News

SUSTAINABILITY OF REAL ESTATE IN THE ERA OF COVID-19

With the growth of human civilization, economy has witnessed rise in pandemics, an epidemic that spreads beyond a country’s border. The concerns have now been made in the possible thoughts of business and legal issues due to novel corona virus on the real estate sector.

It is a situation that has brought the entire world into the health care crisis and immediate threat to heath. The global business has faced major disruptions due to the global pandemic, with the obvious reason of health repercussions. There have been direct commercial impacts on specific sectors, with interruptions to supply chains, challenges in meeting contractual obligations and implications under funding arrangements, other impacts are universal.

There is large impact on travel and tourism industry and containment measures, increased record keeping, protecting sensitive personal data to business continuity planning; the economy in the world has drastically seen a fall. Corporations would need to assess the viability of any measure within their respective workplace and come up with solutions depending upon the nature of their business and interaction with the public.

There are innumerable legal challenges faced by the real estate industry brought by Covid-19. These issues can be broadly classified as those covering Commercial Office Real Estate, Retail Commercial Real Estate and those affecting Real Estate linked Businesses.

Real estate’s may have the biggest drawback due to the Pandemic. Where all commercial real estate may see a decline, retail businesses may find that their regular flow of customers has substantially reduced. Service businesses may face similar consequences like the other two. There might be a reduction in the work hours because employees are quarantined or because customers do not want to come to a place where they have to physically interact with employees, such as barbershops, restaurants, and beauty parlors. Commercial property values may decline, rent rates may decline, and the ability of tenants to make their lease payments may increase loan default rates.

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

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

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

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

Many international and domestic construction contracts contain force majeure clauses to give relief in these circumstances. The purpose of a force majeure clause is to avoid the legal and commercial uncertainty of events that would otherwise frustrate the performance of the contract. The operation of the force majeure clause may differ in each case and specific legal advice should be sought.

Therefore, there need to be strategic investment made in the such situation for new properties and already existing contracts must be amended considering the present situation. A little adjustments are healthy not only for an individual but for society an mankind as a whole.