This article has been written by Rishav Kiran Vakharia, pursuing the Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.
A leave and licensing agreement is mainly an agreement that is entered into by a landlord (licensor) and a tenant (licensee) who’s looking to occupy the property of the landlord for commercial or residential purposes. The leave and licensing agreement allow the licensor to transfer the rights and interests of his property to the licensee for a certain amount of consideration. These licenses have to be registered at the sub-registrar’s office. A license is a personal right granted to a person to do something upon the immovable property of the licensor. This license does not amount to the creation of interest in the property itself but is purely a permissive right to use and occupy the immovable property. It creates no duties and obligations upon the persons making the grant and is, therefore, revocable except in certain circumstances expressly provided. Further, the rights and duties are determined by the terms and conditions of the contract entered by parties, unlike a lease which is governed by the Transfer of Property Act, 1882. The license, when granted, has no other effect than to confer liberty upon the licensee to go upon the land, which would otherwise be unlawful.
The outbreak of the novel coronavirus has created a global pandemic of a previously unexplored level. Over 30 million people were infected and more than a million died due to the virus. Amidst the COVID-19 global pandemic, many businesses have suffered losses as well. As the virus spreads, it causes an adverse effect on the economies of different countries by disrupting and reducing their economic activities. Apart from the industrial sector, various other sectors were also hit by the raging pandemic and were forced to bring about changes to the way they operated. One of the sectors that faced a lot of issues is the real estate sector which also took a major hit during the pandemic. Due to people being forced to accept a lesser salary than usual and others being laid off or fired, people found it hard to keep up with the rent charged by landlords. A majority of residential leave and licensing agreements are taken by people who work in blue or white-collar jobs who were asked to take a full pay cut or accept a reduced salary in order to retain their jobs. Others entering these agreements were associated with start-up businesses and the pandemic only increased their uncertainties. Most startups did not survive for too long when quarantine restrictions were laid down by the government which led to them going bankrupt and thus, many ended up canceling the licensing agreement that they had signed for their businesses. Even huge companies faced problems while trying to pay rent as businesses had slowed down and people had to be fired.
Force majeure clause and COVID-19
In general most commercial leave and licence agreements have a force majeure clause. This clause basically means that if under unforeseeable circumstances an event takes place which renders the party to the leave and licensing agreement incapable of fulfilling his or her part of the agreement, it shall be a good enough excuse for non-performance of the contract. Force majeure events include but are not limited to the following:-
- Plague, epidemic, and natural disasters such as flood, drought, volcanic eruption, hurricane, cyclone, tornado, landslides, tsunami, etc.
- Fire, explosions, nuclear accidents, biological or chemical contamination.
- Civil war, riots, military power, a revolution of any sort, war declared by a different country, invasion, armed conflict such as a hostile attack, act of terrorism.
- Ionising radiation or radioactive contamination.
- General labour disturbances such as strikes, lock-outs, boycotts, occupations of factories and premises.
In India, when the spread of COVID-19 began and the government saw no other way to stop the spread of the virus except by calling for a nationwide lockdown, it gave way to the recognition of this event as a force majeure. No one could have predicted that a pandemic would take place which would lead to people losing their jobs and their salaries. These people did not have the means to pay the rent in full as agreed upon in the leave and licensing agreement which led to the landlords or licensors agreeing to take a lesser amount of rent or revoking the agreement altogether.
A license can only be revoked when the property is destroyed or by a superior force standing altered from what the property actually was when it was given to the licensee. Here, the contract stands revoked only if the two essentials are fulfilled and therefore, it is clear that most licensees could not use this as the pandemic did not destroy or alter properties, it just stopped the licensee from using the property for what it was agreed for by paying the full consideration. and therefore, this gives rise to the force majeure clause under Section 32 of the Indian Contract Act 1872. The invocation of this clause greatly depends on how the same has been defined in the agreement between the two parties. Firstly, there are certain essential elements that have to be fulfilled for the clause to come into play. They are as follows:
- There must be an occurrence of an event.
- There is a default in the performance of the duties mentioned in the agreement.
- The default in the agreement must be due to the happening of the said event which is beyond the control of the party so invoking the force majeure clause.
- This default must be absolute and there must not exist an alternative that may render the party able to continue with the contract.
- The force majeure clause can be invoked only after a point where there is no other alternative for the party to mitigate the loss despite having tried everything in their effort to manage the risk.
Therefore, the main question is whether the force majeure clause can be invoked in the case of the COVID-19 pandemic. It is mentioned in the Indian Contract Act that the same can be invoked in the case of the act of god, emergency, calamity, or act of government. Thus, can the pandemic and the lockdown restrictions constitute one of the above for the invocation of the force majeure clause?
Force majeure mainly talks about unforeseen events taking place due to which there is a non-performance of a contract leading to either suspension or termination of the contract. One can question whether the COVID-19 plague is a biological event or an act of god? Is it hard to say as an event such as this has not taken place for many years and the law pertaining to such uncharted events is yet to be developed? There is no particular definition or legal provision to categorise the same. Many countries have had to change their understanding of existing laws of force majeure to apply them to the pandemic. Taking the United States, for example, the courts there usually interpret force majeure events as severe natural disasters based on the precedent set by the supreme court in Gleeson v Virginia Midland Railway. However, after the pandemic, they had to go against this precedent to allow for COVID to be brought under the ambit of force majeure. Therefore, the courts accepted COVID-19 as an act of god and invoked force majeure but the application also depended on many other instances, such as what is included in the contract, negotiations, dispute resolutions, limitations of liabilities, indemnity, etc.
Impact of COVID-19 on leave and licensing agreements
The Government of India mentioned that COVID-19 constitutes a natural calamity and the disruption of the supply chain of goods will enable the force majeure clause to be invoked. This led to many lease and license agreements being altered to pay deferred rent till the business started making enough profits to pay the rent on the whole. Commercial agreements took a major hit as they were the ones paying the most rent all of which was taken from the profit of the business, however, if the business could not run during the lockdown there were no profits and with no profits came the problem of not having enough money for the payment of the stipulated rent agreed in the contract. The problems did not stop here. While some parties had the ability to pay at least half the rent there were others who could not pay even half which led to the business shutting down and the agreement being revoked. This meant that the licensor would have to find a new tenant for his immovable property which was on its own another problem as no one was looking to set up a business during a lockdown where no one was allowed to go out. Coming to residential agreements, a majority of the population who live in rented properties paid the stipulated rent through the profits or their salary that they had earned either from their business or their job respectively. However, due to businesses shutting down and running under loss and people losing their jobs, rents were being reduced by 20 – 50% of the originally stipulated rent. It was even ordered by some of the state governments of certain states to allow for deferred rental payment of those who found it difficult to pay rent.
The Hon’ble Delhi High Court had the occasion of analysing suspension of rent vis-a-vis COVID in the recent judgment passed in the case of Ramanand & Ors. v. Dr. Girish Soni & Anr. The tenant in the case had filed a pending rent revision petition and had moved an interim application seeking suspension of rent of Rs. 3,50,000/- per month due to the closure of business activities during the lockdown. He pleaded frustration of contract under Section 56 of the Indian Contract Act, 1872. The High Court consequently analysed the concept of frustration of contract as envisaged under Section 56 of the Indian Contract Act, 1872 and came to the conclusion that the same has no applicability to the case at hand as the agreements of the lease are executed contracts as different from executory contracts as executory contracts are contracts that have not yet been fully executed. It is a contract in which both sides still have important performance yet to be performed and that the lease agreements are not of this nature are therefore not under the ambit of executory contracts. Rather, they have executed contracts as they have been duly executed by the parties to the contract. The concept of frustration of contracts can only be applied to executory contracts. It was further held by the Hon’ble Court that frustration of contract makes the whole contract void and therefore, their application to leave and licensing agreements would mean that the tenants must then surrender the possession of the premises.
Having experienced this situation first hand and having gained first-hand knowledge from, the author would like to conclude by saying that most commercial licensors wrote off the rent and required the licensee to only pay the basic maintenance of the immovable property or allowed for payment of a lesser rent in installments as and when the licensee had the ability to pay. When it came to a revenue-sharing rental agreement, the revenue was written off and only the basic minimum maintenance was made to be paid by the licensee. Coming to residential leave and license agreements, the higher income class did not face too many problems as they were asked to work from home and were paid the same salary. They used the premises to work and therefore the licensor did not grant any reduction in rent as there existed no situation which led to the licensee being incapable of making payment. However, when taking a look at the lower middle class and low-class income group, it appears as if they were affected the most by the pandemic and the lockdown as they either worked for daily wages or low-income jobs which suffered losses and had to shut down or let go of their employees rendering them without a salary and incapable to pay the whole amount of the rent. In these cases the licensors often allowed for a reduction in rent going as low as offering a 50% reduction and for those who could not pay rent at all, the agreement was revoked completely. Even though the law deters licensees from evoking the force majeure clause by using COVID-19 and the mandatory lockdowns as a cause, the courts and various states have tried to adopt a more liberal stance keeping in mind the need to maintain a balance between the rights of the licensor/lessor and licensee/lessee as well the uncharted nature as well as the gravity of the situation.
- Rahul Jain, Kushboo Rupani, Maharin Mehta and Asiya Khan, Force Majeure: Impact on leave and licence agreements, Mondaq, (Aug. 2, 2021, 1:20 9m) https://www.mondaq.com/india/litigation-contracts-and-force-majeure/985776/force-majeure-impact-on-leave-and-license-agreements
- Carter b Casady & David Baxter, Pandemics, public-private partnerships (PPPs), and force majeure, pp 1077-1085 2020
- Rahul Jain, Kushboo Rupani, Maharin Mehta and Asiya Khan, Force Majeure: Impact on leave and licence agreements, Mondaq, (Aug. 2, 2021, 1:40 9 pm) https://www.mondaq.com/india/litigation-contracts-and-force-majeure/985776/force-majeure-impact-on-leave-and-license-agreements
- Nohid Nooreyezdan, Monika Bhonsale, Sohni Kherada, Impact of Covid 19 on license and leasing arrangements. AZB & Partners (Aug. 2, 2021, 1:55 pm) https://www.azbpartners.com/bank/impact-of-covid-19-on-license-and-leasing-arrangements/
Students of LawSikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: