Impact of Covid-19 on leasing in India
Juris Corp, Mumbai
Juris Corp, Mumbai
Covid-19 has changed the dynamics of the world in many ways. It has grossly affected households, businesses and workers from all classes of society, all over the world. As a result, many tenants are facing a cash crunch and are unable to fulfil their rental obligations. On the other side, either due to lease rental discounting or landlords facing a loss of revenue, lessors are also finding it difficult to waive or suspend the rent due to them.
Force majeure and the Transfer of Property Act 1882
Force majeure is a contractual clause which exempts a party from performing its contractual obligations as performance has become impossible due to the occurrence of an unexpected event. Force majeure is governed by the Indian Contract Act 1872 (ICA). If a force majeure event occurs outside the scope of the contract, it is dealt with under section 56 of the ICA.
Under section 108(b)(e) of the Transfer of Property Act 1882 (TPA), even in the absence of a force majeure clause, if an ‘irresistible force’ renders the property unfit for use, the lessee has certain rights. Thus, the question is whether Covid-19 qualifies as an ‘irresistible force’. Based on various High Court judgments, it can be concluded that in the case of a lease, the property being ‘wholly destroyed’ or ‘rendered substantially and permanently unfit’ is a necessary condition for the applicability of section 108(e) of the TPA subject to the terms of the contract. However, the circumstances concerning Covid-19 have ‘not rendered properties permanently unfit for the purpose for which they were let’. Therefore, an expansive interpretation of the provisions of section 108(b)(e) will have to be rendered by the judicial forums in order to accommodate the interests of lessees during this pandemic.
Recent judicial pronouncements
The Bombay High Court
In a recent judgment of Standard Retail Pvt Ltd v M/s G S Global Corp and Ors, the Bombay High Court denied relief to a party seeking protection of force majeure on account of the Covid-19 outbreak and specifically stated the lockdown cannot come to the rescue of the petitioners so as to resile from their contractual obligations of making payments. The order also stated that the fact that the petitioner had suffered damages is also not a factor which can be considered and held against the respondent.
The Supreme Court of India
On 30 April 2020, the Supreme Court of India passed an order in the case of Pawan Pathak Prakash v Bar Council of India, where the Court rejected a writ petition seeking waiver of rent of lawyers’ chambers during lockdown and directed the Bar Council of India to assist its members, keeping in mind the prevailing situation.
The Delhi High Court
Recently, the High Court of Delhi in the case of Ramanand and Ors v Dr Girish Soni and Anorrejected an application for waiver or suspension of rent on account of the lockdown.
The Hon’ble Delhi High Court held that the relationship between the landlord and tenant is primarily governed either by contracts or by law. In the realm of contracts, the respective rights and obligations of the parties would be determined by the terms and conditions of the contract itself. Where there is a contract, whether there is a force majeure clause or any other condition that could permit waiver or suspension of the agreed monthly payment, the matter would be governed by the contractual terms. However, if there is no contract at all or there is no specific force majeure clause, then the issues would have to be determined on the basis of the applicable law. In circumstances such as the outbreak of a pandemic, the grounds on which the tenants could seek waiver of rent under contracts which have a force majeure clause would be governed by section 32 of the ICA. The Delhi High Court made a reference to Black’s Law Dictionary, where force majeure had been defined as ‘an event that can be neither anticipated nor controlled’ and includes ‘both acts of nature’(eg, floods and hurricanes) and ‘acts of people’ (eg, riots, strikes and wars).The High Court observed that a force majeure clause could be differently worded in different contracts as there is no standard draft or interpretation of the same. Thus, the essential principle is whether the contract contains a clause providing for waiver or suspension of rent. Reliance was placed on a Supreme Court judgment, where the Court, after much deliberation, held that in case the contract itself contains an express or implied term relating to a force majeure condition, the same shall be governed by section 32 of the ICA. Section 56 of the ICA, which deals with impossibility of performance, would apply in cases where a force majeure event occurs outside the contract. However, there are various conditions that must be fulfilled to satisfy the conditions of ‘impossibility’ under section 56 of the ICA.
Section 56 – Frustration of contract
The Delhi High Court placed reliance on the case of Raja Dhruv Dev Chand v Raja Harmohinder Singh and Anor. The Supreme Court, after considering the law on ‘impossibility of performance’ from various jurisdictions, held that, in the Indian context, section 56 ‘lays down a positive rule relating to frustration of contracts and the Courts cannot travel outside the terms of the section’. The Supreme Court held that section 56 of the ICA does not apply to lease agreements. The Court drew a distinction between a ‘completed conveyance’ and an ‘executory contract’.
Factors necessary for determining the question of suspension of rent
The Delhi High Court considered the following factors to determine to whether the tenants were entitled to any relief or suspension of rent:
- Nature of the property: location of the tenanted premises in prime commercial area.
- Financial and social status of the parties.
- Amount of rent.
- Contractual conditions: no contractual condition permitting non-payment of rent.
- Protection under any executive orders: there are cases where the Central and State Government may have, from time to time, given protection to some classes of tenants such as migrants, labourers, students, etc. However, the aforesaid case is not covered by any of these executive orders.
Provisions of the Transfer of Property Act 1882 governing landlord-tenant relationship qua force majeure
The High Court, in Sangeeta Batra v M/s VND Foods, held that the fact that the lease premises, intended to be run as a restaurant, was sealed is of no relevance as the tenants did not choose to terminate the lease. It was held that unless the lessee terminates the lease, the obligation contained under section 108(b) cannot be avoided. In view of the settled legal position, the High Court, in this judgment, held that, for a lessee to seek protection under section 108(b)(e) of the TPA, there has to be a complete destruction of the property, which is permanent in nature, due to the force majeure event. In this case, the High Court observed that section 32 of the ICA did not have applicability despite an implied term relating to a force majeure condition.
Therefore, the Delhi High Court relied on the aforesaid case and took the view that temporary non-use of a premises on account of lockdown which was announced due to the outbreak of Covid-19, cannot be construed as rendering the lease void under the TPA and therefore a tenant cannot waiver payment of rent. This decision further reinforces the legal position in India, that is, the grant of protection of force majeure would be governed as per the provisions of each contract and shall differ on a case-to-case basis.
It is, therefore, clear from the catena of judicial pronouncements that the grant of suspension/waiver of rent in case of leased property will depend upon the terms of the contract between the parties. If there is no contract or relevant force majeure clauses in the contract, the relevant provisions of the TPA will be applicable and the conditions thereunder will have to be satisfied. The relevant provisions of the TPA are useful only if the lease is sought to be voided, and the TPA does not contemplate suspension of rent in such a situation. In the absence of appropriate, protective and enforceable legislation, executive orders, or contractual terms, parties may seek to invoke the equitable jurisdiction of the judicial forums. The question as to whether the suspension of rent ought to be granted or not would depend on the facts and circumstances of each case and shall also be subject to satisfaction of various factors, including those taken into account by the Delhi High Court in the case of Ramanand and Ors v Dr Girish Soni and Anor.
Order No 40-3/2020-DM-I(A) dated 29 March 2020 issued by the Ministry of Home Affairs; Government of India and Order No F/02/07/2020/S.1/PT; File/81 dated 22 April 2020 and Order No 122-A F/02/07/2020/S.I/9 dated 29 March 2020 both issued by the Delhi Disaster Management Authority, Government of NCT of Delhi.