This article is written by Ayushi Mahajan, from Centre for Legal Studies, Gitarattan International Business School (Guru Gobind Singh Indraprastha University). This article talks about various provisions under Indian laws to handle delinquent tenants before and after COVID-19.

Introduction

The COVID-19 virus is negatively impacting many aspects of the life of the world, not least including economics closer to the home. Unfortunately, commercial real estate and the capital markets are not immune to these effects. In light of modern real estate investment, which almost always involves a substantial amount of leverage, landlords must take certain steps to protect their investment. Those steps would include softening the revenue shortfall from tenants and anticipating downstream problems that could create distressed tenants with the landlord’s lender.

Concept of tenancy

A tenant is a person who pays the compensation or rent for using a house, base, building, or land, which is that of a landlord or rightful owner. Nowadays, the inclusion of the tenants is also governed by a duly registered agreement unlike in the past, when there was no agreement for the purpose.

Who is a delinquent tenant

Delinquent Tenant refers to a tenant whose rent payment which is provided under the respective lease remains unpaid for more than 31 days after the original due date for the payment of such rent; Provided that, if the arrears of the payment as of any fixed date are still outstanding, which represents less than 25% of the monthly rent payment due by such tenant and if the entire amount of such delayed rent payment is subject to an agreed payment plan or government-related subsidy payment, such tenant will not be considered a delinquent tenant; Rent of a tenant which is paid by check and received on time by the landlord, when the tenant returns the check to the landlord due to lack of sufficient funds with his bank, he sometimes becomes criminal. Since the rent is so low, the landlord can now give 3 days notice to pay or leave.

Provided further, that any such payment plan should be on reasonable and customary terms and conditions which reflect market standards.

Types of tenancies

There are such types of tenancies that exist. They are:

• Statutory tenant

This type of tenant is only controlled under the Maharashtra Rent Control Act, 1999 who can be evicted on the restricted grounds only on the basis of permission in the said Act. There can be no relation under this Act nor any will in respect of rights nor tenants can assign, transfer, mortgage, sublet, give license tenancy rights.

• Lessee

A lease falls within the purview of the Transfer of Property Act, 1882 that gives the lessee a lot of rights, as opposed to other forms of the tenancy. In leases, we come across leases for a period of 100 years or even forever which gives an owner very little right when he leases his property.

• Licensee

A licensee used to reside on the premises of the licensee which is for a minimum period of 11 months. This right can be regained by filing a case with the competent authority if the tenant refuses to vacate and, it is probably the safest option for the landlords. The agreement governing this tenancy is a leave and license agreement to be duly registered.

Act governing lease

When a contract of the lease is executed, although it is stated as a contract under the Indian Contract Act, 1872, there is a transfer of property in the contract. Therefore, the lease is governed under the Transfer of Property Act, 1881.

The lessee is taken into possession and it is the duty of the landlord then to allow the tenant to be in possession without any hindrance under Section 108 (c) of the Transfer of Property Act. Furthermore, the lessee is bound to the proper time and place that the renter pays the rent as provided under Section 108 of the Act.

Can a lessee avoid paying the rent in the lockdown

A comparative study of the principle of frustration which is provided in Section 56 of the Indian Contract Act, 1872 and Section 108 (e) of the Transfer of Property Act will be important to note here.

Section 108 (e) of the Transfer of Property Act states of completely or permanently destroyed & permanently unfit, but section 56 of the Contract Act refers to making an act unlawful or impossible. Therefore, there is no doubt that the Contract Act covers a much wider area than the Transfer of Property Act.

COVID crisis and tenancy

From 21 March 2020, the entire country went into lockdown to stop the spread of COVID 19 virus. The state of this pandemic has led to a sudden wave of recession and a kind of depression in the context of people with massive job losses, leaving many people homeless due to not paying their house rent. The situation was also difficult for landlords who may have loans or EMIs on their properties and relied too heavily on the payment of rent to pay their EMIs on the loan.

Seeing the plight of tenants, the government of various states tried to intervene in different ways, for example, Delhi CM Arvind Kejriwal called for landlords to rent for at least 3 months. He also offered that in this crisis the government could help pay the rent if tenants could not do so in the event of this epidemic. On the other hand, the Uttar Pradesh government published an official decision to imprison or punish the landlords who failed to make concessions in the collection of rent.

When all this quarrel was going on for the payment of rent, suddenly the Delhi High Court ruled by the judgment of 21 May 2020 Ramanand and Others v. Dr. Girish Soni and Others that there was no excuse for not paying rent during the lockdown period due to COVID-19. The Court ruled that a tenant may receive the waiver or the suspension of the rent which is subject to the fact that there could be a large amount of force in the contract, which provides for such a situation. However, it postponed the payment of the fare scenario as an option without any full exemption.

Dealing with a delinquent tenant

As we all know that payment is the essence of any leave and license agreement and non-payment of compensation/rent can lead to eviction of tenants. Besides, all initiatives by various governments were mostly advisory in nature as there was a complete absence of a government circular or ordinance to relieve tenants during the COVID epidemic lockdown.

Therefore, the tenants had no option but to pay the rent unless and until there is a mutual agreement between the landlord and the tenant for the delay in the payment of a few months. On the other hand, most of the commercial tenancy contracts have a force majeure clause that can help the tenant claim some relief until the situation improves.

But others who cannot seek relief due to the absence of a clause can make an arrangement with the landlord in the following ways:

• Postpone rent payments mutually

We can defer payments for a few months by altering the arrangement and include that payments can be made after a few months. On the other hand, the said deferred payment may be charged to provide some relief to the landlords. This will also help landlords who may have EMIs or loans related to their property on their heads. We know that the RBI has postponed loans during the COVID epidemic, so landlords can consider these options for their Delinquent tenants.

• Novation of contract

Once the tenant and the landlord agree on the new payment terms, they change the earlier agreement under Section 62 of the Indian Contract Act, 1872 by canceling the original contract and re-registering an agreement with the newly agreed terms can proceed to register from.

• Adjust the security deposit

If the parties are unable to resolve the differences amicably, the landlord can adjust their dues against the security deposit deposited with them and evict the tenant. This happens mostly in cases where the tenant does not have a force majeure clause in the agreement so that it will knock the door of the court of the appropriate court to protect it.

• Relief under Disaster Management Act, 2005

Tenants belonging to economically depressed classes can seek relief under the Disaster Management Act, 2005. For example, construction workers, migrant workers, or students can also seek relief to avoid being evicted from their homes.

The landlord’s perspective

When considering a tenant’s request for rent, a landlord also needs to assess their financial obligations and cash reserves. Some landlords may be able to make temporary concessions without loss of material, while others may struggle to meet their mortgages and other obligations as a result of a substantial reduction in rent payments. In the latter case, the landlords will need to have an open and open discussion with their lenders about the possibility of prohibition. Responses to these requests will vary by lender, but at the very least, each landlord should be approached with transparency to plan for consideration and resume payments. 

In reality, it appears that some lenders are expressing a desire to consider temporary relief in light of the COVID-19 epidemic. In the multilateral context, the Federal Housing Finance Agency announced on March 23, 2020, that owners of the multi-million property would be eligible for a mortgage prohibition on the condition that they evict evictions for tenants unable to pay rent due to the effect of COVID-19 Suspend it.

Landlords who charge a strong deal and demand strict compliance with the tenant’s lease obligations need to fully consider the practical issues associated with enforcing the lease. The epidemic has closed many courts, limiting them to emergency cases only. Some judges may consider that the eviction action does not qualify for the limited resources of the court. 

If an eviction lawsuit is successful, the landlord must think carefully about the practical effect of evicting the tenant during an epidemic. For example, what is the probability of finding a replacement tenant in the current environment?

Given the cost of repairs and build-outs associated with a new tenancy, does it negotiate a plan for the landlord to flex with the tenant and resume payments when the business resumes or overtake goes? 

If the landlord and tenant eventually agree to work together, they need to formulate a plan for payment of rent, utilities, insurance, taxes, and resume rent payments, to negotiate the trigger and time for payment of deferred rent.

A negotiated solution may be the best alternative

Ultimately, both the landlords and the tenants need to negotiate with a different mindset than “business as they are doing as usual”. The COVID-19 epidemic has forced tenants and landlords to regroup with an almost unprecedented set of circumstances. To get the best possible results, the two sides may find it in their best interests to work together until normal business tasks resume. Federal and state relief may also help. At the state level, low-interest loan programs designed to serve as bridge loans may be available during the epidemic. These loans cover costs during mandatory closures and encourage businesses to retain their employees.

Like landlords’ relationships with their tenants, landlords should communicate with their lenders as soon as possible to determine whether a short-term loan modification is necessary or appropriate. Like good tenants, lenders will often make arrangements for good borrowers.

Conclusion

The economic impacts of the COVID-19 virus are likely to weigh heavily on the commercial leasing industry. With open communication, landlords, tenants, and lenders can get through future upheavals. However, ignoring a potential issue until it actually defaults under a lease or loan is a recipe for irreparable harm to the parties involved.

To achieve the best possible outcome, both parties to the tenancy may work together in their best interests to explore a short-term solution to the payment of rent, until normal behaviour and commerce resume. However, if short-term solutions do not work, it can lead to ugly scenarios, in which tenants may be evacuated for not paying dues, forcing them to force them into non-commercial agreements.

References

• https://www.advocatekhoj.com/library/bareacts/indiancontract/index.php 
• https://www.advocatekhoj.com/library/bareacts/transferofproperty/index.php?Title=Transfer%20of%20Property%20Act%20, 1882
• https://indiankanoon.org/doc/1879190/#:~:text=(c)%20the%20lessor%20shall%20be,by%20the%20lease%20without%20interruption.
• https://indiankanoon.org/doc/648614/ 
• https://indiankanoon.org/doc/1879190/
• http://www.legalserviceindia.com/legal/article-2432-case-summary-of-ramanand-v-s-dr-girish-soni.html 
• https://indiankanoon.org/doc/595325/
• https://www.advocatekhoj.com/library/bareacts/disastermanagement/index.php?Title=Disaster%20Management%20Act,%202005
• https://www.advocatekhoj.com/library/bareacts/maharashtrarentcontrol/index.php?Title=Maharashtra%20Rent%20Control%20Act,%201999
• https://www.advocatekhoj.com/library/bareacts/transferofproperty/index.php?Title=Transfer%20of%20Property%20Act%20, 1882 

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: