Search
  • CRSLMREL, NUJS

Solving the Dilemma of Payment of Rent under Commercial Lease Agreements during COVID-19

Updated: Jun 30, 2020

Author: Megha Shaw


Introduction

In India, the spread of COVID-19 has resulted in countrywide lockdowns in five phases, which have disrupted the country’s economy in several ways. All business clusters, regardless of scale, industry, and profitability, are eyeing to adopt methods to reduce their operation costs. For many mall retailers, rent expense is a major cost that the lessee pays to the lessor as per the commercial lease agreement.[1] One of the major impacts of the pandemic in the real estate sector revolves around the commercial lease agreement, where the lessees would be keen to address and rationalize the enormous rent liability for the leased property during the lockdown.[2] In these extraordinary times, the lessees would be inclined to seek suspension of rent or reduction in rent liability, since they have not been able to use the premises during the unprecedented lockdowns.[3]

Background

On 24th March 2020, the National Disaster Management Authority (‘NDMA’) issued an order for lockdown in the country.[4] All commercial and private establishments were to remain shut for 21 days, but this period was extended further.[5] The MHA issued an order[6] on 30th May 2020, allowing the reopening of shopping malls from 8th June 2020, while the lockdown will be in force till 30th June in the containment zones. Therefore the retail shops in the malls have been closed for 75 days and several cases are filed in the court for suspension of rent during this period. What the future holds for these businesses is uncertain at this point in time.

Objective

In these circumstances, when malls are reopening after 75 days, the retail associations throughout the country seek suspension of rent or waiver in some form from the mall authorities (lessors).[7] To notify the mall authorities, all retailers, cinemas, and restaurants are invoking force majeure clause to avoid paying any rent.[8] Now, this dormant clause in the lease agreements has suddenly become a contentious topic. Further, since all agreements do not have the force majeure clause, the lessees under such agreements wonder if the doctrine of frustration can be invoked to address their concerns. This article seeks to clarify the uncertainty revolving around the position of law on whether the retailers have to pay the rents or not.

Force Majeure Clause And Doctrine of Frustration

It is essential to understand the meaning of ‘force majeure’, a French term, meaning ‘superior force’. It is not correct to say that anything beyond the control of the parties to a contract comes under the force majeure clause.[9] Different contracts have used different wordings to define the force majeure clause depending on the events envisaged by the parties to the contract, as there is no fixed interpretation of the clause. In lucid terms, ‘Force Majeure’ events allows non-performance of contractual obligations of a party, while not resulting in any significant breach of the contract, provided such contractual obligation is adversely affected by events beyond the control of an affected party such as an act of God, natural disaster, war, strike, lockout, epidemic, Government orders, etc.[10]

Section 32[11] of the Indian Contract Act, 1872 (‘ICA’) encompasses the statutory foundation of force majeure clause while section 56[12] of the same act deals with the doctrine of frustration. In a landmark case, the Supreme Court has held that “…. where the Court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of Section 56 altogether.”.[13] Further, in this case, the court also clarified that these types of clauses which deals with contingent contracts and similar other provisions, will come under the purview of section 32 of the ICA. Thus, force majeure clause does not come under section 56 of ICA, which lays down the doctrine of frustration.

Is There Any Other Remedy If The Contract Does Not Have The Force Majeure Clause?

In Raja Dhruv Dev Chand v. Harmohinder Singh & Anr, the Supreme Court has held that a lease agreement transfers the right to enjoy the leased property to the lessee, and hence it is governed by Transfer of Property Act, 1882 (herein referred to as TOPA) and not by ICA.[14] Thus, the doctrine of frustration (Section 56 of the ICA) cannot rescue the lessees who do not have a force majeure clause because ICA does not apply to the lease agreement.[15]

In the same case, Supreme Court has held that “Where the property leased is not destroyed or rendered substantially and permanently unfit, the lessee cannot avoid that lease.” [16] The lessees cannot seek suspension of rent by relying on section 108 (e) of TOPA[17] because the pandemic has neither destroyed the leased property nor made it unfit for future use. Therefore, it is clear that the parties who do not have the force majeure clause in their contract can neither bank on ICA nor the TOPA for seeking suspension of rent.[18]

Does the Mere Presence of Force Majeure Clause Enable The Lessee To Seek Suspension Of Rent?

The Retailers (lessees) who have the force majeure clause in their lease agreement have to check the wordings of the clause to find whether it includes the term ‘epidemic’ or ‘pandemic’ or ‘government order’, or any other word that can include the situation of lockdown, as a force majeure event. Recently Delhi High Court has held that lockdown by the government orders to prevent the outbreak of COVID-19 was “prima facie in the nature of force majeure”.[19]

If the lease agreement contains the force majeure clause and the word ‘epidemic’ or ‘pandemic’ or any other event considering the prohibition by government order, is covered under the force majeure event, then the party invoking such a clause has to adhere to the procedural requirement as stated in the agreement.[20] The procedural requirement can be in the form of the requirement of the lessee to inform the lessor about the invocation of such clause, and it can also be the time limit within which such notice has to be sent to the lessor. Thus, to avoid any technical arguments, adhering to the strict procedural compliance as per the agreement will help the lessor if any legal dispute related to the payment of rent arises in the near future.[21]

The mere presence of the force majeure event, which makes the performance of a contract more onerous, is not sufficient to do away with the performance.[22] The direct link in between the non-performance of the obligation by the party (payment of rent) and the force majeure event (the lockdown) has to be established.[23] Mere commercial hardships cannot be a sufficient reason justifying the non-performance of the obligation under the agreement.[24] The party (lessee) has to prove the practical impossibility created by the pandemic resulting in such circumstances that lessee is not in a position to fulfill its performance as per the agreement. [25] If there is a specific clause on the suspension of rent or any such waiver, only then can the parties seek suspension of rent as a right, on the occurrence of the force majeure event.[26]

In a recent Delhi High Court judgment, the court has emphasized that the lessee can generally request suspension of rent by invoking the equitable jurisdiction citing the non-use of premises for a certain period, and the decision of the court would depend on the facts and circumstances of each case. [27] Accordingly, the Supreme Court has reiterated, “the mere non- use of the leased land may not always entitle the tenant for suspension of rent.” [28] The Court has also stated that parties cannot seek the suspension of rent as a right, unless, such specific suspension or waiver clause is present in the contract[29].

Conclusion

Therefore, it is clear that only the happening of the lockdown or pandemic would not automatically entitle the lessee to seek the suspension of rent, but the lessee will be entitled to the only specific relief that is stated in the agreement. And if the party invokes the force majeure clause, they have to make sure that they can prove the impossibility of the rent payment due to the lockdown and establish a direct linkage between them. If the parties intend to continue with their business relationship, and if they do not have the force majeure clause in the lease agreement it is advisable that the parties should re-negotiate and mutually agree to alter the terms of the lease for a short duration of time or till a near-normal situation approaches for the business community.


[The author is a fourth year student at West Bengal National University of Juridical Sciences, Kolkata.]

Notes and References

[1] Ankit Sharma, Mall Operator may not receive rentals during lockdown: ICRA, ET Realty, March 25, 2020 <https://realty.economictimes.indiatimes.com/news/retail/mall-operators-may-not-receive-rentals-during-lockdown-icra/74803467> (Last visited on June 12, 2020) [2] Ratna Bhushan, Writankar Mukherjee, Sharmistha Mukherjee, Lockdown Effect: Restaurant, cinemas & retailers at malls seek zero rental till May, ET Bureau, April 03, 2020, 7:48 AM, < https://economictimes.indiatimes.com/industry/services/retail/lockdown-effect-restaurants-cinemas-retailers-at-malls-seek-zero-rentals-till-may/articleshow/74956239.cms?from=mdr> [3] Id. [4] Ministry of Home Affairs Order no. 40-3/2020-D dated 24.03.2020, available at <https://www.mha.gov.in/sites/default/files/Guidelines.pdf> (Last visited on June 8, 2020) [5] Id. [6] Ministry of Home Affairs Order no. 40-3/2020-DM-I (A) available at <https://www.mha.gov.in/sites/default/files/MHAOrderDt_30052020.pdf> (Last visited on June 8, 2020) [7] Writankar Mukherjee, Rasul Bailey, Covid-19: Retailers seek rental rebates from malls as sales slump 50%, ET Bureau, March 18, 2020 < https://economictimes.indiatimes.com/industry/services/retail/covid-19-retailers-seek-rental-rebates-from-malls-as-sales-slump-50/articleshow/74683433.cms?from=mdr > (Last visited on June 8, 2020) [8] Supra note 3. <https://economictimes.indiatimes.com/industry/services/retail/lockdown-effect-restaurants-cinemas-retailers-at-malls-seek-zero-rentals-till-may/articleshow/74956239.cms?from=mdr> (Last visited on June 8, 2020) [9] Devendra Deshmukh, Harsh Parikh, Abhiraj Gandhi, ‘Not a “One Size Fits all” Scenario’, Mondaq, May 11, 2020 available at <https://www.mondaq.com/india/litigation-contracts-and-force-majeure/930290/covid-19-real-estate-impact-not-a-one-size-fits-all-scenario> (Last visited on June 8, 2020) [10] Lex Counsel Law Offices, ‘Possibility of Non Payment of Lease Rent Due to Covid-19’, International Lawyer Network, April 08, 2020 available at <https://www.ilntoday.com/2020/04/possibility-of-non-payment-of-lease-rent-due-to-covid-19/> (Last visited on June 8, 2020), see also McCardie J. in Lebeaupin v. Crispin ([1920] 2 K.B. 714) as cited in Dhanrajamal Gobindram vs Shamji Kalidas And Co. AIR [1961] SC 1285. [11] The Indian Contract Act, 1872, § 32. [12] The Indian Contract Act, 1872, §56. [13] Satyabrata Ghose v. Mugneeram Bangur & Co. [1954] AIR 44, ¶ 18. [14] Raja Dhruv Dev Chand v. Harmohinder Singh & Anr., [1968] AIR 1024. [15] Energy Watchdog v. CERC & Ors, [2017] 14 SCC 80. [16] Supra note 12, ¶ 17. See also, Sushila Devi v. Hari Singh & Ors, AIR [1971] SC 1756, ¶ 18. [17] The Transfer of Property Act, 1882, §108 (e). [18] Ramachandra Madan, ‘Frustration Goes Viral: Commercial Leases and Force Majeure’, SCC Blog, May 1, 2020 available at https://www.scconline.com/blog/post/2020/05/01/frustration-goes-viral-commercial-leases-and-force-majeure/ (Last visited on June 8, 2020) [19] M/s Halliburton Offshore Services Inc. v. Vedanta Limited, O.M.P. (I) (COMM)& I.A. 3697/2020. [20] Supra note 6. [21] Aurelia Menezes, Latha Sanmugam, ‘Coronavirus Legal issues and perspective relating to real estate in India’, March 19, 2020 available at <https://www.mondaq.com/india/landlord-tenant--leases/905514/coronavirus-legal-issues-and-perspective-relating-to-real-estate-in-india> (Last visited on June 8, 2020) [22] Supra note 11. [23] P.V. Kapur, Tenancy Agreement and Covid 19 Lockdown: A ‘Majeure’ Headache, The Wire (Law), May 28, 2020, available at <https://thewire.in/law/tenancy-agreements-covid-19-lockdown-force-majeure>, (Last visited on June 8, 2020), see also, Sri Ananda Chandra Behera v. Chairman, Orissa State Electricity Board, [1997] I OLR 390. See also, Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp & Ors. Order dated April 8, 2020 passed by the Bombay High Court in Commercial Arbitration Petition (Lodging) No. 404 of 2020. [24] Supra note 10, see also, M/S Alopi Prasad & Sons Ltd v. The Union of India, [1960] AIR 588. [25] Supra note 15. [26] Id. [27] Ramanand and Ors v. Dr. Girish Soni & Anr, RC. REV. 447/2017 (Delhi High Court) decided on May 21, 2020. [28] Raichurmatham Prabhakar & Anr v. Rawatmal Dugar, [2004] 4 SCC 766. [29] Supra note 28.

162 views0 comments

Recent Posts

See All

The Biotech Manifesto of Maharashtra

Author: Clarissa D'Lima The strain on the healthcare system in the current pandemic and the demand for a novel cure is a much-awaited update by all. While countries around the globe seem to be in a gr

SIGN UP AND STAY UPDATED!
  • Grey Twitter Icon
  • Grey LinkedIn Icon
  • Grey Facebook Icon

© 2023 by Talking Business.  Proudly created with Wix.com

  • Twitter Social Icon
  • LinkedIn Social Icon
  • Facebook Social Icon