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COVID-19 CRISIS’ EFFECTS ON THE COMMERCIAL LEASE CONTRACTS

Updated: Jul 29

[Authored by Max Croson, 3rd year BA.LLB.(Hons.) student at USLLS, Guru Gobind Singh Indraprastha University.]

INTRODUCTION


The lockdown period during the COVID-19 pandemic has left businesses in a state of complete jeopardy and mayhem as the economy is gradually progressing towards an economic recession. Due to the pandemic the unemployment rate in India has hiked up to 22.7% on a national level.[1] The businesses especially the small business owners who had leased their shops and offices, due to the lockdown have not been able to pay the rent or premium of the leased area.

Devoid of resources and money, and being not able to pay the rent as per the lease contract has pushed their backs against the walls. Therefore we have recently seen many petitions being filed in courts seeking measures against eviction from the use of property due to failure of payment of rent. In order to seek relief the most discussed aspect is the extent of applicability of the ‘Force Majeure’ clause in the lease contracts.


Force Majeure Clause


In a layman’s words the term ‘Force Majeure’ is Act of God. As per the Section 56 under Chapter IV of the Indian Contract Act, 1876 relates to the performance of contracts and circumstances of being excused or dispensed on the ground of the contract being void. In so far a force majeure event occurs beyond the scope of contract (i.e. the parties could not foresee such event in the normal course of life, at the time of entering into the contract).[2] A contract to do an act which after the contract is made, becomes impossible or unlawful (by reason of some event which could not have been foreseen the promisor in the normal course of nature), becomes void when the act becomes impossible or unlawful[3]. This is distinguished from contingent contract becoming void due to happening of a subsequent event which was contemplated by the parties as provided in the contract (internal force) and where Chapter III of the Indian Contract Act, 1872 will be applicable[4]. The English law has expansive material on this subject, yet the Courts in India have held as per laws of India to be concerned, primarily as embodied in Sections 32 and 56 of the Contract Act, 1872[5].

Now, the most important question that is becoming a topic of debate among the property owners and lessees is whether ‘Force Majeure’ clause can be used to get relaxation from paying rent? Whether ‘Rule of Frustration’[6] of contract can be applicable in case of no provision of Force Majeure clause in the lease deed?

Before answering these questions we shall understand the extent of applicability of the Rule of Frustration and Force Majeure as per the Section 56 of the Indian Contract Act, 1872. There is a lot of misconception regarding the applicability of Section 56 of the ICA to the lease agreements. So first of all we shall keep in mind that this section is not applicable to the lease agreements.

Now, most people would be wondering as to why this provision is not applicable on lease agreements, when this section deals with agreements and contracts itself?[7]

The merits of the lease agreements are different from the contracts dealt by the ICA, 1872. Hence, are governed by the Section 108(e) of Transfer of Property Act, 1882. The Section 108(e) of the Transfer of Property Act states that if by fire, tempest or flood, or violence of an army or of a mob, or other irresistible force, any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was lent, the lease shall, at the option of the lessee, be void: Provided that, if the injury be occasioned by the wrongful act or default of the lessee, he shall not be entitled to avail himself of the benefit of this provision.[8]


The force majeure defined as per the Black’s Law Dictionary[9] is termed as an irresistible or superior force that can either be a cause due to a natural calamity or a human malfeasance (e.g. riots, war, strikes).Therefore, for rendering COVID-19 pandemic to be responsible for making the property unfit for any commercial use so that the remedy of force majeure be taken, it is important to establish COVID-19 to be an ‘irresistible force’ under Section 108(B)(e) of Transfer of Property Act. As until now there has been no reasonable case or precedent yet, on the basis of which a distinction between an irresistible force and force majeure can specifically be mentioned. The qualification of COVID-19 as a force majeure to lease contracts is still disputed due to the uncertain nature of events which varies in every lease case. Furthermore, there are property rights and lease deeds which calls for certain criteria to be followed in order to execute force majeure.


In such a scenario it is unlikely that COVID-19 could make the property permanently unfit for usage. However, the order released on 24 March 2020[10] by the National Disaster Management Authority imposed nationwide lockdown under Section 6 (2) (i) of the Disaster Management Act, 2005 could possibly be used as an arguable point for the lessee in establishing COVID-19 as an irresistible force preventing the use of leased property.

Furthermore in Delhi HC ruling of Airports Authority of India Vs Hotel Leelaventure Ltd.[11] says “When a lease is executed there is transfer of property. The lessee is put in possession and it may be said that after the lessee is put in possession there is nothing yet to be done. Therefore Section 56 would not apply because condition (b) would not be fulfilled, there being nothing yet to be done by either of the parties. Section 108 (e) of the Transfer of Property Act, 1882 excludes the general law i.e. Section 56 of the Indian Contract Act.”

However, in situations relating to agreement to lease being executed (when neither registered or acted upon), if fulfills all the requirements irrespective of the ‘Force Majeure’ clause then Section 56 of the ICA shall be applicable and the agreement will stand void under the ‘Rule of Frustration’.[12]


Then what about the right and liabilities of a lessor? How can a lessor seek remedy if the contract is frustrated due to the use of irresistible force[13]?

The lessor can use their rights and liabilities as per the lease agreement to establish authority in such matters of dispute and seek relief. In the recent judgment of Ramanand & Ors Vs Dr. Girish Soni[14] by the Delhi High Court has set out the requisite guidelines to be taken into account with regard to requests for waiver of rent. The Section 32 of the Contract Act will only apply when a clause of force majeure providing for waiver or suspension of rent is listed in the agreement to lease; Section 56 of the Contract Act is not applicable to lease agreements; in the absence of any contract between the lessor and lessee, the provisions of the Transfer Property Act will govern leases. The lockdown resulting in temporary non-usage of the premises due to COVID-19 pandemic cannot be taken as an excuse to render the lease void under Section 108 (B) (e) of the TP Act hence the tenant is not liable to avoid payment of rent under the force majeure clause.

Hence for a lessor, in case the lessee refuses to pay rent, the lessor shall be entitled to seek the guarantee or cash deposits if mentioned in the lease and can invoke their rights under the force majeure clause if provided in the lease as remedy and recover the amount of rent.

Furthermore due to exhaustion of funds the lessees have claimed failure to pay rent on grounds of insolvency. It is provided by Section 82 inter alia that where property is transferred subject to a condition making any interest therein reserved or given to or for the benefit of any person, to cease on his becoming insolvent, such condition is void. At the same time, it is provided in the second paragraph of the section that nothing therein contained applies to a condition in a lease for the benefit of the lessor or those claiming under him. This section contains express provision that if the lessee is adjudicated an insolvent and the lease provides that a lessor may re-enter on the happening of that event, the lease is determined by forfeiture.[15]


CONCLUSION


Now before we conclude we shall revisit the question that we asked above regarding the relief in rent to the lessee. The important point that is to be noted here is that if there is a specific clause mentioning the rights and duties and also the liabilities to remain suspended as such in the event of a ‘Force Majeure’ which includes the words like epidemic, pandemic or disease etc., then the tenant may invoke the clause to get relief.

In case such clause may not exist in the executed deed then both the parties shall use methods of arbitration and settlements to reach a compromise that may suit and be acceptable by both the parties to the contract, for a constructive solution. So it is important for both the landlords and the tenants to review their lease deed and approach a solution before jumping to conclusions with inaccurate knowledge about their rights and liabilities and creating a state of panic.

Until now there has been no notification or ordinance to be passed exclusively addressing this issue by the Indian government. Further the orders issued by the State Governments do not address the situation of lease agreements (rent relaxation orders only in relation to poor laborers or migrant workers).[16]

These times call for a mutual understanding among both the parties and to negotiate the best possible outcome in this scenario.


[1] As per the recent report on 3rd June, 2020 by the CMIE (Centre for Monitoring Indian Economy) [2] Energy Watchdog vs Central Electricity Regulatory Commission [(2017) 14 SCC 80]. [3] Second part of Section 56 of the Indian Contract Act, 1872. [4]Satyabrata Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44 [5]Ganga Saran v. Firm Ram Charan Ram Gopal, 1952 SCR 36 at pp. 38 and 42. [6]Frustration occurs when, without default of either party, a contractual obligation has become incapable of being performed and changed the very foundation of the contract, because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. [7]Raja Dhruv Dev Chand v. Raja Harmohinder Singh, 1968 SCR (3) 339, para 17. [8]The Transfer of Property Act Pg.no.-380, by Dr. S.N. Shukla (Published by Allahabad Law Agency, 2006 edition) [9]Black’s Law Dictionary 4th ed. 1972 [10]National Disaster Management Authority notification vide order no. 1-137/2018-Mit-II(FTS-10548), available at: https://ndma.gov.in/images/covid/NDMA-Order-for-extending-the-Lockdown-Period-till-030520.pdf [11] 2016 (160) DRJ 186 [12] Sushila Devi and Anr. Vs Hari Singh and Ors., AIR 1971 SC 1756, Hon’ble SC held that the ‘Law of Frustration’ as embodied in Section 56 of the Contract act applies only to a contract that is an agreement to lease, and does not apply to leases. [13] Supra Sec. 108 (B) (e) [14] RC. Rev. 447 of 2017; Decided on 21 May 2020 [15] The Transfer of Property Act Pg.no.-408, by Dr. S.N. Shukla (Published by Allahabad Law Agency, 2006 edition) [16] Maharastra Industries Department has passed an order for companies to delay their lease payments without any risk of penalties.

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