COVID-19 -Impact on commercial leases

Introduction

The ongoing Lockdown by Govt. of India (”Govt.”) to curb the spread of novel Coronavirus (COVID-19), resultantly adversely affecting the global markets and businesses leading to stalling of manufacturing operations, stoppage of operation of offices etc. In view of the unprecedented situation the country is facing, several legal issues have also cropped up, like the enforceability of ‘force majeure’ clause in lease deeds for payment of rent(s). Apart from the applicability of ‘force majeure’, revision of rentals, rent free periods and cashing in of the interest free security deposit (“IFSD”) are some of the major issues that have propped up before “lessors” and “lessees” in this current period of impasse. The situation may not get totally better once the eventual restrictions are eased out as liquidity issues and delay in receiving rentals might become an increasing regularity for property owners. Hence, it is important to tread a path that offers a viable solution to minimise loses of both “lessors” and “lessees”.

Applicability of “Force Majeure” on lease

“Force-Majeure” is an occurrence of extraordinary event(s) or circumstances beyond human control which renders the performance of contract impossible. The same has to be incorporated as a clause in a contract with an intention to save the performing party from the reverberation of such an event. Whether the “Force-Majeure” clause in lease deedcan grant a relief of non-payment/waiver of the rental(s) by the lesseein view of outbreak of COVID-19, depends upon how the clause has been worded in the deed. In general, the “Force-Majeure” clause in a lease deeds excuses the lessee from non-payment of rental if there is any damage or destruction of the lease property due to occurrence of specified/unforeseen event(s) and usually does not provide any relief of waiver/suspension in payment of rental(s) in occurrence of all/any unforeseen event(s) mentioned in the clause. The Hon‘ble Supreme Court (“SC”) while dealing with the similar issue in Raja Dhruv Dev Chand vs Raja Harmohinder Singh had held that where the property leased is not destroyed or substantially and permanently unfit,the lessee cannot avoid the lease if he is unable to use the property for the purpose for which it was let out.’

This principle has been derived from Section 108(e) of the Transfer of Property Act, 1882 (“TPA”) which states that if any material part of the property be wholly destroyed or tendered substantially or permanently unfit for the purpose for which it was let out, because of fire, tempest, flood, violence of an army or a mob, or other irresistible force, the lease may, at the option of the lessee, be avoided. However, when the lease deed contains a specific clause regarding any waiver/suspension of rent(s) during an occurrence of “Force-Majeure” event, then int hose circumstances the “Force-Majeure” clause can be invoked by the lessee by giving prior intimation in writing to the Lessor for the limited durationduring theperiod of unforeseen event(s).

Applicability of 'doctrine of frustration' on lease

When agreements explicitly does not have a “Force-Majeure” Clause, then the parties can seek relief under the principle of “Doctrine of Frustration” which has evolved from Section 56 of the Indian Contract Act, 1872 (“ICA”). In such circumstances the performing party is unable to perform its part of obligation(s) due to the occurrence of an unforeseen event(s). However, the said doctrine would not be applicable in cases where lease deeds are primarily governed by the TPA.This position of law was affirmed by the SC in T.Lakshmipathi & Ors vs P. Nithyananda Reddy &Orsⁱⁱ wherein it referred to the law laid down in Raja Dhruv Dev (supra) and held that doctrine of frustration belongs to the realm of law of contracts and it does not apply to a transaction where, along with a privity of contract, a privity of estate has also been created in as much as lease is the transfer of an interest in immovable property within the meaning of section 5ⁱⁱⁱ read with Section 105^iv of TPA.

IFSD and vacancy of premises

A poignant problem that often burdens courts and litigators is the issue of refund of IFSD and vacancy of premises on the “determination of lease”^v. Now, either due to “Force-Majeure” or “doctrine of frustration” commercial leases may be terminated prematurely. These may include non payment of rent, not vacating the premises or refusal to return the IFSD. Some case laws and practical experiences in the past have shown that such pertinent issues do exist. In fact, no less than the Delhi High Court (“Delhi HC”) in the matter of Punjab National Bank vs Sh. Virendra Prakash & Anr.^vi ruled that “penal costs should be imposed on dishonest tenants who illegally continue to occupy the tenanted premises by raising a frivolous defence.“ In the case of HS Bedi vs National Highway Authority of India^vii the Delhi HC penalised the landlord for frivolously prolonging litigation and not returning the IFSD. The Delhi HC in aforesaid judgment also made suggestions regarding the avoidance of litigation and amongst other measures requested Reserve Bank of India to take measures to avoid frivolous litigation. However, till date the IFSD remains a contractual aspect in lease deeds left to the mercy of “lessors”.

It may be noted that vacancy of premises is statutory under TPA and return of IFSD under the ICA. However, to avoid any multifarious costs that litigation might bring in, it would be best if the “lessor” and “lessee” both involved in mediation to avoid any disputes. “Lessors” are to be aware that a lot of the commercial premises used are used by “lesses” either as their corporate office, registered office or in case of warehouses, even the aspect of de-bonding is required. Therefore, it might be prudent enough on part of “lessors” to look at rent revisions or provide certain additional benefits to the “lesses”. These may include, particularly in warehouses, where premises can be shared, leasing the premises to certain additional companies and reducing the area of storage of goods for original “lessee”.

Like n all premises, in commercial premises like offices etc., it is always necessary to have the rentals based on a particular area of measurement, e.g. most commonly used “square feet”. Therefore, “lessees” may curb their area of operation and avoid unnecessary costs. “Lessors” of “shared office services” may also use the same to avoid potential drop in rentals and they may accommodate more personnel in their premises.

Conclusion

Conclusively, it is established that the ‘doctrine of frustration’ would not be applicable on lease even though it does not have a “Force-Majeure” clause, like in case of other agreements/deeds.

Considering the current situation, it is advised that the provisions of the lease deed should be carefully reviewed and examined, and in the absence of any specific provision related to suspension/waiver of rental(s) during the period of “Force-Majeure” the lessee may request the lessor to renegotiate the lease terms primarily the lease rentals owing to suspension of business operations all over the country which has adversely revenue generation and has caused financial loss. It is also advisable for the parties entering into fresh lease deeds, that they should incorporate a specific clause with respect to temporary adjustments of rental(s) under specified/unforeseen circumstances like the present pandemic situation due to COVID-19.

(i) 1968 AIR 1024 SC

(ii) Civil Appeal No. 4526 of 1999

(iii) Section 5 of the TPA defines ‘Transfer of Property’

(iv) Section 105 of the TPA defines a ‘Lease’

(v) As generally understood to be termination of lease

(vi) MANU/DE/0620/2012

(vii) RFA 784/2010, CM Nos. 19620/2012 & 1320/2013

This update is by Harshita Sharma, Advocate & Associate at Agarwal Jetley & Co., Advocates & Solicitors. Contact: Email: contact@agarwaljetley.com or Mob: (+91) - 9922628447