Articles

Covid-19-Effects on Lease

By April 17, 2020 May 1st, 2020 No Comments
Covid-19: Effects on Lease

Covid-19: Effects on Lease

Amidst the outbreak of Covid-19 and its consequential countrywide lockdown, shutting down majority of the commercial, industrial and retail activities, the much forgotten ‘Force Majeure’ clause in contracts and leases is now receiving close scrutiny. In simple terms, ‘Force Majeure’ events relieve a party from performance of its contractual obligations, without any consequential breach of the contract, provided such performance is adversely impacted by events outside the control of an affected party such as act of God, natural disaster, war, strike, lockout, epidemic, Government orders, etc., however it depends upon the language in the contract.

The Ministry of Home Affairs vide its order dated March 29, 2020, in exercise of its powers conferred under Section 10(2)(l) of the Disaster Management Act, 2005, directed all State/Union Territory Governments and State/Union Territory Authorities to take necessary actions and issue necessary orders, inter alia, for waiver of rent for workers by landlords for a period of one month. However, the Government has not yet issued any order/notification with respect to suspension or waiver of lease rentals for commercial lease contracts entered into by businesses, except for IT companies who are operating from Software Technology Parks of India (STPI) Centres[1].

In the absence of any relief or clarity by the Government on the performance of obligation to pay lease rentals under commercial lease agreements, business entities and retail outlets are struggling with no sales and revenue but still saddled with ongoing rent and employee payment obligations and are vigorously evaluating the ‘Force Majeure’ clause under their respective agreements. 

A. APPLICATION OF THE INDIAN CONTRACTS ACT, 1872 (“Contract Act”):

Section 32 of the Contract Act and Section 56 of the Contract Act deals with such circumstances where the performance of a contract can be suspended with without being penalised for the non-performance.

In terms of Section 32 of the Contract Act, if the designated event on which the contract is dependent becomes impossible, such contract becomes void. Whereas, under Section 56, the parties have not, while entering the contract, considered any such event due to which the contract may become void.

Section 32 of the Contract Act postulates if the event, on which the contract is contingent which parties have contemplated at the time of entering the contract, becomes impossible, the contract becomes void. Thus, in terms of Section 32 of the Contract Act, if the designated event on which the contract is contingent becomes impossible, such contract becomes void, however, such contemplation must be clearly expressed in the contract.

Section 56 of the Contract Act embodies & positive rule of law relating to the doctrine of frustration and this section must be treated as exhaustive so far as it goes. The doctrine of frustration, as embodied in this section, is applicable only to purely contractual obligations and not to a contract creating an estate in land which had already accrued in favour of a party. This doctrine of frustration, therefore, cannot apply to completed contracts of lease where possession has already been taken by the lessee under the contract and the lessor has nothing more to do under the contract[2].

B. APPLICATION OF TRANSFER OF PROPERTY ACT, 1882 (TP Act):

Leases, though satisfying all the requirements of a contract, are instruments of conveyance and are governed by the Transfer of Property Act, 1882.

A lease of an immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. Lessor, lessee, premium and rent defined. The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent[3].

Focusing on the pandemic situation at present, the provision of TP Act has recognized few events which are related to force majeure events, such as fire, tempest or flood, or violence of an army or of a mob, or other irresistible force due to which the property is destroyed or rendered substantially and permanently unfit for the purposes for which it was let, then the lease agreement would, at the option of the lessee, be void in nature[4]. Further, the TP Act under section 111 (b) states in relation to automatic determination of lease in the events as mentioned above.

In light of the above, no provision permits the lessee to unilaterally suspend the payment of lease charge/rent and as the possession of the property lies with the lessee by virtue of the lease agreement executed between the lessee and the lessor and the provisions of the TP Act, the lessee’s liability to pay the rent shall continue till the termination of the lease in accordance to the terms of the agreement executed.

It is clarified that in order to declare the agreement void in light of the above-mentioned analysis, the lessee shall expressly communicate the same to the lessor and surrender the possession of the property and put the lessor into the possession of the property[5] by terminating the agreement executed by them with the lessee in relation to the subject property. Therefore, as long as the lessee does not surrender to his lessor the possession which he obtained from the latter at the time of the lease, he cannot rid himself of his obligations under the lease[6].

C. CONCLUSION:

In light of the outspread of Covid-19 and lock-down declared by the Government of India, which has been supported by respective states, the lessees are seeking waiver from the obligation to pay rent for the reason that they are unable to ‘enjoy’ the property and generate revenues.

Pursuant to the analysis above, the performance of the lessor to provide a property on lease is not ‘impossible’ and purpose of the lease agreement continues, therefore, the lessee cannot, while being in the possession of the property, unilaterally suspend the payment of rent. Further, the outspread of Covid-19 has not resulted in the destruction of the premise rendering it unfit for use by the lessee/tenants and hence cannot be of any avail.

Therefore, the lessee shall be obligated to abide by the terms of the lease agreement which they have executed with the lessor and pay rent pursuant to the terms of the agreement, until the lessor and the lessee comes to a mutual consent for waiver of rent or part thereof or specifically mentioned under the terms of the agreement entered into between the lessor and lessee.

Authors: Prashant Jain, Co-Founder & Partner; Abhishek Gupta, Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) prashant@samistilegal.in (ii) abhishek@samistilegal.in.

Updated as on April 17, 2020

References:

[1] https://pib.gov.in/PressReleseDetailm.aspx?PRID=1615052

[2] Gurdarshan Singh vs Bishan Singh, AIR 1963 P H 49

[3] Section 105 of TP Act

[4] Section 10(B)(e) of TP Act

[5] Section 108 (q) of the TP Act

[6] Gandavalla Muniswamy vs Marugn Muniramaiah

Image generation credits: https://www.canva.com/templates/

 

Leave a Reply