Suspension/Waiver of Rent under Commercial Leases or Licenses during COVID-19: A Force Majeure Event?

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Introduction

The COVID-19 pandemic has claimed thousands and afflicted billions of lives across the world. It has adversely affected the economy at large, including but not limited to, private and public organizations. India too has been afflicted by the aforesaid pandemic and the virus has spread at an alarming rate. As a result, the entire nation was put under a 21-day lockdown since 23.03.2020, by the Hon’ble Prime Minister Shri Narendra Modi, in an endeavor to combat the threat of the virus.

In furtherance to the lockdown, a press release was also published by the Government of India on 24.03.2020. Furthermore, the National Disaster Management Authority, chaired by the Hon’ble Prime Minister, in exercise of its powers under Section 6(2)(i) of the Disaster Management Act, 2005, issued an Order dated 24.03.2020, directing the Ministries/ Departments of the Government of India and the State/ Union Territories and their respective Authorities to take effective measures to prevent the spread of COVID-19 in the country. The aforesaid Order imposed a complete restriction upon the movement of people outside their homes, suspension of all transport services (except essential goods)/ educational institutions/ industrial establishments/ hospitality services etc.

Subsequently, the Ministry of Home Affairs, vide its Order dated 29.03.2020, issued directions to the landlords, inter alia, directing them not to demand payment of rent from the workers, including the migrants, living in rented premises/ accommodation. The said Order, however, was silent on suspension/ waiver of rent for commercial leases/ licenses/ agreements entered into by organizations/ corporations.

Pursuant to the aforesaid lockdown, many organizations/ corporations have undergone and are still witnessing a severe financial crisis coupled with liquidity crunch due to disruptions in their businesses. This has resulted in such lessees/ licensees (as the case may be) finding it difficult to fulfil their respective obligations to pay rent/ license fee in terms of the agreement.

Now it has been witnessed that many such lessees/ licensees are seeking suspension/ waiver of rent/ license fee on the basis of Force Majeure clauses, contained in their respective commercial leases or licenses and in the absence of such a clause, on the basis of frustration of contract, thus resulting in a dispute. Is this permissible? Does the law come to their rescue?

The present article is in the aforesaid context, wherein the author shall attempt to end the confusions/ doubts with respect to entitlement of the tenants to seek waiver/ suspension of payment of rents, in the absence or presence of a Force Majeure clause under commercial lease/ license agreements, as the case may be, during the period of lockdown as well as post lockdown.

Force Majeure Clause, Frustration of Contract and its Legal Implications

The term “Force Majeure” finds no place in any of the statutes in India, however, in Latin, it means “superior force”. In Black’s Law Dictionary, the term “Force Majeure” has been defined as ‘an event or effect that can be neither anticipated nor controlledThe term includes both acts of nature (e.g. floods and hurricanes) and acts of people (e.g. riots, strikes and wars)’.[1]Simply put, the occurrence of an event beyond the reasonable control of either of the parties and which the parties could not foresee at the time of execution of the contract, can be termed as a Force Majeure event.

At this juncture, it is imperative to mention herein that the said clause cannot be, under any circumstances, implied in a contract and there has to be a specific clause to this effect, in the absence of which the parties cannot take advantage of non-performance of a contract due to an occurrence of a Force Majeure event. However, in the absence of a Force Majeure clause under the commercial Lease Deed as well as the Leave and License Agreement, it has been witnessed that tenants seem to take recourse to Section 56 of the Indian Contract Act, 1872 [“ICA”], which deals with impossibility to do an act or frustration of contract. Section 56 of the ICA reads as follows:

Agreement to do impossible act—An agreement to do an act impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Compensation for loss through non-performance of act known to be impossible or unlawful—Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.”

Let us first examine the scope of Force Majeure clause as well as the applicability of Section 56 of ICA to a Lease Deed.

Lease Deed

The term “Lease”, though is a contract and largely being governed by the provisions of ICA, has not been defined anywhere under the said statute and only finds its place under the provisions of Section 105 of Transfer of Property Act, 1882 [“TOPA”], which defines Lease as follows:

A lease of 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.

It is pertinent to reiterate herein that the Force Majeure clause cannot be implied in a contract and has to be specifically provided under the said contract, in order to avail the benefit of non-performance or suspension of a contract during such period of Force Majeure event. Given the present situation, if a Lease Deed contains a Force Majeure clause, then a strict interpretation shall be followed as has been held by the Hon’ble Supreme Court of India in the matter of Energy Watchdog & Ors. v. Central Electricity Regulatory Commission & Ors.,[2] and the parties shall not be at the liberty to go beyond what has been expressly stated and agreed between the parties at the time of execution of the Lease Deed. Thus, if the Force Majeure clause covers the present pandemic, the lessee(s) may consider invoking the said clause, inter alia, seeking suspension/ waiver of rent during such a period of Force Majeure event. However, the same is subject to determination of nature of the lessee’s obligation.

In the absence of a Force Majeure clause, the lessee(s) have been seen to rely upon Section 56 of the ICA, citing frustration of/ impossibility to perform a contract in order to either seek suspension or waiver of rent. However, it appears that the lessee(s) may not be able to invoke the doctrine of frustration enshrined under the provisions of Section 56 of the ICA, as the language of Section 56 of the ICA suggests that those agreements shall be void, the purpose of which to do an act itself becomes impossible or unlawful. Now, in the present situation, the leased/ licensed premises have already been transferred in the possession of the lessee/ licensee and there is nothing left to be performed apart from paying monthly rent/ license fee, which does not form part of the performance of the contract but merely a consideration to be paid, every month till the expiry of such lease, for the performance already completed at the time of execution of the contract. Simply put, lease(s) and license(s) are concluded contracts/ executed contracts/ completed conveyance, where the promise made has been completed immediately upon the execution of such lease/ license, as the case may be, whereas, Section 56 of the ICA is only applicable to executory contracts, where the promise made are not completed immediately upon the execution of the contract and are to be performed in future i.e., post execution of the contract. Thus, Section 56 of the ICA would not apply to lease deeds and similarly situated contracts.

In support of the aforesaid argument, it is imperative to highlight the observations of the Hon’ble Supreme Court of India in the matter of Dhruv Dev Chand v. Harmohinder Singh & Ors.,[3] wherein the court, unequivocally and categorically, held that provisions of Section 56 of the ICA does not apply to lease deed, as the same being a completed conveyance and not an executory contract and observed as follows:

“By s. 4 of the Transfer of Property Act the chapters and sections of the Transfer of Property Act which relate to contracts are to be taken as part of the Indian Contract Act, 1872. That section however does not enact and cannot be read as enacting that the provisions of the Contract Act are to be read into the Transfer of Property Act. There is a clear distinction between a completed conveyance and an executory contract, and events which discharge a contract do not invalidate a concluded transfer.

By its express terms s. 56 of the Contract Act does not apply to cases in which there is a completed transfer. The second paragraph of s. 56 which is the only paragraph material to cases of this nature has a limited application to covenants under a lease. A covenant under a lease to do an act which after the contract is made becomes impossible or by reason of some event which the promisor could not prevent unlawful, becomes void when the act becomes impossible or unlawful. But on that account the transfer of property resulting from the lease granted by the lessor to the lessee is not declared void.”

Similar line of reasoning was followed by the Delhi High Court in one of its recent judgment in the matter of Ramanand & Ors. v. Dr. Girish Soni & Anr.[4] However, the court while dealing with the question of suspension of rent in the present situation has placed its reliance on the judgments of the Hon’ble Supreme Court of India in the case of Raichurmatham Prabhakar and Ors. v. Rawatmal Dugar[5] and Hon’ble Delhi High Court in the matter of Aranya Hospitality Management Services Pvt. Ltd. v. K. M. Dhoundiyal & Ors[6] and observed that mere non-usage of premises would not entitle the tenant to seek suspension of rent as the tenant has not been dispossessed of the premises and at the same time intends to occupy/ enjoy the same. Despite the said fact, the court took a liberal approach considering the present situation and had granted some relaxations in payment of rent by rescheduling the timelines for payment of rent.

In view of the aforesaid, it can be concluded that the provisions of Section 56 of the ICA would not apply to lease deed and thus, the provisions of Section 108(e) of the TOPA would come into play, which reads as follows:

“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: Provided that, if the injury be occasioned by the wrongful act or default of the lessee, he shall not be entitled to avail himself of the benefit of this provision”

The lessee(s), in the present scenario, may take recourse to the provisions of Section 108(e) of the TOPA and argue that the leased premises/ property has been rendered substantially unfit for the purposes for which it was let and thus, the lease deed is void. However, the lessee(s) may find it challenging to prove that the present pandemic, being temporary in nature, has resulted into rendering the premises/ property “substantially and permanently” unfit for use. Nonetheless, the lessee(s) seeking recourse to the aforesaid provision cannot continue to occupy the premises and may have to vacate the said premises in order to avail certain benefit/ relaxation under the said provision.[7]

Having discussed the applicability of Force Majeure clause as well as Section 56 of the ICA to the Lease Deed, let us now examine the applicability of the same to Leave and License Agreement.

Leave and License Agreement

Leave and License Agreement in India, though is a contract, is largely governed by the provisions of Indian Easements Act, 1882 [“IEA”]. As has already been discussed above, the legal position with respect to the scope of Force Majeure clause as well as the provisions of Section 56 of the ICA under the Lease Deed remains same and unaffected as that of the Leave and License Agreement.

Nonetheless, one may argue that there exists no provision under the IEA, which curtails the applicability of Section 56 of the ICA and hence, the doctrine of frustration would apply to the present scenario. However, it appears that such an argument shall not sustain in the eyes of law due to the following reasons:

Firstly, in view of the provisions of Section 62(d) of the IEA, which provides that a license is deemed to be revoked where the property is destroyed or by superior force so permanently altered that the licensee can no longer exercise his right. It is pertinent to note herein that the present pandemic situation is temporary in nature and has only restricted the licensees to use the premises for a certain period of time and thus, cannot be considered as a destruction or permanent alteration. Thus, the licensee taking recourse to Section 62(d) of the IEA might find it challenging to prove that the present pandemic, being temporary in nature, has resulted in destruction or permanent alteration of the premises.

Secondly, the IEA consists of provisions specifically dealing with the rights of the licensee and licensor and on the contrary, the provisions of ICA are general in nature and shall only apply where there is an ambiguity to the existence of a special right. Simply put, a licensee can only avail the benefit of the provisions of the IEA, which has specifically been enacted by the legislature for the purpose of safeguarding the rights of the licensee. In support of the said argument, it is imperative to highlight the settled position of law laid down by the Hon’ble Supreme Court of India, inter alia, holding that special law prevails over the general law.[8] Thus, it can be argued that the provisions of the IEA, being a special statue, shall apply to Leave and License Agreement and shall exclude the applicability of the provisions of Section 56 of the ICA.

Concluding Remarks

Considering the present pandemic situation in the entire nation and the existing legal framework, the lessee(s)/ licensee(s) may find it difficult to seek suspension/ waiver of rent in the absence of a specific Force Majeure clause.

However, in view of the recent judgment[9] of the Delhi High Court, wherein the court has taken a liberal approach towards the tenant and has granted a relaxation in the payment of rents while keeping in mind that the lessee intend to occupy the premises, a parallel analysis can be drawn and the lessee(s)/ licensee(s) might consider terminating the Lease Deed/ Leave and License Agreement with immediate effect and vacating the leased/ licensed premises, irrespective of the fact that a notice of termination for a specific time period has to be served upon the lessor(s)/ licensor(s). Such a termination might help the lessee(s)/ licensee(s) in saving its obligation to pay future rent/ license fee. However, the lessee(s)/ licensee(s) would still be obligated to pay rent/ license fee for the period they had occupied the leased/ licensed premises, prior to termination.

Alternatively, the lessee(s)/ licensee(s) may consider negotiating and altering their existing contracts, i.e., Lease Deed(s) or Leave and License Agreement(s) with the lessor(s) or licensor(s), as the case may be.

(This post has been authored by Varun Tandon, an Associate at L&L Partners, New Delhi)

References

  1. Black’s Law Dictionary Eighth Edition, First South Asian Edition (2015).

  2. (2017) 14 SCC 80.

  3. AIR 1968 SC 1024.

  4. RC. REV. 447/2017, decided on 21.05.2020.

  5. (2004) 4 SCC 766.

  6. Arb. A. (Comm.) 6/2017, decided on 21.03.2017.

  7. Supra note 4.

  8. J. K. Cotton Spinning & Weaving Mills Co. Ltd. v. State of Uttar Pradesh & Ors., AIR 1961 SC 1170; Kidar Lall Seal & Anr. v. Hari Lall Seal, AIR 1952 SC 47.

  9. Supra note 4.

Cite as: Varun Tandon, ‘Suspension/Waiver of Rent under Commercial Leases or Licenses during COVID-19: A Force Majeure Event?’ (The Contemporary Law Forum, 19 August 2020) <https://tclf.in/2020/08/19/suspension-waiver-of-rent-under-commercial-leases-or-licenses-during-covid-19:-a-force-majeure-event?> date of access.

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