owners or organisation of flat owners. Further, the aforesaid provision clarifies that the developer will continue to be liable for payment of dues and penalties related to the outgoings which were collected from the flat owners prior to the transfer of the flats, even after such transfer is completed.

By a co-joint reading of Sections 3 and 6 of the MOF Act, the Supreme Court concluded that the Respondent-Developer was obligated to provide the Appellant-Society with the occupancy certificate and was also liable to discharge payment of all outgoings until such a certificate was provided. The Supreme Court further observed that the failure of the Respondent-Developer to do so was a continuing wrong and the Appellant-Society was entitled to claim compensation for such continuing wrong.

 

The Verdict

 

Following the above analysis, the single-judge bench of Justice Dhananjaya Y Chandrachud dealt with the findings of the NCDRC and overruled the decision of the NCDRC on the eligibility of the Appellant-Society as a consumer under Section 2(1)(d) of the CP Act. Based on precedent judgments of the Supreme Court, it was concluded that the failure of a developer to obtain an occupancy certificate or abide by contractual obligations would amount to a deficiency in service under the CP Act. The Supreme Court thus held that:

“In the present case, the respondent was responsible for transferring the title to the flats to the society along with the occupancy certificate. The failure of the respondent to obtain the occupation certificate is a deficiency in service for which the respondent is liable. Thus, the members of the appellant society are well within their rights as ‘consumers’ to pray for compensation as a recompense for the consequent liability (such as payment of higher taxes and water charges by the owners) arising from the lack of an occupancy certificate.”

Allowing the appeal, the Supreme Court thus, directed NCDRC to decide the complaint based on the observations made by the Supreme Court in deciding the appeal and dispose of the complaint within a period of 3 months from the date of the judgment therein.

 

Significance of the Judgment

 

It is noteworthy that the provisions of the MOF Act have been interpreted in conjunction with the consumer protection law to offer relief to flat owners. It is expected that this judgment can come to the aid of flat owners who have purchased flats and are waiting for decades for regularisation of their flats.

In the present scenario, under the Real Estate (Regulation & Development) Act, 2016 (“RER Act”) (which was introduced in the succession of the MOF Act) developers are obligated to obtain the completion certificate or the occupancy certificate, or both, as applicable, from the relevant authority and make the same available to the flat purchasers or association of flat purchasers.[iii] Hence, for buildings that are registered under the RER Act, the authority set up under the RER Act can be approached in case of delay by the developer to provide an occupancy certificate.

Thus, the instant matter also resounds an alarm bell for developers to ensure that the occupancy certificate requirements are complied with as a prime concern as flat purchasers may have recourse to multiple forums to seek relief in case of any delay in this regard.

References

[i]Civil Appeal No. 4000 of 2019 in the Supreme Court of India Civil Appellate Jurisdiction.

[ii]Real Estate (Regulation & Development) Act, 2016 (Act No. 16 of 2016), §2(zf).

[iii]Real Estate (Regulation & Development) Act, 2016, § 11(4)(b).

 

Image Credits: Photo by Tierra Mallorca on Unsplash

It is noteworthy that the provisions of the MOF Act have been interpreted in conjunction with the consumer protection law to offer relief to flat owners. It is expected that this judgment can come to the aid of flat owners who have purchased flats and are waiting for decades for the regularisation of their flats. In the present scenario, under the Real Estate (Regulation & Development) Act, 2016 (“RER Act”) (which was introduced in the succession of MOF Act) developers are obligated to obtain the completion certificate or the occupancy certificate, or both, as applicable, from the relevant authority and make the same available to the flat purchasers or association of flat purchasers.

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Note in Relation to Registration of Transactions of Fragmented Land

The office of Inspector General of Registration and Controller of Stamps of State of Maharashtra issued a Circular dated July 12, 2021 bearing number 249/2013/454 concerning registration of documents which are subject to the provisions of Maharashtra Prevention of Fragmentation and Consolidation of Holdings (Amendment) Act, 2015 (“Circular”).

The Circular considers the 2015 amendment to the Prevention of Fragmentation and
Consolidation of Holdings Act, 1947 (“Act”), whereby section 8B of the Act was introduced
and consequently, the provision of the Act that imposed certain restrictions on the transfer of
fragmented land holdings (viz. sections 7, 8 and 8AA) was made inapplicable to the following
lands:

  1. Which are situated within the limits of a Municipal Corporation or a Municipal Council; or
  2. Which are situated within the jurisdiction of a Special Planning Authority or a New Town Development Authority appointed or constituted under the provisions of the Maharashtra Regional and Town Planning Act, 1966 (“MRTP Act”) or any other law for the time being in force; or
  3. Which are allocated to residential, commercial, industrial or any other non-agricultural use in the draft or final regional plan prepared under the MRTP Act or any other law for the time being in force.

The above exemption was, however, subject to the proviso which stated that no person shall
transfer any parcel of land situated in the areas specified above, which has an area less than the
standard area notified before the date of coming into force of the Maharashtra Prevention of
Fragmentation and Consolidation of Holdings (Amendment) Act, 2015, unless such parcel was
created as a result of sub-division or layout approved by the Planning Authority or the
Collector, under the provisions of the MRTP Act or any other law for the time being in force.

Further the Circular states that in view of the above provision, it has been observed that despite
the condition stipulated under the aforesaid proviso, transactions continue to take place in
relation to such land holdings without obtaining appropriate permission as stated therein. Thus,
the following directions have been provided:

  1. Where the total area of a survey number is two acres and if one, two or three gunthas of land is being sold out the same survey number, the document relating to such transaction will not be registered unless the layout of such survey number shows the demarcation of the one-two guntha(s) of land parcel and unless such demarcated layout is approved by the Collector or competent authority.
  2. If any party has already purchased a fragmented land parcel, the approval of the competent authority as per section 8B of the Act is to be obtained.
  3. Where land boundaries of the fragmented land parcel have been demarcated or if such fragmented land has been surveyed by the Government Land Records Department and such demarcation map reflects the independent boundaries of the land parcel to be sold, the above stated permission will not be required. However, the above-described conditions will subsequently apply to the land so demarcated and separated.

In accordance with the above, the Circular directs sub-registrars to exercise caution in the
matter and ensure that there are no irregularities while registering such documents and in case
of any irregularities being found, appropriate administrative action may be taken against the
concerned sub-registrar.

Image Credits: Photo by Gautier Pfeiffer on Unsplash

The Circular directs sub-registrars to exercise caution in the
matter and ensure that there are no irregularities while registering such documents.

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Global Captive Centers in India: Can Add Value if Set Up Differently

Major forces of change, such as the emergence of new technologies, maturing of platform-based business models and other competitive threats are forcing businesses to transform themselves. Another driver of large-scale change is the pandemic, which has led to new ways of working. Hybrid models, where a large chunk of employees work remotely and not from a designated office space, are now becoming the norm. Although some companies have begun to announce plans for their employees to return to workplaces, the consensus opinion is that a hybrid model is going to become the new norm because it significantly reduces operating costs; also, employees are finding it more convenient.

One area where the above changes are clearly visible relates to how large and medium enterprises across industries are looking at outsourcing to countries such as India. In recent years, the contours of both IT outsourcing and BPO have evolved rapidly; the above-mentioned forces of change are only accelerating the velocity of change.

A survey by NASSCOM recently found that by 2025, MNCs are likely to set up 500 new Global Captive Centers (GCCs) in India. Until two years ago, the number of such units established annually was around 50. This demonstrates that India’s large talent pool continues to be attractive. But it’s a different world we live in than even five years ago.

Earlier, most MNCs viewed their GCCs in India as low-cost delivery centers and design, architecture, prioritization of projects etc. were all the exclusive domain of Business/Technology leaders in the parent company. Cost arbitrage opportunities still exist in India vis-à-vis western countries, and thus, cost savings will remain an important objective for evaluating GCC performance. However, the ongoing shifts are raising the bar on how GCCs are expected to contribute to their parent organizations. Along with cost-efficient service delivery, enhancing automation, driving process innovation and enabling adoption of new technologies and architecture paradigms will all become important performance criteria. In some cases, there may even be expectations of new product innovations coming out of the Indian GCC.

MNCs will need appropriate operating models and talent to deliver on the potential. Employee contracts need to be suitably structured. IPR must be appropriately protected. Compliance with data privacy and other regulations must be ensured. As MNCs plan and implement their GCCs in India, they must keep in mind that India too is changing rapidly. They must formulate their strategies keeping in mind four specific factors:

  • Quality infrastructure (including reliable electricity and broadband connectivity) is now available across the country, and not limited to Tier 1 cities. This gives companies a wider choice of locating their GCCs.
  • As a result of reverse-migration triggered by the pandemic, talent too is available in smaller cities across the country. Given the possibility of remote working, the proximity to families and lower cost of living have become significant incentives; in fact, many employees prefer to live and work from such locations.
  • Many state governments are offering incentives to companies establishing operations in less-developed parts of their states and creating employment opportunities.
  • The country’s FDI, income tax and GST regimes are also frequently being tweaked to make India more competitive and business-friendly.

All this means that making choices and decisions around business objectives, investment routing, structuring and locations based on criteria and checklists that were relevant even a couple of years ago may lead to sub-optimal outcomes. Your GCC in India has the potential to be a global Centre of Excellence- so make sure that you make the right decisions so that your investments deliver ROI in ways that go far beyond cost arbitrage.

Mr. Sandip Sen, former Global CEO of Aegis and a well-known veteran of the BPO industry, put it thus: “These are exciting times for the Business Process Management industry for many reasons. Use of Artificial Intelligence (AI), analytics and higher levels of automation mean that players at the lower end of the value chain will need to raise their capabilities. In the next phase, GCCs will focus more on innovation as well as technology enablement aimed at enterprises to embrace ecosystem-based business models and higher levels of customer-centricity. But to achieve all this, companies have to take an approach that is very different from what they might have taken some years ago”.

 

Image Credits: Photo by Alex Kotliarskyi on Unsplash

MNCs will need appropriate operating models and talent to deliver on the potential. Employee contracts need to be suitably structured. IPR must be appropriately protected. Compliance with data privacy and other regulations must be ensured. 

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Force Majeure: Evolution of Jurisprudence in India Post COVID-19

The extraordinary outbreak of the Covid19 pandemic has had staggering effects on the economy, health and commerce of about 110 nations across the globe. Even after almost a year, the situation is far from normal. In addition to the massive pressure on the health and medical segments, several other unprecedented factors played crucial part in the whole system, economy, commerce, or business. Given the present situation of disruption of supply chaindisruption of assured manpower, uncertainty of future planning, inadequacy of security as well as the forced restraints in free commercial activities, numerous commercial contracts have either been interrupted, delayed or cancelled. The present situation has thrown light on several important questions with respect to the jurisprudence of the force majeure clause in various commercial contracts or frustration of contracts 

 

Force Majeure Typically in Law

 

The term force majeure which seems to have been borrowed from the Code Napoleon had received interpretation in several decisions of the English Courts in earlier years. In Matsoukis v. Priestman and Co.[i] . Justice Bailhache opined that force majeure would include strikes and break-down of machinery but not bad weather, or football matches, or a funeral. In Lebeeaupin v. Crispin[ii] Justice McCardie had observed: “A force majeure clause should be construed in each case with a close attention to the words which precede or follow it, and with due regard to the nature and general terms of the contract. The effect of the clause may vary with each instrument.”

In the Indian context, the Supreme Court has considered, interpreted and decided the events of force majeure in various judicial precedents, inter-alia from Satyabrata Ghosh vs Mugneeram Bangur[iii] to Energy watchdog vs CERC[iv] The Court has maintained a strict yet flexible approach towards the concept of force majeure and frustration of contracts. In the case of Alopi Prashad and Sons vs. UOI[v] the Supreme court had observed that commercial hardship shall not be a just and reasonable ground to support frustration of contract and excuse performance.

As we find in the commercial world, contracting parties have generally been incorporating the force majeure clause in their contracts since ages, to absolve themselves of any liability arising out of events beyond their reasonable control. However, in this discussion we would focus the force majeure arising out of Covid-19 pandemic.

 

COVID 19 and Application of Force Majeure

 

There was a difference of opinions and questions were raised over the fact that some contracts though having a force majeure clause, do not stress on the word ‘pandemic’, ‘epidemic’, ‘disease’ etc. , while majority of the contracting parties rely on the general phrase ‘any other unforeseeable event, not under the control of either of the parties.’

 
Executive Interpretation:
 

Alike the private sector, the Government contracts and the Public Sector transactions also started suffering on account of the pandemic and declaration of lockdown throughout the country. To address the situation fairly, the Ministry of Home Affairs came out with Notification No. F. 18/4/2020 PPD dated 19-02-2020 with respect to Manual for Procurement of Goods, 2017 declaring that the interruptions in supply chain due to Covid 19 from China or any other country shall be covered under the ambit of force majeure, and that force majeure shall be invoked whenever considered appropriate following the due process of law.

While the power of the Ministry to bring certain events within the ambit of force majeure under clause 9.7.7 of the Manual for Procurement of Goods, 2017 by a simple notification, may be a different issue, but as it appears, by this notification the Corona Pandemic was brought within the meaning of force majeure as defined in the Manual for Procurement of Goods, 2017 and tacitly, this event certainly becomes applicable in respect of all government and/or public sector contracts irrespective of application of the Manual for Procurement of Goods, 2017.  It may be noted that this Memorandum of 19th February 2020 was issued prior to Covid-19 affecting operations in India, recognizing the difficulty faced by the contracting parties regarding import of materials from other countries which were impacted by the pandemic.

Similarly, on account of various representations and submissions made by various Renewable Energy (RE) Developers and RE Associations, and considering the prevailing situation, the Ministry of New and Renewable Energy vide Office Memorandum No. 283/18/2020-GRID SOLAR dated March 20, 2020 declared Covid-19 as a force majeure event. The Ministry vide the said order granted time extensions in scheduled commissioning date of RE projects, in light of disruption of supply chain due to the pandemic.

The Ministry of Roads Transport and Highways also in its Circular dated 18.05.2020 inter-alia classified the pandemic as a force majeure event. In addition, the Ministry of Home Affairs by its Order no. 40-3/2020(D) dated 24 March 2020 expressed that the country was threatened with the spread of Covid 19 virus and therefore has considered to take effective measures to prevent its spread across the country and therefore in exercise of powers under section 10(2)(I) of the Disasters Management Act 2005 issued various guidelines for immediate implementation. Subsequently, by Office Memorandum dated 13 May 2020 the Ministry of Finance, Department of Expenditure referred to its earlier memorandum dated 19 February 2020 and also referred to the Manual of Procurement and recognized inter-alia that in view of the prevailing restrictions, it may not be possible for the parties to the contract to fulfill contractual obligations. Therefore, after fulfilling due procedure and wherever applicable, parties to the contract could invoke force majeure clause for all construction / works contracts, goods and services contracts, and PPP contracts with Government Agencies up to a certain period and subject to certain conditions. Therefore, officially the Government of India recognized Covid-19 Pandemic as an event of force majeure applicable in relation to contracts with Government Agencies, in effect resulting inclusion of Public Sector Undertakings also.

While the specific acceptance of force majeure in relation to Government sector contracts may not have any binding effect on the contracts outside the scope of the explicit instances or in relation to purely private contracts between two private parties, they probably offered an explanatory value to bring Covid 19 and the forced restraints imposed on account of lockdowns, within the ambit of force majeure.  

 
Judicial Interpretation:
 

In the Indian judicial scenario the court would rely on the terms of force majeure clause in the contracts or on principles of frustration under section 56 of the Contract Act. This means, unless there is compelling evidence for non-performance of contract the courts do not favor parties resorting to frustration or termination of contract. On account of the enormous devastative effects the Pandemic created on the commercial and economic environment in the country, different Courts had to come forward and grant relief to different contracting parties who were severely affected by the Pandemic.

The Delhi High Court considered the matter in June 2020 in the case of MEP Infrastructure Developers Ltd vs. South Delhi Municipal Corporation and Ors[vi]. The court essentially relied on the Ministry of Roads Transport and Highways (MORTH) circular and observed that:

27(i) The respondent Corporation itself referred to Circular dated 19.02.2020 which notified that the COVID-19 pandemic was a force majeure occurrence. In effect, the force majeure clause under the agreement immediately becomes applicable and the notice for the same would not be necessary. That being the position, a strict timeline under the agreement would be put in abeyance as the ground realities had substantially altered and performance of the contract would not be feasible till restoration of the pre-force majeure conditions.” 

The court also expounded on the continuous nature of the force majeure event and held that the subsequent lockdown relaxations given by the central government and the state government shall not amount to abatement of the force majeure event, at least in respect to major contracts such as road construction projects. The court also identified the distinct effects of the lockdown, independent of the effects of the pandemic and its implications on various contracts which many be affected by the force majeure conditions.  

In the case of Standard Retail vs G.S Global Corp Pvt. Ltd[vii] steel importers had approached the Bombay High Court seeking restraint on encashment of letters of credit provided to Korean exporters in view of the COVID-19 pandemic and the lockdown declared by the Central/State Government citing that the contracts between the parties were unenforceable on account of frustration, impossibility, and impracticability. The Bombay High court by its order dated 8 April 2020 rejected the plea inter-alia on the grounds: 

  1. The Letters of Credit are an independent transaction with the Bank and the Bank is not concerned with underlying disputes between the buyers and the sellers.
  2. The Force Majeure clause in the present contracts is applicable only to one respondent and cannot come to the aid of the Petitioners.
  3. The contract terms are on Cost and Freight basis (CFR) and the respondent had complied with its obligations and performed its part of the contracts and the goods had already been shipped from South Korea. The fact that the Petitioners would not be able to perform its obligations so far as its own purchasers are concerned and/or it would suffer damages, is not a factor which can be considered and held against the Respondent.

The court also observed that:  

“The Notifications/Advisories relied upon by the respondent suggested that the distribution of steel has been declared as an essential service. There are no restrictions on its movement and all ports and port related activities including the movement of vehicles and manpower, operations of Container Freight Station and warehouses and offices of Custom Houses Agents have also been declared as essential services. The Notification of the Director General of Shipping, Mumbai, states that there would be no container detention charges on import and export shipments during the lockdown period.

In any event, the lockdown would be for a limited period and the lockdown cannot come to the rescue of the Petitioners so as to resile from its contractual obligations with the Respondent No. 1 of making payments”.

Therefore, even if the event is a force majeure, contracts may not be avoided if the event does not affect performance of the entire contract or affect every aspects of any contract. The event has to be specific to the failure.

In the Halliburton case[viii] , decided on May 29, 2020, the Delhi High court was of an unequivocal opinion that:

“62. The question as to whether COVID-19 would justify non-performance or breach of a contract has to be examined on the facts and circumstances of each case. Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. The Court would have to assess the conduct of the parties prior to the outbreak, the deadlines that were imposed in the contract, the steps that were to be taken, the various compliances that were required to be made and only then assess as to whether, genuinely, a party was prevented or is able to justify its non- performance due to the epidemic/pandemic”.

Further, while discussing the scope of the force majeure clause in contracts it was observed by the court that:

“Para 63. It is the settled position in law that a Force Majeure clause is to be interpreted narrowly and not broadly. Parties ought to be compelled to adhere to contractual terms and conditions and excusing non-performance would be only in exceptional situations. As observed in Energy Watchdog it is not in the domain of Courts to absolve parties from performing their part of the contract. It is also not the duty of Courts to provide a shelter for justifying non- performance. There has to be a ‘real reason’ and a ‘real justification’ which the Court would consider in order to invoke a Force Majeure clause”.

The Madras High Court in the case of Tuticorin Stevedores’ Association vs The Government of India[ix], dated 14 September 2020, observed that the question as to whether on account of the pandemic outbreak of Covid-19, the parties can invoke the principle of force majeure need not detain us. The calamitous impact and disruption caused by Covid-19 on the economic front has been recognized by the Government itself.

In Confederation for Concessionaire Welfare & Ors. vs Airports Authority of India & Anr[x] the Hon’ble Delhi High Court observed on 17 February 2021 inter-alia that the court has perused the clauses relating to Force Majeure. There can be no doubt that the pandemic is a force majeure event. Since the Petitioners wish to terminate/exit from their respective agreements, while directing completion of pleadings and while the issues are under examination by this Court, there is a need to reduce the risk to both parties as simply postponing the exit by the Petitioners would also make it impossible for the AAI to re-allot the spaces to willing concessionaires and the outstanding against the Petitioners would continue to mount. Accordingly, as an interim measure the Hon’ble Court directed certain processes to be followed.

In another case of Ramanand vs. Dr. Girish Soni RC.[xi], an application came under consideration of the Delhi High Court which raised various issues relating to suspension of payment of rent by tenants owing to the COVID-19 lockdown crisis and the legal questions surrounding the same. By order dated 21-5-2020 the Delhi High court while determining whether lease agreements are covered under the ambit of section 32 and section 56 of the Act and even though it was held that suspension of rent on the grounds of force majeure is not permissible under the circumstances, the court allowed relaxation in the schedule of payment of the outstanding rent owing to the lockdown.

The Hon’ble Supreme Court in the case of Parvasi Legal Cell and Ors. Vs Union of India and Ors., observed that the pandemic was an ‘unusual’ situation, that had impacted the economy globally. This case revolved around the liability of the airlines to compensate passengers who faced cancellation of flights due to government-imposed lockdowns and restrictions on inter-state and international travels. The court relied on the office memorandum issued by the Ministry of Civil Aviation dated 16th April 2020 to dispose of the petition.

In the case of Transcon Iconia Pvt. Ltd v ICICI Bank[xii], the Bombay High Court while determining whether moratorium period would be excluded for NPA classification observed inter alia as under:

‘38… the period of the moratorium during which there is a lockdown will not be reckoned by ICICI Bank for the purposes of computation of the 90-day NPA declaration period. As currently advised, therefore, the period of 1st March 2020 until 31st May 2020 during which there is a lockdown will stand excluded from the 90-day NPA declaration computation until — and this is the condition — the lockdown is lifted’.

Yet, in another judgment passed in R. Narayan v. State of Tamil Nadu & Ors.[xiii] the Madras High Court directed the Municipal Corporation to waive the license fee for running a shop at a bus stand, and observed that:

“…this Court would be justified in treating the “lock down” as a force majeure event which will relieve the licensee from performing his obligation to the corresponding extent.” The Court also observed that … “The respondents (The Government of Tamil Nadu & Ors.) themselves have chosen to treat the lock down restrictions as a force majeure event. But they have relieved the licensees from the obligation to pay the fees only for two months. The reason for granting waiver for the months of April and May would equally hold good for the entire “total lockdown” period.”

Therefore, as it appears, most of the High Courts relied on the government orders that classified pandemic as force majeure, although the relief granted in each case has been subjected to restraint based on the accompanying facts and circumstances. The common observation however remained that the Covid-19 pandemic is a force majeure event.

 

Key Takeaways

 

Hence, it can be summarized that, commercial hardship shall not be a just and reasonable ground to support frustration of contract and excuse performance. The Courts have no general inclination to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events. Parties are at an obligation to complete their part of the contract against all odds, within a reasonable and practical limit. However, where the contract itself either impliedly or expressly contains a term according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Act. If, however, frustration is to take place de hors the contract, it will be governed by Section 56.

The following preliminary conditions are emerging to be sine quo non to invoke covid-19 as a valid defense for non-performance:

  1. The contract is rendered impossible to perform: To establish pandemic as a force majeure occurrence de hors the contract the parties must demonstrate how the pandemic has disturbed the fundamental basis on which the obligations and agreements of the parties rested [Naihati Jute Mills Ltd. Vs Khayaliram Jagannath[xiv]]. This principle was also adequately elaborated upon by the Bombay High Court in Standard Retail vs G.S Global Corp Pvt. Ltd. A mere invocation of the force majeure clause in light of the pandemic does not absolve the parties from discharging their contractual obligations. A prima facie case has to be built justifying the reason for inability and seeking such an exemption.
  1. Prior conduct of the parties: While pleading the defense of force majeure, it is highly pertinent for the concerned party to ensure that, prior to the outbreak of the pandemic, the party was discharging its functions in a bona fide manner within the stipulated conditions of the contract. Additionally, as enumerated in the Halliburton case by the Delhi High Court, the concerned party should have demonstrated a bona fide attempt at undertaking all reasonable measures to execute its obligations in light of the situation and was genuinely prevented to act upon the same due to the collateral effects of the pandemic.
  1. Collection of documents capable of corroborating the claim of force majeure: It is crucial for the party invoking the force majeure clause to corroborate their claims with valid documents applicable to the specific instance, given the unusual and unprecedented situation. In the present scenario, these documents can include the abovementioned government circulars and guidelines, local medical reports, news reports, announcements etc. It needs to be kept in mind that generic documents howsoever crucial they may be, might not be enough in any specific case. While citing such documents, the affected party also has a duty to carry out a due diligence to ensure such exemptions and relaxations are strictly applicable to their case as observed in Standard Retail vs G.S Global Corp Pvt. Ltd.

 

No Straitjacket Formula                     

 

As can be summarized, different Courts in India have upheld the defense of frustration of contract and the defense of force majeure sparingly in every case. Even though the Covid 19 pandemic and its consequent lockdown can be generally covered under the ambit of force majeure, but there can’t be any straitjacket formula and its invocation strictly and solely shall depend upon the facts of each case, previous conduct of the parties and the prevailing circumstances in the specific scenario. If there are alternate modes of performing contractual obligations, the liable party shall not have the luxury to hide behind the comfort of doctrine of frustration or the doctrine of force majeure and absolve themselves of their duties. Accordingly, it would need a very careful examination of the whole situation before any ground is taken for avoidance of obligations under a concluded contract.

References:

[i] (1915) 1 K.B. 681

[ii] (1920) 2 K.B. 714

[iii] [1954 SCR 310]

[iv] [(2017)14 SCC 18].

[v] [1960 (2) SCR 793]

[vi] W.P.(C) 2241/2020

[vii] Commercial Arbitration Petition (l) no. 404 of 2020

[viii] Halliburton Offshore Services Inc. v. Vedanta Ltd. O.M.P (I) (COMM.) No. 88/2020 & I.As. 3696-3697/2020

[ix] WP(MD)No.6818 of 2020 and WMP(MD)No.6217 of 2020

[x] W.P.(C) 2204/2021 & CM APPL.6421-22/202

[xi] REV447/2017

[xii] 2020 SCC OnLine Bom 626

[xiii] Case No.19596 of 2020 and W.M.P.(MD)Nos.16318 & 16320 of 2020

[xiv] AIR 1968 SC 552

Image Credits: Photo by Medienstürmer on Unsplash

The Courts have no general inclination to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events. Parties are at an obligation to complete their part of the contract against all odds, within a reasonable and practical limit.

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Restoring value through tenancy reforms

The phenomenon of urbanisation, accompanied by the aspirations of the masses looking to make an ascend out of and above their life circumstances, dawns with transformation of landscapes. The harbours of the coast often become a passageway to opportunities. Settling the chaos of the opportunities in the city of Mumbai post the Second World War led to unique tenancy model in the city which sheltered its migrant population that would not otherwise be able to afford a shelter to call its own and ever since, rent control laws continue to bear the blame for much of an unlocked value of premises in the city despite the initial righteous intention of tenancy reforms.

Righteous Intention v. Regressive Implementation

The Maharashtra Rent Control Act, 1999 stands as a successor of the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947, which was enacted as social welfare, as well as regulative legislation with a bonafide intention of protecting tenants from exploitation by and tyranny of landowners and from the spurt in rentals. The aforesaid situation did not change much with the enactment of the Maharashtra Rent Control Act, 1999 as the provisions of this substituted legislation were nothing but old wine in a new bottle. It carried forward the pros and cons of the erstwhile Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 without rationale a and, as a result, rented premises in Mumbai city continue to fetch lower rental returns than prevalent market value or become a subject matter of long-lasting litigation/s. This situation has adversely impacted the rental market in the city of Mumbai and people are caught between the adverse demand and low yielding supply of the premises to be meant for rentals.

Against this background, yet another tenancy reform, the Model Tenancy Act, 2021 as approved by the Union Cabinet in the first week of June 2021 (“the Model Act”) is now being viewed as a great catalyst towards boosting the rental market as it may stimulate the market by promising secured higher rental returns to the landowners (which includes premises’ owner) and as an affirmative driving force addressing most of the concerns of its predecessors.

Rationalising the Expectation

While the disputes arising out of decades-old tenancies continue to keep their memories alive in the Small Causes Courts and further in the appellate courts, the prevailing skepticism that premises owners have lately clung to as a result of the pandemic over letting out their premises, shows the unreliability of the current rent control laws and eviction proceedings under the Maharashtra Rent Control Act, 1999. However, the enactment of the Model Act too depends on the adaptation of the provisions by the States to suit their indigenous tenancy models.

The State of Maharashtra has already cleared its stand in favour of protecting the interest of the tenants enjoying protection under the prevailing rent control regime.[i] Further, the prospective applicability of the Model Act is an important consideration while assessing the extent of the change to be expected out of the Model Act. Hence, it is required that the thrust of the reforms be maximised where it can be currently realised from the very stage of entering into a rental agreement, while the process of working out the reforms into the indigenous tenancy models continues to be unravelled by the State government.

One of the reforms that is hoped for is an overhauled dispute resolution process for rent and tenancy related matters. The Model Act seeks to nail the long lasting tenancy litigation by proposing a three-tier adjudicatory system being the Rent Authorities, Rent Courts and Rent Tribunals vested with exclusive jurisdiction to try and adjudicate disputes falling under the scope of the Model Act which does not extend to “question of ownership or title”.[ii] The essential condition to be met to seek relief through the Rent Authorities or the Rent Courts and Rent Tribunals is to have a rental agreement that is duly identified with a unique identification number by the Rent Authority set-up for a district under the Model Act.[iii]

An overview of the role to be played by the authorities/courts to be constituted under the Model Act is as tabulated below:

 

Matters related to the eviction of tenants are to be adjudicated upon by the Rent Courts, which may try and dispose off the matter based on the terms and conditions stipulated in the agreement entered between the disputing parties or on the basis of an application/documents made/placed before it.

Eviction of a tenant may be sought on the following grounds under the Model Act:

  • Non-payment of arrears of rent and other related charges for a period of two consecutive months despite being served a notice by the landowner as stipulated under the Model Act.
  • Abandonment of the premises (part or whole) by the tenant without the consent of the landowner.
  • Misuse of the premises includes the use of additional space by the tenant, causing damage to the premises, or carrying out activities that cause a public nuisance or are illegal.
  • Carrying out repair and alterations to the tenanted premises.[i]
  • Bonafide requirement by the legal heirs of a deceased landowner during the subsistence of the tenancy agreement.[ii]

It is noteworthy that the Model Act also provides for the interest of landowners who have let out vacant land as a part of the tenanted premises, to enable the landowners to undertake construction on the vacant land by causing severance of the vacant part of the land from the tenanted premises. In order to give effect to such severance of vacant land, the landowner may make an application before the Rent Court, if the landowner is unable to obtain possession of the vacant land from the tenant. The Rent Court may, on being satisfied with the willingness of the landowner to commence construction on the vacant land without causing undue hardship to the tenant, direct severance of vacant land or make other such orders that it may deem fit.[iii]

Restoring Value

The Model Act once again comes in as a tenancy reform with noble intent at a time when restoring the value of constructed properties that are vacant as a fallout of the current circumstances is vital for the recovery of the real estate market. While the applicability of the Model Act to the premises that have been trapped under old rental agreements and arrangements is subject to its enactment by the State, the assurance, that continues to gleam through is the balance that can be brought about by having a watertight rental agreement as per the Model Act. The Model Act accords primacy to the rental agreement executed between the landowner and tenant and strives to ensure its absolute enforcement.

Execution of new rental agreements pertaining to residential and commercial premises as per the provisions of the Model Act, as may be notified by the State government, will be the first step for landowners who seek better returns on their premises along with a more balanced set of landowner-tenant obligations. The challenge here remains to convince existing tenants to agree to the shift.

Taking a lesson from the quandary arising out of the existing rent control legislation, it is important that the implementation of the Model Act should be directed towards giving full effect to the balanced set of rights and obligations of tenants and landowners as currently envisaged therein. The pitfall to be avoided is the misuse of the autonomy given to the landowners and tenants while putting the provisions of the Model Act, that place reliance on the rental agreement to steer the course of the tenancy, into practice. It is only when the fine balance of responsibilities created under the Model Act are replicated in rental agreements, that the potential positive socio-economic impact of the Model Act will be of aid to the collective advancement towards the goal of ‘Housing for All’.

References

[i] Naresh Kamath, Maharashtra to Partially Adopt Central Model Tenancy Act, HINDUSTAN TIMES (June 3, 2021),
https://www.hindustantimes.com/cities/mumbai-news/maharashtra-to-partially-adopt-central-model-tenancyact-101622743211971.html.

[ii] The Model Tenancy Act, 2021, §40.

[iii] The Model Tenancy Act, 2021, §4(4)(a).

[iv] The Model Tenancy Act, 2021, §10.

[v]The Model Tenancy Act, 2021, §20(3).

[vi] The Model Tenancy Act, 2021, §32.

[vii ] The Model Tenancy Act, 2021, §35(7).

[viii] The Model Tenancy Act, 2021, §35(8)

[ix] The Model Tenancy Act, 2021, §38(3)

[x] The Model Tenancy Act, 2021, §37.

[xi]The Model Tenancy Act, 2021, §35(2).

[xii]The Model Tenancy Act, 2021, §21.

[xiii]The Model Tenancy Act, 2021, §22(2).

[xiv]The Model Tenancy Act, 2021, §27.

 

Image Credits: Photo by Sasun Bughdaryan on Unsplash 

 It is only when the fine balance of responsibilities created under the Model Act are replicated in rental agreements, that the potential positive socio-economic impact of the Model Act will be of aid to the collective advancement towards the goal of ‘Housing for All’.

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2021 Budget Impact on the Real Estate Sector

The Real Estate Sector has received an undeniable boost with the recommendations of the Union Budget of 2021. Projects like ‘Housing for All’ and ‘Pradhan Mantri Awas Yojana’ (PMAY) have always received emphasis under the Modi regime. Through the changes proposed to be implemented by the Union Budget of 2021, it is clear that measures like the granting of tax holidays for affordable housing and tax exemptions in the interest of migrant workers with regard to rental housing projects point towards the priority that the housing and Real Estate Sector enjoy in the current Union Government’s policy and execution scheme.  

Considering the unavoidable and unforeseeable fiscal deficit that struck the economy with the onset of the pandemic in 2020; the Finance Ministry had to tread judiciously with limited room for any big announcements under the Union Budget of 2021.  

 

The main standpoint with regard to the Real Estate sector that was observed was the policy of the government to promote and facilitate ‘Housing for All’ which entailed prioritizing and increasing access to and affordability of housing.  

The Budget of 2021 allotted Rs. 54,581 crores to the Ministry of Housing and Urban Affairs. 

  
Here is what the Real Estate gained in the Union Budget of 2021 

 

Increase in safe harbour limit for primary sale of residential units 

  • The safe harbour limit for the primary sale of residential units has been increased from 10% to 20% in order to increase the incentivisation of Real Estate developers and home buyers. 

Incentivising Affordable Housing 

  • In an instance of taking up a loan to purchase a house; the government had already allowed, in its 2019 Budget; a deduction of interest rate that amounted to a monetary sum of around Rs. 1.5 lakh to increase affordability and purchasing power. 
  •  This deduction in interest rates for housing loans is proposed to be extended further for another year- till March 31, 2022 in the current Budget policy. This would mean that the deduction of Rs. 1.5 lakh will continue to be available for loans that are taken up in order to purchase houses at affordable rates till March 31, 2022.  
  • To further advance the procurement and supply of affordable housing, the current Budget also proposed a year-long tax holiday for affordable housing projects till March 31, 2022.  
  • With an unprecedented rise in the number of migrants all across the country due to the pandemic; Nirmala Sitharaman has also advanced the action of allowing for a tax exemption for notified “Affordable Rental Housing Projects” in order to facilitate and encourage the supply of Affordable Renting Housing to these migrant workers.  

REITs 

  • Further, the Budget has also encouraged debt financing of InVITs and REITs by Foreign Portfolio Investors by according relevant amendments to legislations. These amendments would facilitate ease of financing to InVITs and REITs, consequently promoting greater funds for the real estate and infrastructure sectors.  
  • The Finance Ministry also went a step further and suggested the provision of advance tax liability to arise only after the payment or declaration of dividend. This move is aimed to eliminate the uncertainty that arose with an estimation of dividend income by shareholders for paying tax in advance. Further, the Finance Ministry has also proposed that tax on dividend income may be deducted at the more beneficial treaty rate, for Foreign Portfolio Investors.   

Infrastructure Development 

  • The Budget has also allotted revenue towards the development of infrastructure around the country. 702 kms of conventional metro is already operational, added to another 1,016 kms of metros and RRTS that is under construction in 27 cities across the country. 
  • Metro rail systems and access will now be provided at affordable and decreased prices, to increase access through the development of two new technologies- ‘MetroNeo’ and ‘MetroLite’ in Tier-2 cities and certain areas of Tier-1 cities. This is expected to increase efficiency and safety. 

Construction workers 
 

  • With an increase in the importance accorded towards the unorganised labour sector, the Finance Ministry has further proposed to initiate and introduce a portal to collect information on construction-workers, buildings and gigs, particularly for migrant labourers. This will promote insurance, housing, health and food policies for these migrant workers. 

 

Analysis  

 

A close analysis of the afore-mentioned changes proposed by the Union Budget undeniably brings out the Government’s intention to assist, promote and facilitate development and growth in the real estate sector.  The focus laid by the Government on Affordable Housing and its policies will undeniably cause growth in this sector. Additionally, the infrastructure initiatives in the Budget are also extremely beneficial and will provide a huge boost to the sector, allowing its growth and subsequent development.  

However, the current Budget policies revolving around the real estate sector have failed to accord with the additional demand levels that were anticipated by the stakeholders of the industry in order to sustain the growing demand for housing. To facilitate growth, efficient execution and time-bound implementation are crucial. Persistent focus and attention according to the policy of ‘Minimum Government, Maximum Governance’ would promote the ease of doing business. The proposed level of expenditure on infrastructure by the Government on metro lines, roads, warehousing, ports, etc. is a move that is expected to give a boost to the economic GDP and hence, is commendable.  

Conclusion 

 

While the various measures proposed to be implemented in the real estate sector through the current Budget will positively impact an economy that is still grappling with the hit delivered by the COVID 19 pandemic, these changes and proposals also act as a mark of the industry’s transition from mere existence to actual growth. 

References 

1 Budget Speech | Union Budget. (indiabudget.gov.in) 

2 Budget 2021: Analysis. (freepressjournal.in) 

 

Photo by Fabian Blank on Unsplash

close analysis of the aforementioned changes proposed by the Union Budget undeniably brings out the Government’s intention to assist, promote and facilitate development and growth in the real estate sector.  The focus laid by the Government on Affordable Housing and its policies will undeniably cause growth in this sector. Additionally, the infrastructure initiatives in the Budget are also extremely beneficial and will provide a huge boost to the sector, allowing its growth and subsequent development.  

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Income Tax Relief for Developers and Residential Home Buyers To Boost Real Estate Sector

In a bid to provide an additional boost to the economy, as well as the home buyers, the Union Finance Minister – Nirmala Sitharaman, has announced a new stimulus package under Atma Nirbhar Bharat 3.0, on November 12, 2020.  As per the announcement, the acceptable difference between the ‘circle rate’ and the ‘agreement value’ for residential properties has been hiked from the existing 10% to 20%. The tax sop announced is expected to provide relief both to Developers as well as to Buyers, on the notional gains on which income tax is paid by them. The relief, which has been made effective from November 12, 2020, and will be applicable until June 30, 2021, is applicable only on the primary purchase of residential unit of value up to Rs. 2 crores.

What is Circle Rate?

 

Circle rate is the minimum rate per square foot for land or property fixed by the Government. State governments publish area-wise rates of properties, on a yearly basis, known as ‘Circle Rates’ or ‘Ready Reckoner’ rates or ‘Guideline Values’. Any difference between the Circle rate and the Agreement value beyond the acceptable rate [i.e. 10%, now increased to 20%], is taxed as “income from other sources” u/s. 56(2)(x) of the Income-tax Act 1961 (“the Act”). Accordingly, a Buyer of such property would be required to pay tax on the difference, at the applicable slab rates. Further, in the case of a Developer, under the provisions of section 43CA of the Act, the ‘sale consideration’ of such a property is deemed to be the Circle rate for the purposes of computing profits & gains.

 

 

How this will benefit?

Assume that a Buyer is buying a residential property from a Developer for a sum of Rs. 1 crore. The Circle rate value of the property is Rs. 1.2 crore. Prior to the relaxation, as the difference between the Circle rate value and Agreement value exceeded 10%, the Developer was required to consider Rs. 1.2 crore as his Sale consideration u/s. 43CA of the Act for the purpose of calculating his Profit & Gains from Business & Profession.

 

Similarly, since the difference between the Circle rate value and Agreement value exceeded 10%, the Buyer was required to show the difference between the Circle rate value and Sale consideration of Rs. 20 lacs (1.2 crore Less 1 crore) as deemed income under the head “Income from other sources” u/s. 56(2)(x) of the Act and pay tax on the same at the applicable rate.

 

The stimulus package announced provides relief by increasing the acceptable difference between the Circle rate and Agreement value from 10 % to 20 %, providing much-needed relief, both to the Buyer as well as to the Developer, during the current pandemic times.

 

The above tax sop is available only on purchase of new residential property from the Developer of value up to Rs. 2 crores and is not applicable on the resale of property. Also, the said benefit is not extended to the sale of commercial property. Nevertheless, the stimulus is expected to help Developers to clear unsold stock and generate liquidity for their other projects.

Image Credits: Nataliya Vaitkevich from Pexels

The stimulus package announced provides relief by increasing the acceptable difference between the Circle rate and Agreement value from 10 % to 20 %, providing much-needed relief, both to the Buyer as well as to the Developer, during the current pandemic times.

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