The
Impact of Covid -19 On Rent Agreements.
With
the widespread of the Coronavirus the supply chain has brutally hit by the
COVID-19 flare-up, it is likely that obligation under numerous agreements will
be deferred, interfered, or indeed, even dropped. Counterparties (particularly
providers) to agreements may try to defer or potentially stay away from
execution (or obligation for
non-execution) of their legally binding
commitments as well as end contracts,
either in light of the fact that COVID-19 has genuinely kept them from playing out their legally
binding commitments, or in light of the fact that they are trying to blame it so as to remove
themselves from a troublesome bargain. Further, organizations may not be
capable to play out their commitments under their client understandings due to their provider's non-execution and may in go try to
defer as well as maintain a strategic distance from execution (or risk for nonperformance) of
their legally binding commitments as
well as end contracts.
With
the future uncertain about the set of the restrictions and obligations which
would be imposed post 14th April, in this context, it is an
opportune moment to examine the impact of doctrine
of frustration and force majeure on the lease agreements.
With
the closure of the official leased premises, one of the imperative questions is
regarding the payment of the rent.
Would lessee be saved by the
doctrine of force majeure and doctrine of frustration, or would he be forced to
pay the rent even though his commercial activity has been hit by the forced
lockdown?What are the
other remedieswhich are available to him? What are the options available to him?
To
answer the above mention question it is imperative to understand this we have
to first understand the meaning of the doctrine of force majeure and doctrine
of frustration and whether or not these doctrines are applicable to the lease
agreements?
What
do mean by Force Majeure?
Force
majeure is a French term meaning superior force refers to an
unforeseeable event which excuses the parties from the performance of a legal
contract obligation. It implies any unforeseen
event or circumstances, beyond the control of man that renders the
performance of any contract impossible. Examples of ‘force majeure’ events could
be war, civil strife, natural disasters or governmental
actions that frustrate the contract and render it impossible to perform by
either party. Commercial property rental agreements, for offices and
restaurants, do contain such ‘force majeure’ clauses.
Restaurant
and retail businesses, which pay the highest rentals, tend to
incorporate force majeure clauses in their contracts which would suspend
rent payment should any force majeure event occur. Interpreting such
clauses assumes importance in the context of Covid-19, which has led to
lockdowns and shut-downs across India.
Doctrine of Frustration
The
doctrine of frustration is mention under Section 56 of The Indian Contract Act
1872 (“ICA”). The section
contemplates that any act which has to be performed after the contract is made
unlawful or impossible to perform, and which the promisor could not prevent,
then such act becomes impossible or unlawful will become void. The doctrine of
frustration comes into play when a contract becomes impossible of performance,
after it is made, on account of circumstances beyond the control of the parties
or the change in circumstances makes the performance of the contract
impossible.
The
Court can give relief on the ground of subsequent impossibility if it finds that
the whole purpose or the basis of the contract has frustrated by the intrusion
or occurrence of an unexpected event or change of circumstances which was not
contemplated by the parties at the date of the contract would not prevent, then
such act which becomes impossible or unlawful will become voidable.
Jurisprudence
At
the very outset, it is pertinent to note that the general rule of force majeure
and frustration does not apply to lease deeds.The Supreme Court clarified this
position early on in Raja Dhruv v. Raja Harmohinder Singh[1],
it
was held by the Hon’ble apex court, agricultural lands were leased in
erstwhile undivided Punjab for cultivation. Such cultivation subsequently
became impossible on account of the partition of India. The Plaintiff (the initial
lessee) commenced an action for refund of the previously paid rents. The
Supreme Court dismissed the claim of force majeure under
Section 56 on two broad grounds. First, it held that rights under a
lease are not simply contractual rights and are instead governed under the
provisions of the Transfer of Property Act, 1872 (“TPA”). Second,
the Court reasoned that Section 56 of the ICA does not apply to a concluded
contract where no further performance was required. The Supreme Court
re-affirmed this position in Sushila Devi v. HariSingh[2] which
also involved a claim for refund of rent and deposit in relation to lands that
now formed part of Pakistan.
Therefore,
in the cases of Covid-19 lockdown, the commercial tenants might cite the
doctrine of frustration under section 56 and seek remission of the payment of
rent payable during the lockdown period. However, the landlords may rely upon
the Supreme Court rulings that since the Doctrine of Frustration of Contract
does not apply to leases of property, it would not apply to leave and license
agreements also, which form the basis of most commercial rental contracts.
But,
that does not mean that the tenants do not have any recourse of law. In the
case of DhruvDev Chand vs. Harmohinder Singh and Others[3],
the Hon’ble Supreme Court held that the Doctrine of Frustration under Section
56 of the Indian Contract Act would not apply to leases of land.
It, however, held that if the leased property is destroyed by
fire, tempest, flood or violence, then the tenant has the option to declare the
agreement voidable or non-performable under Section 108 of the Transfer
of Property Act, 1882. However, in the light of above, the issue in the
case of lockdown notifications issued by the government is that such lockdowns
and restrictions are not of permanent nature. This would not permanently affect
the long term usefulness of the property.
So,
it can be inferred that recourse is provided under Section 108 of TPA.
Section 108(B)(e) of the TPA provides “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 let, the lease shall, at the option of
the lessee, be void ...
One
of the most pertinent precedent regarding the interpretation of Section 108 is
in the case of VannattankandyIbrayi
v. KunhabdullaHajee[4]In
this case Supreme Court held that upon the destruction of a building due to
fire, the lessee has the option to treat the lease as having become void and
avoid further obligation to make rent. However, in the event that such option
is not exercised by the lessee, he is not entitled to squat on the land.
However, this decision was overturned by the Supreme Court in the case of SahaRatansiKhimji
v. Kumbhar Sons Hotel[5] Pvt. Ltd,In
this case the Hon’ble apex court observed that merely because the leased
premises are destroyed, does not mean that the tenancy stands automatically
terminated. Both of above mention decisions deal with situations where the
leased premises were physically destroyed and not where tenants were prevented
from accessing such premises due to supervening events. Therefore, in the light
of above, accordingly it can be said that these both
these judgments are no great authority in dealing with the current situation of
Covid-19.
There
are three conditions which need to be satisfied before any benefit of Section
108{B}{e} can be taken. These three conditions are
1. The
existence of an ‘irresistible force’
2. Property
becomes substantially and permanently unfit for use for which it was let
3. The
lessor must be informed of the lessee’s decision to render the lease deed void.
Therefore, it can be easily inferred by reading these
conditions that in order to take the benefit under Section 108 it has to be
established that Covid-19 rendered the property completely and permanently
unfit for the purposes for which the property was leased out. In other words it
is to be established that Covid-19 in itself is an instance of “irresistible
force”. Further, under Section 108(B)(e) of TPA, it is the duty of the lessee
to give a notice to the lessor. . If the lessee fails to give notice under
Section 108(B)(e) of the TPA, the lease is deemed to remain unaffected
regardless of a force majeure event. It is imperative to note that
once this notice is sent, the lease agreement between the parties stands
terminated.
Conclusion
One
of the major concerns during this lockdown period would be regarding the
payment of the rent despite the lessee not having the access to the leased
property. The question needs to be
answered by the courts on case-to-case basis. However, in the earlier
precedents mention above, it is clearly laid out that the lessee is in
possession of the property and has access to is unless a notice under Section
108(B)(e) of the TPA is sent to the lessor.
In Shankar Prasad and Ors.v. State of M.P. and Ors[6], the High
Court of Madhya Pradesh held that the obligation to pay rent
by the lessee did not cease, even though the godown leased out was completely
destroyed by a fire, as the lessee had not sent a notice under Section
108(B)(e) of the TPA to the lessor. This position of law has also been followed
by the High Court of Bombay in Amalgamated
Bean Coffee Trading Company v. Surjit Singh Jolly (2017) and the
Delhi High Court in Chamber of Colours and Chemicals Pvt. Ltd. v.
Trilok Chand 9 (1973) DLT 510 and Airport
Authority of India v. Hotel Leela Venture Ltd (2016) 231 DLT 457
. The logic governing these transactions is that unless the lessee
satisfactorily surrenders the property by way of a notice, the lessee is deemed
to be using the property and is obligated to pay rent. The lessee should be
mindful to elaborate, in its notice, reasons as to why COVID-19 is an event of
irresistible force under Section 108(B)(e) of the TPA. It is also settled law
that a financial inconvenience in making payment does not qualify as a force
majeure event.
Another
caveat, which has to be kept in mind, is that most of the lease agreements and especially
in the cases for lease of commercial establishments docontain an arbitration
clause as a means for dispute resolution.
Such arbitration clauses can resort to
the ‘fast track procedure’ contained in Section 29B of the Arbitration and
Conciliation Act, 1996. Under the fast track procedure, the arbitral tribunal
appointed by the parties can conduct the proceedings in a quick and summary
manner and pass the arbitral award (or judgment) within six months.
But the jurisprudence regarding the arbitration of
disputes under a lease deed is currently pending resolution by the Supreme
Court. In Himangni Enterprises v. Kamaljeet Singh Ahluwalia(2017) 10
SCC 706 the Court held that disputes under the TPA were
non-arbitrable. The correctness of this view has been doubted in VidyaDroliavsDurga
Trading Corporation 2) RCR (Civil) 542and a
reference to three judge bench is currently pending.
Given that there a
large number of unanswered and open ended questions it would be quite
interesting to note that how the courts react to the Covid 19 had an impact on
the commercial relationships.
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AUTHOR: -GURKARAN SINGH.
(Pursuing Law from Faculty of Law, Delhi University,Authored a policy document for ministry of law and justice,Research assistance on book on Mediation )
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AUTHOR: - JAIDEEP BHALLA
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