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.

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