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This article is written by Koonal Tanwar, an advocate practising at Delhi High Court.

Introduction

The ongoing political, economic & Public health fiasco supplemented by the extreme lockdown measures, adopted & enforced by the government to curtail the spread of COVID-19, has resulted in collision of various interests of the lessors (Landlord) with that of the lessees (tenant). On one hand, the lessees were neither able to enjoy the possession of the property nor were able to generate any income because of the national lockdown, whereas on the other hand, the lessors felt completely deprived of their rental income. Generally, the ‘relationship’ of the lessor & the lessee is well defined under a lease agreement[1], nevertheless, the same is also governed by the various laws of the land, inter alia, The Law of Contracts. However, such a relationship is jeopardised by the unusual turn of events which are presently prevailing across the nation.

In such scenario, the most important question which arises is:

Whether the lessees are liable to pay their lease rent even during the lockdown period, when the lessees were prohibited to carry out any business activity[2] on such rental property?

To find the answer to the aforesaid question, one needs to look into the ‘boilerplate clauses’ of the agreement, such as ‘force majeure clause’, notice clause, amendment clause, indemnity clause, termination clause, temporary suspension clause, etc.

Force Majeure Clause: A Force Majeure event refers to those unforeseeable events, which are beyond the control of either of the parties and which could not have been avoided even if the Affected Party had taken reasonable care, and for which none of the parties can be held responsible.

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The Force Majeure clause usually defines the obligations of the parties to a contract during the occurrence of those unforeseeable events, which are beyond the control of the parties, and for which none of the parties can be held responsible. Such clauses usually include the events, which are acts of God, war, government action, terrorism, floods, earthquakes, and other natural calamities. During the occurrence of such events, the contracting party is entitled to be temporarily excused from performing its obligations as prescribed under the contract. Therefore, the Force Majeure Clause generally provides two options to the parties, i.e. Temporary suspension of the agreement or termination of the agreement.

Thus, there are two conditions which need to be satisfied to invoke the Force Majeure clause:

  1. Occurrence of an unforeseeable event which is beyond the reasonable control of any of the parties; and
  2. Such occurrence must affect the ability of any of the parties to perform its respective obligations.

Undoubtedly, the first condition stands satisfied inasmuch as this pandemic is beyond human control and many of the most developed nations including USA, Spain, France, etc are struggling to control the spread of this deadly virus. Moreover, the extreme lockdown restrictions imposed by the government was also clearly beyond the control of the parties.

As far as the second condition is concerned, it is a fact that the tenant takes the commercial property on lease only for a specific object/purpose i.e. to carry out a business activity. Furthermore, the rent of commercial property is usually very high as compared to the residential property as the tenant is expected to earn from the rental property. However, the lockdown along with the several restrictions imposed by the government, rendered it impossible for the tenant to even have access to such property. Therefore, in such circumstances, it can be said that the purpose of the contract was frustrated.

Furthermore, recently the finance minister has announced that the government will issue an advisory to states and urban territories and their regulatory authorities ‘to treat COVID-19 as a force majeure event’ under RERA[3]. Therefore, one can expect that even the courts shall be inclined to treat the COVID-19 as a force majeure event for various types of contracts.

It is to note that the temporary suspension of the contract, can neither be claimed as a matter of right nor can be implied under any Indian Law, but its applicability can only be construed by carefully perusing the language of the clause[4]. Moreover, recently The Hon’ble High Court of Delhi, in  CM Appl. 10848/2020 vide its order dated 21.05.2020, has held that “the fundamental principle would be that if the contract contains a clause providing for some sort of waiver or suspension of rent, only then the tenant could claim the same. The force majeure clause in the contract could also be a contingency under Section 32 which may allow the tenant to claim that the contract has become void and surrender the premises. However, if the tenant wishes to retain the premises and there is no clause giving any respite to the tenant, the rent or the monthly charges would be payable.” Nonetheless, in the mentioned case, there were certain facts & circumstances which were specific to that case, such as:

  1. There was no rent agreement or lease deed between the parties and hence Section 32 of Indian Contract Act could not apply to that case;
  2. The case is governed by the provisions of the Delhi Rent Control Act, 1958;
  3. The tenants are also not ‘Lessees’ but were ‘unauthorised occupants’ in the mentioned case as an eviction decree has already been passed against them;
  4. The compensation ought to be reasonable and should make up for the loss caused to the Landlord due to delay in execution of the eviction decree. These factors completely tilt the balance in favour of the Landlord.

Therefore, the said order passed by the Hon’ble High Court cannot be said to operate as a general law for all other cases dealing with the commercial lease and other matters shall be dealt with by the courts only after considering their respective facts & circumstances.

Nevertheless, absence of force majeure provisions in the contract does not render the party as remedy-less, as the common law ‘doctrine of frustration of contract’ can come to such party’s rescue. The Hon’ble Supreme Court in Energy Watchdog v. CERC & Ors[5], specifically held that “in case the contract itself contains an express or implied term relating to a force majeure condition, the same shall be governed by Section 32 of the Indian Contract Act. Whereas, insofar as a force majeure event occurs that dehors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract Act.” Hence, the Doctrine of frustration finds its manifestation in Section 56 of the Indian contract act 1872 which deals with those cases where the performance of contract has been frustrated and the performance of it has become impossible to perform due to any unavoidable reason or condition. However, threshold of the doctrine usually remains very high in the eyes of law and “the relief is given by the court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement[6]”. Moreover, way back in 1968, while drawing a distinction between a ‘completed conveyance’ and an executory contract’ the Supreme Court has held that section 56 does not apply to lease agreements[7]. If that’s so, then if the lessees who have taken land commercial land on lease by the government are forced to pay the rent even where the government itself imposed lock down restrictions, wouldn’t that amount to unjust enrichment? Nonetheless, there has been a drastic change in the circumstances since then, and also the prevailing circumstances caused due to outbreak of novel coronavirus Covid-19 is totally unprecedented. Therefore, in the near future, it can be expected that the Hon’ble Supreme Court would possibly differ from the stand taken by it in the distant past.

Apart from the aforesaid, both the lessors & the lessees must consider following facts before taking the matter to the court:

  1. The country is facing its worst economic slump since 1991[8], and there appears no chances of recovery any soon. Unprecedented mass layoffs and furloughs by most of the companies has led to a drastic jump in the rate of unemployment in India. Consequently, the rates of properties which are already at all time low, will further go down. As a result of which, the rental of the commercial spaces/properties will sink substantially.
  2. The government has already directed all the offices/establishments/businesses to operate on ‘Work From Home’ model as much as possible. This will further diminish the demand for commercial spaces and consequently, it will become very difficult for the lessors/landlords to find a new tenant/lessee at the same rent/lease amount which they are currently getting from their tenants/lessees.
  3. During such times, if a tenant vacates and hands over the possession to the landlord, the chances of the property lying vacant for long durations will be very high.
  4. In case the landlord moves the court, seeking recovery of the unpaid rent, the chances of getting an immediate relief would be very low, considering the huge pendency of matters before the courts and the option to go upto the Supreme Court would be open to the parties.
  5. The fate of such litigation will highly depend on how well the clauses of the lease agreement are drafted as the courts shall be guided by various principles of contractual interpretation.[9]

Therefore, it is advised that the parties should opt out of the court settlement, which will save them a lot of money and hassle. Hence, It would be preferable that they negotiate amongst themselves & settle their disputes amicably, keeping the aforesaid facts & circumstances into consideration. First step which a tenant should take is to notify & request the landlord either for complete waiver of the rental during the period of lockdown, or if the landlord seems reluctant, the tenant could ask for a good discount in the rent for the time being. During these difficult times both the parties should think practically and act accordingly as reckless decisions could bring more harm than good in the long term.

Furthermore, having discussed the importance of the language of the contract, one should always get the contract drafted/vetted by a professional. Thinking about saving money in such principal things often costs a huge amount of money during such desperate times. Hence, investing in quality legal services is always the right thing to do. Besides, there are many courses on the contracts per se, which one can enrol oneself into, for broadening one’s knowledge & understanding about the different clauses of a contract, its importance & consequences. LawSikho is one of such organisations which provide high quality online courses on various aspects of law for both advocates as well as non-advocates.

References

[1] Despite the fact that the importance of the contract/‘Lease Agreement’ is very high in the eyes of the law, the people in India do not deem it appropriate to get such an important piece of document, drafted by a professional advocate. They usually get the same prepared by a cheap non-professional by using the cut-copy paste method for a nominal charge. Consequently, many important clauses are usually missed out.

[2] For the purpose of this article, only those business activities are being considered which were not included within the definition of essential activities by the government and hence were prohibited during the lockdown period.

[3] Ankit Sharma ‘Treat Covid-19 as ‘Force Majeure’ under RERA: Finance Ministry’, ETRealty, May 13, 2020

(see more at:- https://realty.economictimes.indiatimes.com/news/industry/treat-covid-19-as-force-majeure-under-rera-finance-ministry/75718131)

[4] Surendra Nath Bibran v. Stephen Court, AIR 1966 SC 1361, Raichurmatham Prabhakar and Ors. v. Rawatmal Dugar, (2004) 4 SCC 766, Aranya Hospitality Management Services Pvt. Ltd. v. K. M. Dhoundiyal & Ors. [Arb. A. (Comm.) 6/2017, decided on 21st March, 2017]

[5] Energy Watchdog v. CERC & Ors., (2017) 14 SCC 80

[6] Satyabrata Ghose vs Mugneeram Bangur & Co., AIR 1954 SC 44

[7] Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr., AIR 1968 SC 1024

[8]‘India facing worst economic slump since 1991, growth forecast at 1.5-2.8%: World Bank’, The Print, 12 April, 2020

[9]Investors Compensation Scheme Ltd vs. West Bromwich Building Society, [1998] 1 All ER 98


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