Impact of COVID-19 on Lease Agreement

Impact of COVID-19 on Lease Agreement

Share this

Introduction

The present situation of lockdown and COVID-19 has resulted in a crash of interests of the lessors and the lessees. The liaison between both the parties are well defined under a lease agreement, but such agreements and contracts are also governed by the various other laws such as the Indian Contracts Act. However, such a relationship is jeopardized by the unusual turn of events which are presently prevailing across the nation.

On one hand, the lessees are not able to enjoy the possession of the property and the way of generating income out of such property became impossible due to the nationwide lockdown, whereas on the other hand, the lessors become underprivileged of their rental income.

In such a situation, one of the most important questions arises, this is whether the lessee is liable to pay the rent even when they are restricted to carry out any business on such property? And to find out the answer of this very question, it is important to look at some important clauses on the lease agreement.

Force Majeure Clause

A Force Majeure event refers to those unexpected events, which are beyond the control of the parties and even could not be avoided and for such events, none of the parties can be held answerable. This clause usually expresses the responsibilities and obligation of the parties to a contract, in case of an occurrence of such unforeseeable event such as acts of God, war, government action, terrorism, floods, etc. It says that the parties to the contract are entitled to get relaxation from the performance of contractual obligation during the occurrence of such an event.

The Force Majeure Clause usually provides two possibilities. They are:-

  1. Temporary suspension of the agreement
  2. Termination of the agreement

And there are two conditions which are to be satisfied to raise the Force Majeure clause. They are:-

  1. Happening of an unpredictable event which is beyond the control of the parties to the contract; and
  2. Such an event must affect the ability of the parties to perform its respective obligations.

The very first condition satisfies this pandemic situation of COVID-19 and lockdown is beyond human control as many developed countries are even struggling to control this situation. Even, the lockdown restrictions imposed by the government were also beyond the control of the parties to the contract.

And as the second condition is concerned, there are some facts to be considered, at first. That the main purpose to lease a commercial property is to carry out a business activity. And that the rent of such property is generally very high as compared to the residential property as it becomes a source of income. But now, it has become impossible for a tenant of a commercial property to carry out any business activity, there and hence no income generation.

Moreover, the recent announcement by the finance minister about issuing an advisory to states and urban territories and their regulatory authorities ‘to treat COVID-19 as a force majeure event’ under RERA[1]. Therefore, the courts shall be motivated to treat the situation of COVID-19 and lockdown as a force majeure event under contractual purposes.

But under the Indian law, the temporary suspension of the contract cannot be claimed as a matter of right, but its applicability can only be interpreted from the language of the clause in the lease agreement [2].

The doctrine of Suspension of Rent

There are contracts, whose performance can be put on hold during a certain time of force majeure event and in some cases, contracts specify full cancellation or termination of the contract. But most of the leases do not permit tenants to hold back or suspend the payment of rent, irrespective of any event, whether unforeseeable. In such cases, a mutual agreement between the parties to the contract must be in the said agreement in accordance with Section 62 and 63 of the Indian Contract Act, 1872.

Case Study- Ramanand and Others vs. Dr Girish Soni and Anr. On 21st May 2020

Facts:-

In this case, the Respondent is the Landlord and the Appellant is the Tenant and they both had executed a Lease Deed on 1st February 1975, where the respondent gave the premises of Shop No. 30-A, Khan Market, New Delhi on rent. The Landlord filed a Suit for Eviction in 2008 before the Civil Judge under the provisions of Delhi Rent Control Act, 1958.

The Rent Controller passed an Order for Eviction on18th March 2017, and the same was challenged by the Tenants in the Tribunal of Rent Control. And the Tribunal also allowed the Eviction Order by rejecting the prayers of the tenants. So, again in 2017, the Tenants filed a Revision Petition before the High Court of Delhi and challenged the said order.

The High Court of Delhi passed an Interim Order on 25th September 2017 and passed an order for stay in the execution of the Eviction Order, on a condition that the Tenants would pay a rent of Rs. 3.5 Lakhs per month from the month of October 2017 to the Owner, for the continuation of its use and carrying on with the occupation and business activity.

After that, the Petition remained pending. In the meantime, the Appellant, tenants filed an Application with urgency in the High Court of Delhi, in quest of suspension of payment of rent, due to the situation of Covid-19 and Lockdown.

Issue:-

Whether the situation of COVID-19 and Lockdown would entitle the Tenants to claim suspension or exemption from payment of rent to the Landlord/Owner?

Judgement:-

The High Court of Delhi made the following interpretations vide Order dated 21st May 2020:

  1. Force majeure is an unexpected event that is beyond the reasonable control of the parties to the contract and includes earthquakes, floods, riots, and war, etc.
  2. The rights and obligations of lessor and lessee, in case of an existed contract, can be determined by:

2.1 If the contract comprises a force majeure clause, then, in that case, the tenant may be given the relaxation for the suspension of the payment of rent, during the force majeure event or the tenant may claim that the contract has become void and can leave the tenanted premises or can hold the premises and continue to pay rent.

2.2 If the said contract does not comprise a force majeure clause, then the parties may plead for the frustration of contract, on the ground of impossibility of performance of the contract due to the occurrence of a force majeure event under Section 56 of the Indian Contract Act but the tenants are not entitled to claim waiver or suspension on the payment of rent, in case of executed contracts, such as lease agreements, under Section 56[3].

2.3 If the contract is in the form of profit-sharing arrangement then, the tenant may seek suspension on the payment of rent on the ground that there is no profit generation out of such property during the situation of COVID-19 and Lockdown.

3. The rights and obligations of lessor and lessee, in case, where no contract exists between lessor and lessee are:

In such a situation, Section 108 of Transfer of Property Act, 1882 governs the tenancies and leases, that, if the property has become permanently unfit for use, then the tenants may have an option of avoiding the lease [4]. But he cannot invoke Section 108 of the TP Act if such property is temporarily unfit to use. Hence, the temporary situation of Lockdown cannot be a reason for a lease becoming void under Section 108 of TPA.

4. The High Court of Delhi also referred to the landmark judgments on the subject of force majeure and frustration of contract. The Supreme Court, in a case, held that a mere rise in price cannot be considered as an occurrence of a force majeure event and the same cannot make the contract void or impossible to perform [5]. The Delhi High Court, in a case, rejected the appeal of taking the plea of lack of water connection, as an event of force majeure, to avoid payment of rent and directed the tenant to pay the rent, in arrears or cancel the agreement [6].

5. The Court considered some facts before giving the judgement:-

5.1 There is no contractual specification related to force majeure or about the suspension of rent in the occurrence of a force majeure event. Therefore, Section 32 and 56 of the Indian Contract Act are not applicable.

5.2 That the Rented commercial property is located in a well-known area and the monthly rent of Rs. 3.5 Lakhs is very low as compared to the current rate.

5.3 Respondent-Landlord must be compensated for the loss suffered due to the delay in the execution of the Eviction Order.

6. The Court passed the following Order:

6.1 The tenants are liable to do the payment of rent to the landlord for the month of March 2020 till 30th day of May 2020 and for the month of April and May 2020 till 25th day of June 2020 and also directed the tenants to make payment of rent from the month of June 2020 as per Interim Order dated 25th September 2017, and said that in case, the tenant fails to do the payment, then the Eviction Order would be executed.

CONCLUSION

The Judgment of the High Court of Delhi in the case of Ramanand and Others vs. Dr Girish Soni and Anr. is the first case that deals with the issue regarding the rights of landlord and tenant in the situation of COVID-19 and the nationwide extreme lockdown that, whether the pandemic can be pleaded as a force majeure event by giving the relaxation to the tenant or not.

But still, we can say that the interpretation of these subjective requisites is usually different from case to case, depending upon the case facts and the circumstances in the past.

Endnotes

[1] On May 13, 2020

(https://realty.economictimes.indiatimes.com/news/industry/treat-covid-19-as-force-majeure-under-rera-finance-ministry/75718131)

[2] Surendra Nath Bibran v. Stephen Court, AIR 1966 SC 1361, Raichurmatham Prabhakar and Ors. v. Rawatmal Dugar, (2004) 4 SCC 766, Aranya Hospitality Management Services Pvt. Ltd. v. K. M. Dhoundiyal & Ors. [Arb. A. (Comm.) 6/2017, decided on 21st March 2017] [3] Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr, AIR 1968 SC 1024

[4] Sangeeta Batra v. M/s VND Foods & Ors., (2015) 3 DLT (Cri) 422

[5] Energy Watchdog vs Central Electricity Regulatory Commission (2017) 14 SCC 80

[6] Aranya Hospitality Management Service Pvt. Ltd. vs K.M. Dhoundiyal & Anr 2017 Del 7645


Steps to be taken by a Victim of workplace sexual harassment

Monika Mukherjee

Author

Monika hails from IFCAI University, Dehradun and she spends most of her time in painting and sketching. Her Interest area lies in laws for women and their protection. For any clarifications, feedback, and advice, you can reach her at monikamukherjee2307@gmail.com

Leave a Reply