Commercial Lease Agreements: Intricacies In The Hour Of Pandemic

INTRODUCTION

The unprecedented Covid-19 pandemic has put the entire world on a standstill. The severe impact unleashed by it is palpable in various sectors of the economy, especially the commercial lease. The widespread outbreak and subsequent lockdown have put the tenants in a financial crisis, rendering them incapable of paying the rent as per the lease agreements.[1] Due to this inability, they seem to look forward to the defence of Force Majeure, the doctrine of frustration, or some other law as applicable to defer or absolve from their liability.

THE CONUNDRUM WITH THE FORCE MAJEURE CLAUSE

The term force majeure (a French phrase) implies a superior force that can neither be anticipated nor controlled, including both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars) which make the performance impossible.[2] The court in Dhanrajmal Gobindram v. Shamji Kalidas[3] relying on this definition held that the term encompasses the impossibility arising from both human intervention and Vis Major (Act of God).

A force majeure clause is mentioned in Section 32 of the Indian Contract Act dealing with contingent contracts, and to invoke it, the party needs to project impossibility in the performance of duties.

The government in its official notification dated February 19, 2020, declared that the Covid-19 may involve the force majeure clause[4] but its applicability in commercial lease agreements will vary from case to case. Hence, multiple situations may arise concerning the clause, for instance, its complete absence, general inclusion, or inclusion with a specific clause. Their elucidation, along with their impacts, is as follows:

i) Absence of the Clause

The ambit of force majeure clause is confined to the specific events spelled out by the parties in the agreement.[5] Therefore the lease agreements which do not specify the events of the impossibility through executive order, natural calamities, etc., or do not have a force majeure clause at all, fall short of grievance redressal under any judicial authority. Thus, no remedy can be sought in case there's no mention of the clause.

ii) Inclusive of a General Clause

Proceeding further, even if the agreement is inclusive of a general force majeure clause, though it is of some help, it might not save the tenant successfully because a broadly drafted clause includes a catch-all phrase considering "all other events beyond the control of both the parties" which is governed by the doctrine of Ejusdem Generis and thus require the establishment of similarity between the argued events of pandemic and those specifically listed,[6] failure of which will render the inclusion futile.

Furthermore, if the authority acknowledges so, the purpose won't still be served as the temporary financial difficulties do not render the performance of the agreement impossible and hence can't be construed as a ground for termination of a contract.[7] However, in case the tenant somehow proves fulfilment of the aforesaid criteria and successfully invokes the clause, it will only allow him to terminate the contract, leading to the surrender of the premises. And if he does not want so, the continued stay on the land will put an obligation on him to pay the rent under the agreement.[8] Hence the conundrum.

iii) Inclusive of a Waiver-Specific Clause

In light of the previous arguments, it seems the only hope left at a tenant’s disposal, as far as force majeure is concerned, is where the agreement is inclusive of a specific clause that provides for deferment, waiver or suspension of rent in case of financial difficulty arising due to certain events similar to those of this unprecedented crisis on the discretion of the parties.

Since the principle of pacta sunt servanda provides that the term of agreements are binding on both the parties and the jurisprudence also stipulates that the interpretation shall be confined to the wordings used in the agreement,[9] notwithstanding the non-fulfillment of the threshold of impossibility, the judiciary shall construe these agreements as per the intent of the parties, thus providing for the relief sought in unenviable circumstances.

NON-APPLICABILITY OF THE DOCTRINE OF FRUSTRATION

When the events create an impossibility of performance of the duties, insofar as a force majeure event occurs dehors the contract, the party may resort to the doctrine of frustration under Section 56 of the Indian Contract Act[10], which makes the contract void on the occurrence of an event that upsets its very foundation. And due to pandemic, the aggrieved parties hope to seek a remedy under this section based on such grounds. However, this doctrine does not apply to commercial lease agreements.

Frustration only activates in case of impossibility arising from a contract to be performed in the future, better known as an executory contract. That is, it applies only to pure contractual obligations and not those in which an estate is already accrued in favor of the party. But, a contract for lease is an executed one, as the lessee obtains the possession from the lessor. It is a complete conveyance that duly transfers the rights and liabilities associated with the property to the lessee.[11] Therefore, it falls outside the purview of this section, as held by the Supreme Court in the case of Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr.[12]

Furthermore, the court reiterated this stance in W.B khadi and village industry board v. Sagore Banerjee[13] case and once again held that the contract for lease falls outside the ambit of this doctrine and thereby non-applicable. Hence, it is evident that there can be no remedial reliance on Section 56 of the Contract Act.

However, the parties may seek some relief under the provisions of the Transfer of Property Act, because of its wider scope.

TRANSFER OF PROPERTY ACT: A GLIMMER OF HOPE

Section 108(B)(e) of Transfer of Property Act,1882 empowers the aggrieved party to terminate the lease agreement on the occurrence of the events not stipulated in it. It generally includes the events, arising from fire, tempest, flood, or any other irresistible force, that wholly destroy the property or render it substantially and permanently unfit.

The Supreme Court in the Raja Dhruv Dev Chand’s[14] case while interpreting the term "substantially and permanently unfit" held that the temporary vacation or non-use of property due to any factor shall not satisfy the criteria of "permanently unfit" required for invoking this defence. Further, the temporary dispossession from the property does not entitle the tenant to discharge his obligation enshrined in the lease agreement.[15] So the claim of the tenant to absolve its liability does not stand strong as the property is left unused only for a temporary period owing to the lockdown by the government, which will ebb away once the situation gets under control.

It is also pertinent to note here that the property is not destroyed in any way because of the Covid-19 pandemic. Though the pandemic was and still is an irresistible force and so are the government's orders of lockdown which have unquestionably hampered the economy, still none of them has manifestly anything to do with properties. And the party cannot terminate a contract unless the subject matter of the same, which includes both superstructure and the site, is destroyed.[16] Hence, no relief under Section 108(B)(e) can be sought.

However, Section 108(B)(n) highlights the responsibility of the lessee to bring to the notice of the lessor in case any of his rights are interfered with.[17] And in a way, it may seek some remedy for the lessee in case the lessor understands the former's plight and calls for negotiation. Even if he decides to go to the court for the latter to take a suitable decision, the court may redress their grievances with its fine sense of judgment as per the status quo. Consequently, suspension of rent may be sought by invoking the equitable jurisdiction of the Court due to temporary non-use of the premises.[18]

WAY AHEAD

Many countries, for example, USA & UK, have enacted comprehensive legislation to mitigate the suffering of anguished tenants by providing a blanket restriction on obligatory eviction of property on account of non-payment of rent during this unprecedented crisis.[19] However, in India, the aggrieved party can only resort to a special inclusion in force majeure clause, or the court's equitable jurisdiction granting suspension or waiver after having regard to financial incapacity of the claimant.

Although the government in its official notification dated March 29, 2020, directs all the landlords to refrain from coercing tenants into the vacation of property on the ground of non-payment of rent or else face repercussions,[20] there is still an ambiguity in its effective enforcement as the Hon'ble Supreme Court refused to implement the same.[21] Therefore, special legislation providing the suspension of rent may soothe the sufferings of the impecunious tenants of our society, while avoiding the litigation as well in this high time.

Endnotes

[1] Sanjiv Dagar, Lease Rent During COVID-19 Period, Obligation Or Exemption?, LAWYERED (June 12, 2020, 10:40 PM), https://www.lawyered.in/legal-disrupt/articles/lease-rent-during-covid-19-period-obligation-or-exemption/ [2] Force Majeure, Black’s Law Dictionary (11th ed. 2019). [3] Dhanrajmal Gobindram v. Shamji Kalidas & Co., AIR 1961 SC 1285. [4] Ministry of Finance, Office Memorandum No. F18/4/2020-PPD (Feb 19, 2020), https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf. [5] Satyabrata Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44. [6] Energy Watchdog v. Central Electricity Regulatory Commission., (2017) 14 SCC 80. [7] Id. [8] Ramanand & Ors. v. Dr. Girish Soni & Anr., RC. Rev., 447/2017 (Del. May 21, 2020) [9] Sumit Kumar Gupta, Applicability of Force Majeure in Commercial Lease Agreements Amid Covid-19, INDIACORPLAW (June 13, 2020) ,https://www.google.com/amp/s/indiacorplaw.in/2020/06/applicability-of-force-majeure-in-commercial-lease-agreements-amid-covid-19.html/amp [10] Supra note 6. [11] Courts of Wards Dada Siba Estate v. Raja Dharam Dev Chand.,1959 SCC Online P&H 164. [12] Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr., AIR 1968 SC 1024. [13] W.B Khadi and Village Industry Board v. Sagore Banerjee., 2002 SCC Online Cal 491. [14] Supra note 12. [15] Raichurmatham Prabhakar and Ors. v. Rawatmal Dugar., (2004) 4 SCC 766. [16] Shaha Ratansi Khimji & Sons VM Kumbhar Sons Hotel Pvt. Ltd., AIR 2014 SC 1895. [17] Shankar Prasad v. State of MP and Ors., 2012 SCC Online MP 4296. [18] Supra note 8. [19] Shrey Fatterpekar, With most offices, shops shut due to COVID-19 lockdown, it's imperative that Centre enacts appropriate law on payment of commercial rent, INDIAFORBES (June 14, 2020, 4:20 PM)https://www.forbesindia.com/india/with-most-offices-shops-shut-due-to-covid-19-lockdown-its-imperative-that-centre-enacts-appropriate-law-on-payment-of-commercial-rent-8420571.html [20] Ministry of Home Affairs, Office Memorandum No. 40-3/2020-DM-IA (March 29, 2020),https://www.google.com/url?sa=t&source=web&rct=j&url=https://mha.gov.in/sites/default/files/PR_MHAOrderrestrictingmovement_29032020.pdf&ved=2ahUKEwjX6Ob2 IDqAhWhILcAHX_YB1kQFjABegQIARAH&usg=AOvVaw3AfAYKnT7QqTq0OJUTOkxd [21] Pawan Prakash Pathak v. Union of India.,C.W.P 11005/2020 (S.C. May 5, 2020).