Whether lockdown entitles the tenants for suspension of rent during COVID 19: The lessor lessee relationship

By | July 25, 2020
Whether lockdown entitles the tenants for suspension of rent during COVID 19: The lessor lessee relationship

This article argues whether lockdown entitles the tenants for suspension of rent during COVID 19 and the legal impact of the lessor lessee relationship in consequence of such conditions. Owing to the uncertain nature of the pandemic, it has become imperative to foster mutual co-operation while seeking for legal avenues whenever it becomes inevitable.

Introduction

Coronavirus/COVID-19 has majorly hit the economy and major sectors are undergoing downfall. Amidst such an outbreak, it was imperative for the countries to resort to a nationwide lockdown to ‘flatten the curve’ of the numbers increasing due to the infection.

This meant the whole nation to confine to their homes, which further led to the shutting down of businesses – slowing down of the economy. Such disruptions in trade and commerce have affected the performance of contracts to either witness a standstill or even impossible to perform.

Under such circumstances, the parties to a contract may either seek an extension and/or avoid the performance of their obligations/liabilities to seek termination of such contracts under the shield using the COVID-19 outbreak. This brings the concept of the ‘doctrine of frustration’ and ‘force majeure’ clause incorporated in the contracts.

The Disputable Arguments

  1. Whether COVID-19 can be considered as an irresistible force;
  2. Whether the property has been deemed permanently unfit due to the virus.

This outbreak has hampered a lot of sectors especially the Real Estate sector and has questioned the rights of the lessor and the lessee. To invoke a force majeure clause, the event shall be such in nature which makes the parties impossible to perform their contractual obligations.

Coronavirus (COVID- 19), was declared a ‘pandemic’ by the World Health Organisation (“WHO”) on March 11, 2020. As per the WHO, a pandemic is defined as

“an epidemic occurring worldwide, or over a very wide area, crossing international boundaries and usually affecting a large number of people”.

Force Majeure

According to Black’s Law Dictionary “Force Majeure” is “superior force”. It is an event or effect that can neither be anticipated nor controlled. Examples of force majeure events include wars, revolutions, riots, and certain ‘Act of God’ (e.g., hurricanes, tsunamis, earthquakes, etc.) During the occurrence of such events, the contracting parties are temporarily excused from their obligations.

Every industry/business relationship is/are impacted by the outbreak of the pandemic, especially the lesser lessee relationship where this is a lot of discussion about whether the tenants should stop paying the lease rent due to the nationwide lockdown?

The current situation is such that the country is witnessing the lockdown for quite a while now and still counting. There is so much uncertainty in every sector. Losses can be witnessed, temporarily shutting down of businesses has bought the economy to a major downfall.

Similarly looking at the “rent”, it could be seen that it does amount to a fair share of the business costs. It is even more painful to see the amount/rent to be paid for space/premises which is not accessible. Therefore, it is imperative to understand as a  matter of right that the tenants may suspend the rent for such premises which cannot be enjoyed physically, in such a situation.

Whether the rent can be suspended

There are a plethora of cases which define the position of law with regards to the contingent contracts under Section 32  and Section 56 of the Indian contract Act, 1872 and Section 108 of the Transfer of Property act, 1882.

Section 56 of the Indian Contract Act, 1872 (“ICA”), which talks about the impossibility of performance of contract owing to certain unavoidable events i.e., “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”.

Section 32 of ICA states that “Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened”

In the recent case of Ramanand and Ors v. Dr Girish Soni,[1] an order passed by the High court has thrown light on the jurisprudential aspect and has tried to clarify the position whether during the existing lockdown if the tenants can waive off or suspend the rent for a temporary period.

Looking into the order, it covers two aspects:

  1. Firstly, dealing with a situation where the lessee can seek suspension of the rent, consequently, this shall depend if any circumstance/event is covered under the agreement.
  2. Secondly, if the force majeure clause is not mentioned with any such circumstance/event covered then what recourse, the lessee can sort to.

From the judgement is it clarified that where the contracts do not have a force majeure clause, but the contract provides for a right to the lessee to terminate the contract in such cases the lessee can only terminate the contract and cannot ask for suspension of rent contractually.

Lease contracts/agreements(executed contracts) and other similar contracts which do not contain a force majeure clause, through this judgment it is clarified that such contracts shall not attract the provisions- Section  56 of the Indian Contract Act.

The applicability of Section 108 of the Transfer of Property Act, is such that it comes into effect where the land/premises becomes permanently unfit or completely destroyed for the party to function. Temporary inability to use the land/premise will not attract section 108.

Therefore, if the force majeure clause is absent from the contract, the party is in no position to suspend the rent in the present lockdown situation. Nonetheless, the tenant, however, it asks for the suspension of the rent on the grounds of equity then that shall be dealt and assessed on a case to case basis.

The court also has considered the scenario of revenue share agreements and has clarified that since the rental/lease agreements are linked to profits the tenant may be entitled to seek a waiver of payment of rent in such a situation if in case the tenant has not made any profits. The courts have however not mentioned any such minimum guaranteed rent which needs to be paid by the tenant, in case the suspension of rent is not envisaged.

Conclusion

The lessees who had given their lands for rent are facing huge problems because of the pandemic situation which has hit the economy and called out unemployment at a huge rate. Due to this, the tenants are unable to pay off their rents. The contracts are assessed with regards to the force majeure clause and thus the parties have been able to protect themselves.

But where the force majeure clauses were not incorporated in the contracts, such a situation had left such a relationship(lesser lessee) in deep chaos.

Through this judgement, the nature of the leasing is looked into deeply. It has indeed thrown some light on the lessor lessee relationship. Consequently, it is also observed from the judgement that remedy is available in such cases but on case to case basis, where there is no force majeure clause incorporated.


Authored by: Yashita Gulati

Alliance University, Bangalore


References

[1] RC. Rev. 447/2017


  1. Criminal Misappropriation of Property: Overview
  2. Property Law & Notes, Case Laws And Study Material