This article is written by Yash Kapadia and Utkarsha Nikam.
The World Health Organization was informed about cases of pneumonia of an unknown cause in the city of Wuhan, China in late 2019. On January 7, 2020 the Chinese Authorities identified a novel coronavirus as the cause, temporarily naming it “2019nCov”. On March 11, 2020, the World Health Organization declared COVID-19, as a pandemic. Since then, countries around the world have imposed mass travel bans, temporary lockdowns and extremely restricted human movement in order to curb COVID-19 from contracting others.
The COVID-19 coronavirus poses severe challenges to the global economic and commercial market. Some have had direct commercial impacts on specific sectors, with interruptions to supply chains, challenges in meeting contractual obligations and implications under funding arrangements etc.
According to the World Health Organisation, Coronaviruses are a large family of viruses which cause illness in animals or humans. In humans, these are known to cause respiratory infections which may differ from a mere common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recently discovered coronavirus causes a disease called COVID-19. The most common symptoms of COVID-19 are fever, dry cough, and tiredness. Other symptoms that are less common and may affect some patients include aches and pains, nasal congestion, headache, conjunctivitis, sore throat, diarrhea, loss of taste or smell or a rash on skin or discoloration of fingers or toes. These symptoms are usually mild and begin gradually. Some people become infected but only have very mild symptoms. The only positive aspect of this virus is that most people (about 80%) recover from the disease without needing hospital treatment.
The present article paper seeks to examine the impact of COVID-19 on various parameters below:
Analyzing the impact of COVID-19 on global economy
It is evident that the economic impact of COVID-19 has been disruptive throughout the world and we are oblivious of a timeline as to when everything will return to normality. Today, we are witnessing something unprecedented which has tested our interpersonal, social and professional relationships. Majority of businesses have been shut owing to the nation- wide lockdown ceasing any sort of economic activity.
According to the International Monetary Fund (IMF), the global economy is estimated to fall over three percent, the steepest decline since the Great Depression of the 1930s. In the United States, more than twenty million people have filed for unemployment benefits. Industrial activities in the Oil and Natural Gas sector have been affected due to a fall in travel worldwide and the transport industry came to halt owing to several countries imposing nationwide lockdowns. The demand for industrial metals also reduced owing to lockdowns in the US, China, European countries.
IMF also anticipates a decrease in food prices by 2.6% in 2020 all due to supply chain disruptions, export restrictions and food security concerns in every region affected by COVID- 19.
However, on an optimistic note, many advanced countries have issued support packages in order to cope with COVID- 19 and regain financial stability, like the United States’ package which works out to be 13% of its GDP and Japan’s package which amounts to above 21% of its GDP. The latest being India’s Atmanirbhar Bharat Abhiyan package amounting to Rs. 20 lakh crore (10% of India’s GDP) which aims to provide relief to Medium, Small and Micro Enterprises (MSMEs) in the form of an increase in credit guarantees.
Impact of COVID-19 on the environment
While the people of the world are suffering, our planet is healing. COVID-19 has portrayed shocking and unbelievable results on the environment. Due to the nationwide lockdowns imposed for defeating COVID-19, the planned transportation was reduced by more than 75%. As all the roads are almost empty, all the industries are almost closed, with only a handful of vehicles providing essential services, CO2 emission, fossil fuel emissions, oil refining, and petrol and coal consumption, have reduced drastically. CO2 emissions have reduced by 8% and air pollution globally has reduced by 25-40% and it is anticipated that it will reduce even further. With flights ported and construction work at halt, the levels of noise pollution have also gone down significantly. For the first time in over 50 years, Mount Everest in Nepal was visible to the naked eye from 120+ miles away from Kathmandu valley. More than 30 cities which had its Air Quality Index (AQI) around 201-300 have improved drastically to about 101-200. New Delhi was ranked as the ‘most polluted city’ in the world by WHO in May 2014, AQI above 200. However, today it has dropped down 23 steps owing to decreased pollution levels. The skies are suddenly more beautiful showcasing nature at its best.
It is in my opinion right to say that no measures, strategies, efforts or recessions, inflations and not even any epidemic or pandemic in this entire century has had such a remarkable impact on the environment that has been done in the last five to six months.
Analyzing the impact of COVID- 19 on the real estate sector in India
Indian real estate sector, which was already struggling to re-emerge from the past turbulence of structural changes, policy reforms, and the liquidity crisis, is now set to witness another major fallout. The Coronavirus outbreak, which originated in China, has infected millions of people worldwide. Simultaneously, it has disrupted industries, trade, and business cycles, thus halting global economic activity significantly.
The real estate market is very important for every country, not merely because it ensures construction structures and infrastructure necessary for life and work, but also because it has strong, multiple durable impacts on the development of a nation’s entire economy. As evident, project sites are shut, site visits have stopped, and construction activity has come to a grinding halt, eventually impacting housing sales. The residential sector has been finding it difficult to launch new projects and continue work on the on-going projects due to halts and labour shortage. There has also been a delay in the supply of construction materials which has further pushed the delivery timelines of various real estate projects on a map of uncertainty.
The mood of all the major and minor stakeholders in this field have been gloom ridden in the second and third quarter of 2020 due to economic slowdown and credit squeeze. It has been reported that over 18,000 projects under construction have been affected due to a shortage of over 30% of construction workers not reporting to work amidst this lockdown.
The closure of malls and retail outlets and other entertainment venues has put the future of commercial real estate deals in the market on hold. Companies all over the world have announced remote working for its employees to contain the spread of COVID- 19 due to which office utilization rates have fallen as remote work increases.
With only five deals getting concluded till May, 2020, it is reported that private equity investments in the real estate sector have taken a massive plunge by 93 owing to India’s economic slowdown.
Analyzing the impact of COVID 19 on landlord tenant relationship worldwide
The impact of COVID- 19 on landlords and tenants is inevitably significant. Majority of work spaces have been shut down in the commercial segment owing to their respective nation-wide lockdowns. Amidst this alarming situation, the businesses which have rented office spaces are now finding it difficult to comply with the obligations under their Rent/ Lease Agreements. Each country around the world is trying its best to support the real estate sector to weather with the COVID- 19 pandemic. Tenants occupying office space and retailers are already in the process of talking to their landlords, trying to renegotiate their commercials in lease agreements in dire need to pay lesser license fees/rent.
China follows the philosophy of “housing for living, not speculation”. Therefore, housing demands under the real estate sector across China recovered in March 2020. This is mainly due to their attractive monetary policies, low interest rates, tax deductions, and government charges to be paid in multiple installments which allows the developers to offset forward sales deposits along with the bank guarantee letters.
United Arab Emirates (UAE)
United Arab Emirates (UAE) in light of the COVID- 19 pandemic has waived off property registration fees and reduced its registration fees by one hundred basis points in Abu Dhabi and DIFC (Dubai International Finance Centre) respectively. The bank exposure has also increased to a whopping thirty percent as well as UAE has now allowed a five percent increase in loan- value ratio on mortgage loans.
In Australia, the federal government has announced that no evictions must take place over the next 6 (six) months and that the concerned landlords and financially distressed tenants (residential and commercial tenants) must amicably agree to reach agreements with respect to the same.
In Singapore, the rental waivers allowed by landlords are at different rates across different properties. A property tax rebate has also been allowed and the tenants will enjoy the same. There is also a legal protection for any termination of leases if the tenant were not able to abide by the terms of their contract due to the effects COVID- 19 has had monetarily on tenants in Singapore.
Relationship between a landlord and tenant and its legal implications
Since the lockdown has come into effect from March 24, 2020, debates have emerged as to whether tenants will be exempted or will have to pay their respective rents. The relationship between a landlord with his tenant or a lesser with his lessee is purely contractual except in cases where such a relation is governed under the provisions of Rent Control and Regulation Act enacted by the respective states where the parties reside in. This relationship is governed by promises and assurances given by both the parties which when put down on a paper turns into a legal document which we refer to as a Rent Agreement and/ Leave and License Agreement and/ a Lease Deed.
Leave and license agreement
A Leave and Licence agreement is a document that bestows the Licensee with permission to occupy the Licensor’s property. Hence the occupancy is granted on Leave and Licence basis and not on tenancy basis. Such an agreement makes eviction easier and in general provides the landlord with greater power.
As per the Indian law, a “Licence” is a right granted by one person to another person or a group of people. Such rights usually concern actions performed in or upon immovable property, actions which would seem unlawful otherwise. Licence grants personal rights and such rights are not transferable.
A Leave and Licence agreement is different from leases as leases create an interest in property whereas the former does not. Another point of difference is that leases are transferable which is not the case in a Leave and Licence agreement.
Can leave and license agreement be for more than 11 months
More often than not, rent agreements are signed for a period of 11 months so that the stamp duty and other charges can be avoided. According to the Registration Act, 1908, lease agreement registration is compulsory if the leasing period is 12 months or more than that.
A Rent agreement will also be governed by the provisions of Indian Contract Act, 1872 as what is included in the Agreement is an offer, acceptance and consideration between the landlord and his respective tenant. The Rent Agreement includes various clauses confirming the commercials mutually agreed upon by the parties such as rent, security deposit, rights and obligations of the landlord and tenant, or any event foreseeable or not, which if arises will give rights to parties to perform or not perform their part of the contract.
However, though a lease when executed is a contract under Indian Contract, 1872, there is a transfer of property in such cases, thus making Transfer of Property Act, 1882 as the governing Act. Section 108 of the Transfer of Property Act, 1882 lays out the rights and liabilities of the lessee and lessor in case of an absence of a contract between them. According to Section 108 (c) of the Transfer of Property Act, 1882, a lessor is deemed to have contracted with the lessee, if the lessee has paid rent reserved by the lease and performs the contract binding on the lessee.
Force majeure and COVID- 19
We continue to discuss the legal relationship between a landlord and his tenant and now focus on the contractual obligations between both the parties in the implication of a force majeure clause in the agreement. The present scenario is a challenging one for both the landlord and tenants who are striving to protect their own interest amidst this economic turmoil. Tenants are trying to invoke the doctrine of force majeure in order to protect themselves from non-fulfillment of their contract.
Further, we seek to examine whether this global outbreak may be construed as a force majeure event or an “act of God”, and can be taken as a defense to absolve a non-performing party from any liability arising out of failure to perform or delay in performance of it’s part of the obligations under an agreement.
The law relating to Force Majeure (a French phrase that means a ‘superior force’) is embodied under Sections 32 and Section 56 of the Indian Contract Act, 1872 (ICA). The term has been defined in Cambridge Dictionary as follows:
“an unexpected event such as a war, crime, or an earthquake which prevents someone from doing something that is written in a legal agreement”.
Whether Covid-19 will be considered as a ‘force majeure’ event?
Section 32 of ICA states that, “Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened”,
“Whether a contractual obligation can be avoided on the grounds of force majeure is a factual determination based on the specific terms of the contract. The courts would examine, whether in each case, the impact of COVID-19 pandemic prevented the party from performing its contractual obligation. Indian courts have generally recognised this concept and have enforced it where appropriate. It is pertinent to note that a force majeure clause cannot be implied under Indian law. It must be expressly provided for under the contract and protection afforded will depend on the language of the clause. There are two possible instances, which may suggest that a force majeure clause covers a pandemic:
- if the contractual definition of a force majeure event expressly includes a pandemic. Inclusion of pandemic to the list of force majeure events will provide clarity as to whether Covid-19 outbreak would trigger a force majeure clause in a contract; or
- if the force majeure clause covers extraordinary events or circumstances beyond the reasonable control of the parties. Such general, catch-all wording may be invoked if it is determined that the factual circumstances caused by the pandemic are beyond reasonable control of the affected party.”
Force majeure clause
Standard Force Majeure Clause
“Notwithstanding any other provision herein to the contrary, either party shall be excused from performance hereunder for failure to perform any of the obligations if (i) such failure to perform occurs by reason of any of the following events (“Force Majeure Events”): act of God, fire, flood, storm, earthquake, tidal wave, communications failure, sabotage, war, military operation, terrorist attack, national emergency, mechanical or electrical breakdown, general failure of the postal or banking system, civil commotion, strikes, or the order, requisition, request or recommendation of any governmental agency or acting governmental authority, or either party’s compliance therewith or government proration, regulation, or priority, or any other similar cause beyond either party’s reasonable control and (ii) such Force Majeure Event is beyond such party’s reasonable control. The party excused from performance shall be excused from performance (i) only after notice from the party whose performance is impaired, (ii) only during the continuance of the Force Majeure Event and (iii) only for so long as such party continues to take reasonable steps to mitigate the effect of the Force Majeure Event and to substantially perform despite the occurrence of the Force Majeure Event. The party whose performance is not impaired may terminate this Agreement upon five (5) consecutive days’ notice during any tax season or upon thirty (30) consecutive days’ notice at any other time, effective immediately upon written notice to such party.”
The Force Majeure Clause is a standard clause incorporated in most of the Agreements entered into between landlords and tenants. The two requisites are as follows:
- It must be an event, directly or by implication, beyond reasonable control of the parties;
- It must affect the ability of the parties to perform their obligations.
This clause entitles a party to not perform to or even suspend the performance of any undertaking during the subsistence of the Force Majeure event. Therefore, in the present scenario, if one is seeking to avoid his/her obligations one must prove the above mentioned prerequisites. This leaves the parties trying to prove COVID-19 as a force majeure event with two options: Either you are unable to perform your contractual obligations in light of the current nationwide lockdown or it has become impossible or unlawful to perform your obligations amidst the nationwide lockdown. Having said the above, due to an unprecedented situation like COVID- 19, the court may have a completely different approach in interpreting a force majeure clause in the following months.
Doctrine of frustration
In such circumstances, the parties may seek remedial measures under Section 56 of Indian Contract Act, 1872. The essential ingredients of Section 56 are that there must be a “valid and subsisting contract”, there must be some “part of the contract yet to be performed” and lastly “after entering the contract, it becomes impossible to perform”. The doctrine of Frustration is based on the maxim “les non cogit ad impossibilia” which means a law will not compel a man to do something he cannot possibly perform. If any contractual obligation becomes impossible to perform, a promisor in such cases will be relieved of any liabilities arising due to breach of contract. A lease however results in creation of an estate and once the lessee is in possession of the property no part of his contract is “yet to be performed” thereby making doctrine of frustration inapplicable in cases of leases. It is also pertinent to note that since the Transfer of Property Act, 1882 has special provisions with respect to a lease; the general provisions of Indian Contract Act, 1872 would not apply.
It is to be noted here that a Force Majeure event only suspends the performance of an undertaking but does not obliterate the requirement to perform even later on by a defaulting party during the operation of the event itself.
The Present Scenario
Since February, various State Governments and the Central Government have issued various guidelines, orders, ordinances, notices under the provisions of Criminal Procedure Code, 1973, Epidemic Diseases Act, 1897 and Disaster Management Act, 2005.
The central and the state governments have also requested all employers to make payment of entire salaries and wages of every employee/ worker irrespective of the nature as a daily or contractual labour or a white or blue collar employee, irrespective of the amount of salary he/ she is liable to receive.
This in turn leads to expectations in the mind of the landlords that their tenants’ ability to pay their rents has not been affected even in the presence of this pandemic. The landlords have a valid point to think that since even the banks have deferred their EMI payments there is no reason why a tenant should not be paying his/her rent.
Unfortunately, on the flip side, many employers/ landlords are not adhering to these directions and have posed salary cuts. The banks have deferred the payment of EMIs but the Term of Loan has been extended with the respective banks charging interests for the period of non-payments of the EMIs.
The situation is currently rife with possibilities of legal disputes arising between landlord and tenants.
At the outset, the Ministry of Home Affairs issued an order on 29th March 2020 with directions to support migrant labourers, adequate food supply and provisions for temporary shelters. The Order also directed all employers of any commercial establishments to pay full wages to their workers on their due dates. The Order mentioned that wherever workers are living in rented accommodations, their respective landlords must not ask for rent for a period of one month thereby lessening the burden on the working class. It is however mentioned in this order that it will be the duty of the district magistrate, superintendent of police and deputy commissioner of police to enforce this.
However, several landlords in Delhi evicted their temporary tenants who were engaged in the medical field due to fears of them getting infected. When the Residents Doctors’ Association of AIIMS, Delhi sent a letter to Union Home Minister Amit Shah describing how doctors, nurses and other healthcare workers were being ostracized and ousted by landlords, action was taken by the Delhi Government. By a notification, the government invoked Delhi Epidemics Diseases, COVID- 19 Regulations and gave powers to district magistrates and deputy commissioners and municipal corporations to take strict penal action against landlords under the relevant provisions of law. An Action-Taken report must also be submitted on a daily basis by the concerned officials.
Some of the top projections which are anticipated amidst our current situation across the real estate sector are:
- Construction site visits will see a considerable drop eventually impacting the sales.
- With project deadlines extended, projects’ completions will be pushed indefinitely.
- Inventory levels will tend to increase thereby putting pressure on builders.
- Cases of builder insolvency will increase as the liquidity situation worsens.
Even before our nationwide lockdown since the end of March 2020, PropTiger.com data show housing sales in India’s nine major cities declined by a staggering 26% in the period between January-March 2020.
Increasing legal disputes amidst this scenario
Traditionally and universally, there has been inherent discord in the landlord-tenant relationship. The current COVID-19 pandemic and its unprecedented impact and consequences have strained it even further. As a result of the pandemic, unemployment rates have shot up exponentially and pay-cuts have become ubiquitous. Under such circumstances, a large percentage of lessees are likely to find it difficult to meet the obligations under their respective lease agreements, thereby fuelling more landlord-tenant disputes.
Let us consider a typical situation involving a rent dispute between the landlord and tenant, which is before a court of law. Let us also presume that the landlord has the resources to pay court and counsel fees to recover his outstanding dues. Ordinarily, the outcome in such cases can be anticipated accurately. However, now, there is likely to be more legal uncertainty surrounding such basic disputes. Courts may have to take into consideration, a large number of factors including the ability of a landlord to unilaterally terminate the lease for failure to pay rent under extraordinary circumstances, a severe change in the tenant’s economic circumstances induced by a force majeure or act of state, and potential bankruptcy of a tenant. Further, in case of commercial leases, the court may be confronted with questions regarding the limited liability of lessee-companies.
The legal and economic implications of the lockdown, which was essentially an emergency measure implemented by the State, is likely to impact the contractual interpretation and outcomes in landlord-tenant disputes. Holistically, the foray of questions may go on and on while one can assume the time in months or years it would take to get a final decree which will always be open to challenge before a superior court of law.
In fact, the Commercial Courts Act, 2015 also bars the direct institution of money recovery suits. To be specific, Section 12A (Pre- Institution Mediation and Settlement) of the aforementioned Act imposes a mandatory obligation that the Plaintiff must initiate mediation before filing any suit which does not contemplate any urgent relief.
The Delhi High Court has recently put to rest a lot of doubts while it discussed the impact of the current scenario on contractual relationships between a tenant and landlord and whether rents can be waived amidst the currents scenario in Ramanand and Ors v. Dr. Girish Soni & Anr.
Brief facts of the above mentioned case is as follows:
- The petitioners were tenants of a commercial premise in Khan Market, Delhi.
- The respondent had filed for eviction of the petitioners from his premises and obtained a decree for the same from a Senior Civil Judge cum Rent Controller.
- The present Revision Application was first heard on 25th September, 2017 and an order was passed fixing the rent at Rs. 3,50,000/- (Three Lakh Fifty Thousand Only) as a condition for grant of stay for continued use and occupation of the premises.
- In lieu of the current nationwide lockdown, the petitioners moved an Urgent Application in the aforesaid Revision Petition.
Contentions and Prayer of the petitioner
- The contentions of the petitioner were that there has been a complete disruption of their business activities and “such circumstances are force majeure and beyond the control of the Tenants”.
- The petitioners prayed for (a) waiver of fixed monthly rent; or (b) partial relief in terms of suspension, part-payment or postponement of rent.
Order and Analysis by Court
- The Court held that a relationship between a tenant and his landlord is primarily governed by a contract or by law. The Court gave its view on applicability of certain provisions explained below.
- The Court relied on Energy Watchdog v. CERC & Ors. held that the courts can consider applicability of Section 32 of the Indian Contract Act, 1872, only if the contract contains some clause of waiver or suspension of rent. A force majeure clause could also be considered if the same is part of the contract. Therefore, it was concluded that in absence of an agreement between parties which would provide respite to the tenant, the rent charges will be payable.
- The court while relying on T. Lakshmipathi and Ors. v. P. Nithyananda Reddy and Ors. also held that Section 108 of Transfer of Property Act, 1881 (explained earlier) will be the governing provision in absence of force majeure clauses in lease deeds. Further the Hon’ble Court held that in order for a tenant to seek protection under Section 108 of Transfer of Property Act, 1881 there must be a complete destruction of property. There is a difference between a property being uninhabitable and inaccessible. It was further held that the temporary inability of the tenant to use his premises due to a lockdown would not entitle a tenant to avoid paying/ suspending rent to the landlord.
- The court concluded by rejecting this Urgent Application but allowed postponement of rent in view of the lockdown. The Court rightly held that such questions would depend on the facts and circumstances of every case.
The aforesaid judgment now brings out a lot of clarity on the question as to whether the present lockdown would entitle the tenants for any waiver from payment of rent.
Resolving the Landlord- Tenant disputes
The world is in an aberrant situation and the effect is visible to us in the economic, political and other dimensions of development. If we analyze the present situation, the probable solutions for the same lie with the landlord and the tenant themselves. Therefore, in this part we specifically focus on probable solutions which can be incorporated by a landlord and tenant to make good the complexities currently existing between them.
Looking at the factual and the settled legal position, solutions to these issues have to be found at the earliest. Currently, the need of the hour is that the landlords and tenants have to sit on the same table and be realistic in order to come to a solution. The aim of both the landlord and tenant must be to come out as a winner out of this situation.
It is pertinent to note that since the economy is going down, the salaries and earning capacity of tenants of residential premises as well as commercial premises is going to be radically cut down. Work from home is going to be the new norm. World’s most powerful companies like Google Inc., Amazon have already decided and given their employees permission to work from home until October. Google Inc. has gone a step further by giving its employees an allowance of $1000 to buy necessary equipment and office furniture as they work from home. This will in turn hit the demand for usage of commercial space of various organizations all over the world.
Furthermore, amidst this nationwide lockdown, there is a bleak possibility that a landlord will get a new tenant. Even if we assume that a landlord lands a new tenant, the rates at which a landlord generally lets out his property will be a distant dream in the current scenario. Even if a tenant pays rent and then vacates the property or is evicted by the landlord, the property will be lying vacant for a considerable period of time which in turn will result in a loss of rental for the landlord.
It is therefore advisable that tenants and landlords must take steps in each other’s interest. Instead, cost-effective solutions that include some sort of deference or even abatement must be taken by both the parties. It is advisable that both the parties come forward and renegotiate the terms of their agreement to charge a reduced rental amount till the economy revives for one or about 6 months. Thereafter, both the parties have to mutually agree to the commercials and take such calls as and when necessary.
In case of a rent concession, the landlord must also keep in mind some of the following factors:
- The tenant’s payment history.
- Long term viability of the tenant.
- The remaining term of the tenant’s Agreement.
- The landlord’s cash flow in the months agreed on concessional rental.
- Occupancy rates in and around the area where the property is located.
In cases where the tenant/ lessee has gone bankrupt or has zero cash flow owing to disruption of his business activities and there is no way in which the tenant can pay his rent, a more humane approach must be taken. An addendum must be made to already existing agreements with the help of lawyers in the current times in the case of novation of contract that the unpaid rent amount will be paid after a particular number of months after the lockdown is lifted.
Court intervention must be avoided as this situation is temporary and taking harsh steps will only worsen an already testing relationship. The cost, courts fees and time involved in litigation along with the plethora of already pending cases the courts will have post resuming work must be considered. More cost effective and less time consuming options must be selected such as the parties must use the services of trained mediators or conciliators where an unbiased third party can come to an amicable settlement which makes it a win-win for both the parties. An air of co-operation between both the parties is a must in order to avoid any party to take any adverse action against the other.
Steps to be taken while entering into new agreements
Certain practical steps may be taken henceforth while entering into new agreements. A special focus must be put on businesses which are more likely to be affected by Coronaviruses. The steps as mentioned above may be:
- Considering that the economic effects of COVID-19 will be around for another 3-6 months an endeavor must be made to address the effects of COVID-19 in crystal clear language.
- Carefully perusing and reviewing the rights and obligations clause.
- Inserting pandemics, epidemics and government enforced lockdowns as impediments in the force majeure clause.
- Making an endeavor to have a business interruption insurance to cover up the loss of income in such unforeseeable cases.
- With the consent of both the parties, make it a point to include clauses relating to temporary adjustment of rents.
- The tenants in particular, must ensure that while signing a new Rent Agreement/ Lease Deed, the agreement includes clear provisions as to suspension/ waiver of rent under specific circumstances.
COVID-19 has caused disruptions in the global economy of the very best developed countries and developing countries with effects probably lasting for a considerable period of time. Hence, we are now at the stage where the fright of the virus is less and the need to co-exist with the same is increasing. The same is evident from the steps countries are taking in order to curb with the same and lift the economy shoulder to shoulder. We have more particularly examined the devastating impact of COVID-19 on India’s real estate sector. Since the time India entered into lockdown, many companies have moved to remote workings but work spaces are now cautiously opening with limited capacity. Commercial offices are now following optimum safety measures while operating and making an endeavor to come back to the normal way of working before COVID-19 restrictions.
We took up the question whether a pandemic such as Covid-19 can be interpreted as an ‘Act of God’ and whether the effects of shutdowns due to COVID-19 can trigger the force majeure clause in contracts. As stated above, this would depend on the language of the clause and the rules of legal interpretation of force majeure clauses.
However, it is also essential that even if the force majeure clause within the agreement is inclusive of the terms epidemics and pandemics, the party affected has to generally prove its interference with the performance of the contractual portion. Since, it depends on what has been stated and incorporated in the clause of force majeure in the contract; it becomes utmost necessary at this point of time of pandemic situation to analyze the key contracts and the clauses inculcated therein. Although, whether a party can be excused from a contract on account of Covid-19 being declared a pandemic is a fact-specific determination that will depend on the nature of the party’s obligations and the specific terms of the contract.
Further, we enlisted the probable solutions in the current scenario and changes that can be incorporated by landlords and tenants while entering into new agreements post COVID-19. Today, the landlord and tenant have to be on the same page and come up with an amicable solution in the best of both their interests in order to avoid long lasting litigation. This will help in a long standing healthy relationship between two parties contractually bound.
The impact of COVID-19 is incessantly growing, but it is now evident that COVID-19 will change the way parties assess many of the standard provisions of real estate contracts in the future. This is similar to the approach taken after the tragic events of 9/11 which influenced the rational of real estate professionals thereby introducing provisions into contracts protecting parties against the risks of terrorism. The provisions and solutions addressed in this article will likely be revised significantly in the coming months in response to the challenges posed by the COVID-19 outbreak.
Therefore, it can be reasonably concluded that the best solution would be to amicably settle by negotiations between parties. If the former is not possible, the services of trained mediators and conciliators must be taken into consideration. In our opinion, the best approach to come out a winner amidst the current scenario is to reduce the rental payments for a certain amount of time as an interim measure and then reframe the terms of the agreement between the landlord and the tenant. Further, it would be best suitable to invoke clauses like that of escalation, price adjustment, liquidated damages and such so as to avoid the suffocation of the amount involved in commercial contracts and get the amount in circulation. Taking care of your business and long term interests is never a bad idea.
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