Impact of COVID-19 on Leasehold Arrangements
Force Majeure is a French term and is commonly traced to French law. It denotes
any event which is beyond the control of the parties. Force Majeure would
include natural calamities like flood, earthquake, hurricanes,
volcanic eruption etc., civil strife, military actions, health emergencies in
the nature of epidemics.
While the expression force majeure is not explicitly
used in the Indian Contract Act, 1872 (“ICA”), the
ICA recognizes that an uncertain event on which the contract is dependent
may become impossible (Section 32) and also that the act agreed to be done by
the parties may become impossible or illegal (second para of Section 56). In
the eventuality of Sections 32 and 56, the contract becomes void at the option
of the party whose performance has been rendered impossible or frustrated.
The purpose of this article is to analyze the operability of force
majeure in a lease agreement. Lease agreements are governed by the
specific legislation, the Transfer of Property Act, 1882 (“TPA”).
The right of lease has been defined to mean among others, the right to
enjoy an immovable property[1]. Hence the TPA recognizes
the lessee’s right to avoid the lease if the property has been destroyed or
rendered substantially and permanently unfit for the purposes for which it was
let, by fire, tempest or flood, or violence of an army or of a mob, or other
“irresistible force”[2].
Since the avoidance of lease on account of events impairing the property
is at the option of the lessee, Courts have held that if the lessee does not exercise
the option to treat the lease to be void after the property is rendered
substantially unfit by fire, he will remain liable to pay rent[3].
Other than the aforementioned, the TPA does not recognise any other force
majeure affecting the rights and obligations under a lease agreement.
The COVID-19 situation has caused the temporary vacation of leased
premises across the nation, thereby creating a wave of requests from lessees
for the exemption of the requirement of payment of rent for the period the
premises was not occupied. The TPA does not recognize suspension of rental
payment by the lessee on account of any grounds as already pointed out above.
It is not uncommon for lease deeds to have force majeure clauses.
Such clauses typically absolve the parties from performing their respective
obligations during the continuance existence of force majeure events.
While such a clause will exempt the lessee from the consequence on
non-performance of its obligation to keep the property in good condition, it is
doubtful if such a clause would suffice to exempt payment of rent during the
period of lockdown announced by the Government due to COVID-19. The obligation
of a lessee to pay rent to the lessor, is not similar to his obligation to
maintain the property in good condition. A
lessee who has been put in possession of the property before COVID-19, continues to be in possession and occupation of the
property, even if the lessee, his employees, customers or anyone else is unable
to physically visit the property due to the restrictions imposed due to COVID-19. The lessee whose belongings are housed at the leased
premises cannot say that he is not in possession and occupation of the
premises. The obligation to pay rent is the consequence of being in
possession of the premises.
Even in the context of executory contracts, it has been held that the
performance of a contract is never discharged merely because it may become
onerous to one of the parties[4]. Therefore, the fact
that the lessee has not been able to carry out his business from the premises,
may not be enough to be entitled to exemption from paying the rentals by
relying on the force majeure clause in the lease deed. One has
to remember that the COVID-19 has not rendered the property unfit for use as
the lockdown is not on account of the property. Further, the party whose
obligations are indeed put to immediate recusal on account of the lockdown are
that of the lessor as he has been unable to make available the property. The
inability of the lessor to perform his obligations should ideally therefore
recuse the lessee from performing their obligations.
It will also have to be seen if the Courts will recognize the ancillary
and long-term economic repercussions created by the COVID-19 pandemic as an
economic force majeure exempting lessees from the obligation
to pay rent during the period of lock-down. It is to be noted that while the
Central Government has issued orders to protect migrant workers from demands
for rent, no such protection has been extended to commercial leases[5].
Can lessees invoke the provisions of Sections 32 and 56 of the ICA? The
answer is no, on account of the well settled position of law that since lease
involves a transfer of interest in immovable property, a lease agreement is not
an executory contract and therefore the provisions of the ICA will not be
applicable over an executed contract[6].
In light of the above, lessees can evaluate the possibilities of
termination of lease contracts and the commercial re-negotiation of the terms
based on the requirements of the future, post the pandemic related lockdown.
[1] Section 105 of TPA.
[2] Section 108 (B) (e) of TPA.
[3] Sri Amuruvi Preumal Devasthanam v. KR
Sabapathi Pillai and Ors (1962)
2 MLJ 452.
[4] Alopi Prasad & Sons vs. UOI, 1960 (2) SCR
793.
[5]https://mha.gov.in/sites/default/files/MHA%20Order%20restricting%20movement%20of%20migrants%20and%20strict%20enforement%20of%20lockdown%20measures%20%2029.03.2020.pdf
[6] Raja Dhruv Dev Chand vs Harmohinder Singh
& Anr, AIR 1968 SC 1024; Lakshmipathi vs. Nithyananda Reddy, AIR 2003
SC 2427; Saha Ratansi Khimji v. Kumbhar Sons Hotel Pvt. Ltd, AIR2014SC2895.