lock-in clause

Terms in an agreement prescribing for a time period within which any one of the contracting parties or either of the contracting parties cannot terminate the contract is known as a lock-in clause. If a contracting party terminates the contract within the lock-in period then such clause claims that the breaching party has to pay the rent for the remaining of the lock-in period, even though he would not be using the licensed premise anymore as a result of the termination of the contract.

 

Things that are generally specified in a lock-in clause:

  • duration of the lock-in period
  • remedy in case of breach of the lock-in commitment
  • notice period (to give a reasonable time for relocation to the licensee or, to give  time to the licensor to select a suitable licensee for his property) If there is a notice period of 3/4 months in the agreement, then after the notice of termination of the agreement, the licensee has to pay the rent for subsequent 3 months from the notice, even if he hands over the possession of the licensed place before completion of the 3 months of notice period. This time period has to be reasonable and the time period may vary depending on the use of the licensed premise. If the claim is unreasonable to burden the licensee then such claim is not enforceable in the court of law.

 

Most of the lock-in clauses in leave and license agreements claim that during the lock-in period (let it be 3 years/ 36 months) the licensor/ licensee cannot terminate the contract and whereas the licensee terminates the contract within the lock-in period (after 3 months of stay), for any reason whatsoever (he has been transferred to another city from his office), he has to pay the rent of the remaining of lock-in period (33 months) to the licensor.

 

Legal implications of a lock-in clause:

Question arises whether the claim of 33 months rent from a licensee in the above mentioned illustration is legally valid? Indian judiciary has clearly held in several cases that such a claim is not valid. The aggrieved party is only entitled to get a compensation/ damages valued by the court itself depending on the actual loss that the party has suffered due to such breach.

 

Remedies in case of breach of a lock-in clause is same to that of the remedies for any other contractual breach i.e., damages and specific performance of the contract. Damages to be paid in breach of the contract is generally quantified in the agreement itself. Nevertheless in each case it is for the court to decide  reasonability of the damages claimed based on evidences advanced during trial. Only reasonable damages is to be awarded by a court for a breach of any contract irrespective of whatever damages amount had been expressly consented upon by both the parties in the agreement.

 

Compensation/ Damages is awarded to make good the losses suffered by the aggrieved party, so as to reinstate him in his original position. Law does not penalise a contracting party for a contractual breach and neither does it allow the aggrieved party to take advantage of such a situation. The rule is that the parties are free to breach the contract provided they compensate the other party, if the other party has incurred an actual loss due to such breach.

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Similarly, as a result of a lock-in clause, a licensor cannot ask the licensee to vacate his place before completion of 3 years. If the licensor does so, then it will amount to breach of contract and the licensee can sue the licensor claiming reasonable damages for the actual loss he suffers due to the breach of the agreement or, ask for specific performance of the contract whereas he has to prove that non-performance of the contract will cause an irreparable damage to him, which cannot be compensated by monetary award.

 

Conclusion:

Therefore if the lock-in clause in a leave and license agreement states that, in case of breach of the said clause, the licensee is liable to pay the rent for the remaining lock-in period i.e., rent of 33 months, is not really enforceable in a court of law. Only a claim based on actual injury suffered by the aggrieved party can be made whereas he has to prove the following things  to make a successful claim[1]:

  1. That such amount claimed is a genuine estimate of damages
  2. That the landlord had altered its position by making the premises available to the licensee keeping in view the licensee’s requirements and spending thereupon. That certain expenditure was incurred on infrastructure specifically provided to the licensee as per licensee’s requirements; certain other expenditure incurred on whitewashing, fixture and fittings and the landlord was forced to incur expenditure again before giving the premises to the new licensee and , therefore, lock-in period was treated as reasonable period to avoid duplication of such expenditure, etc.
  3. That the licensor took all reasonable steps to mitigate the loss consequent on the breach.

Quantifying the compensation/ damages for a breach of the lock-in commitment  is unnecessary as by proving the above mentioned three points, the aggrieved party is only entitled to get a reasonable compensation based on the actual losses/ injury he has suffered and he is not entitled to the agreed quantified compensation amount. Thus mentioning a quantified compensation in the lock-in clause itself acts as a mere scaring provision unenforceable in the court of law.

 

Once the damages have been ascertained by the court, judgement has been passed awarding damages to the aggrieved party, the compensation so awarded takes the nature of debt on the party against whom the compensation has been awarded. Thus the Courts can order for winding up of the licensee/ licensor company, to clear such debt if it does not pay the debt willingly.

 

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[1]Silvermoon Construction Pvt. Ltd. v. South Asian Hospitality Services Pvt. Ltd., MANU/DE/4958/2012

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