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Covid 19’s impact on Lease and suspension of rent

The Covid 19's Pandora's Box has left open several loose strands of ambiguity which require some tightening up, looking at the past reaction and anticipation of the possible future in various factions of life. One such faction already staring at the wall of uncertainty is the one of Real Estate. Shelter being only almost equal to food has been unabashedly neglected in the chaos created by Covid 19 all across the world by various governments, leaving the fate of the renters and landlords much to themselves and their negotiation acumen. Further the reckless drafting of agreements and grey areas of the law has gotten several landlords and tenants to take things in their own hands and take action already. That brings the rest to a conundrum who are left to ponder on questions like - whether the lessees and licensees can waive off or suspend their compensation/rent at such times? Till what extent would the law protect on such a situation and whom? Can the lease be terminated in such times? What weightage can be given to the clauses in the Agreements at such times?

When it comes to real estate, the ones facing severe wrath of the Covid 19 crises presently are the ones holding commercial properties on lease. The exorbitant rentals of the malls and other huge commercial establishments being inversely proportionate to their present sales has gotten both the Landlords and Renters in extreme dilemma, for the way forward. As for a sustainable way forward for the economy to survive, it is imperative that all elements forming a part of its chain are safe.

The latest judgement passed by the Ld. Judge of Delhi High Court on 21st May 2020 in the matter of Ramanand & Ors versus Dr. Girish Soni & Anr., has cleared some fog on this issue and seems to be the prospective polestar which will guide the other litigations way forward.

In the said judgement the Hon'ble Delhi High Court has extensively dealt with various acts and judgements which the disputes pertaining to landlord-tenant, lessor-lessee etc are likely to encounter on their journey through various courts in respect of the Covid crises.

In this judgement of the Hon'ble Delhi High Court, the tenant against whom the decree of eviction was already passed went before the Hon'ble Court to claim suspension of rent amount, which he was liable to pay at market rate to pursue his appeal, which amounted to Rs. 3, 50,000/- (Rupees Three Lakh Fifty Thousand only) per month, in view of the fact that sales had completely stopped and there was no inflow of income due to Covid 19 and the lockdown. The Hon'ble Delhi High Court most candidly responded to the said situation by stating -

'The question as to whether the lockdown would entitle tenants to claim waiver or exemption from payment of rent or suspension of rent, is bound to arise in thousands of cases across the country. Though there can be no standard rule that can be prescribed to address these cases, some broad parameters can be kept under consideration, in order to determine the manner in which the issues that arise can be resolved”

The view of the Hon'ble Supreme Court in the past, when it comes to lease is that lease being governed under the provisions of The Transfer of Property Act, 1882 does not come under the realm of the Indian Contract Act, 1872. In the case of Dhruv Dev Chand Vs. Harmohinder Singh and Ors, the Hon'ble Supreme Court has held that -

'By s. 4 of the Transfer of Property Act the chapters and sections of the Transfer of Property Act which relate to contracts are to be taken as part of the Indian Contract Act, 1872. That section however does not enact and cannot be read as enacting that the provisions of the Contract Act are to be read into the Transfer of Property Act. There is a clear distinction between a completed conveyance and an executory contract, and events which discharge a contract do not invalidate a concluded transfer.”

Further in the judgement of T. Lakshmipathi and Ors. Vs. P. Nithyananda Reddy and Ors. the Hon'ble Apex Court in respect of leases has further held that-

'The tenancy cannot be said to have been determined by attracting applicability of the doctrine of frustration consequent upon demolishing of the tenancy premises. Doctrine of frustration belongs to the realm of Law of Contracts; it does not apply to a transaction where not only a privity of contract but a privity of estate has also been created inasmuch as lease is the transfer of an interest (sic) immovable property within the meaning of Section 5 of the Transfer(sic Property Act (wherein the phrase 'the transfer of property' has been defined), read with Section 105, which defines a lease of immovable property as a transfer of a right to enjoy such property.”

From the aforesaid judgements it appears that the Hon'ble Apex Court infers that disputes pertaining to leases to be governed under the provisions of Transfer of Property Act, 1882 and has excluded it from the purview of the Indian Contract Act, 1872, holding that the lease being a concluded contract cannot be terminated by taking protection of s. 56 of The Indian Contract Act, 1872, which deals with frustration of contracts. Section 56 of The Indian Contract Act, 1872 inter alia holds that -

  • '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.”

Further other relevant provisions to be looked into while determining such disputes pertaining to a lease are s. 108 (e) and s. 108 (m) of The Transfer of Property Act, 1882 which hold that -

s. 108 - 'In the absence of a contract or local usage to the contrary, the lessor and the lessee of immoveable property, as against one another, respectively, possess the rights and are subject to the liabilities mentioned in the rules next following, or such of them as are applicable to the property leased: -

  • S. 108 B (e) - if by fire, tempest or flood, or violence of an army or of a mob, or other irresistible force, any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let, the lease shall, at the option of the lessee, be void:
  • S. 108 B (m) - the lessee is bound to pay or tender, at the proper time and place, the premium or rent to the lessor or his agent in this behalf:”

As per the provisions of the law and view of the Hon'ble Apex Courts when it comes to termination of lease, it appears that section 108 B (m) is exhaustive and the lease would terminate only on conditions as mentioned in the said section and in no other circumstances, further there is also a categorical liability of the lessee to pay rent on time to the lessor. The section 108 B (e) would not be able to bring the present situation of Covid 19 under its purview as proving the premises to be 'substantially and permanently unfit for the purposes for which it was let” would be relatively difficult.  However it is pertinent to note that the opening words of this section are 'In the absence of a contract or local usage to the contrary”, which means if the lessee and lessor contract for another situation by which the lease would terminate or that the lessee could absolve from paying the rent, then that particular contract would prevail, over the provisions of s. 108 of The Transfer of Property Act, 1882.

This calls us for dealing with two possible scenarios -

  1. Where there is a clause pertaining to Force Majeur in the Lease Deed and,
  2. Where there is no clause pertaining to Force Majeur in the Lease Deed.

In respect of the first situation if there is a clause in an Agreement pertaining to Force Majeur,  it would then be imperative to first take a careful look into the Lease Deed and ascertain whether there is just a generic Force Majeur clause or there are words like 'Epidemic/Pandemic” categorically mentioned in the said agreement. Because having a mere Force Majeur clause would not suffice to make an arguable case. There would be legal requirements to be looked into even if the clause is present in the Lease Agreement, like whether the lessee was disabled from using the premises and so on.

Thus if the Lease agreement does have the clause, the appropriate recourse would be to examine its wordings carefully to ascertain if the present situation would be covered in the clause as drafted in the Agreement. Further it would be pertinent to immediately make the lessor aware of the clause and what rights it entails on the lessee and how the premises has become unfit for usage as per the Agreement. The remedy in relation to the said clause would lie under the s. 32 of The Indian Contract Act, 1872.

However if there is no such clause, the option would be to resort to s. 56 of The Indian Contract Act, 1872 which deals with frustration of contract.

But that brings us back to a position which has been iterated and reiterated by the Hon'ble Supreme Court in the judgements as referred above. The Hon'ble Supreme Court has categorically held that the s.56 of The Indian Contract Act, 1872 cannot be imported into the realms of The Transfer of Property Act, 1882 as Leases are concluded contracts and that they not just create a privity of contract but also a privity of estate.

However the latest judgement of Hon'ble Delhi High Court, seems to give a ray of hope to the tenants who want to claim suspension of rent, despite of not having the clause of Force Majeur in the Agreement by holding that -

'Finally, in the absence of a contract or a contractual stipulation, as in the present case, the tenant may generally seek suspension of rent by invoking the equitable jurisdiction of the Court due to temporary non-use of the premises. The question as to whether the suspension of rent ought to be granted or not would depend upon the facts and circumstances of each case as held by the Supreme Court in Surendra Nath Bibran v. Stephen Court, AIR 1966 SC 1361.”

Conclusion: In view of the previous judgements of various Courts and the law for what it stands, it would be safe to deduce that The Transfer of Property Act, 1882 does permit the lessor and the lessee to enter into a contract as per their choice where the rents could be waived and suspended in certain situations. Thus if the Lease Deed is self-sufficient and enumerates such circumstances which cover a situation like that of Covid 19, the lessees would be in a relatively safe position and could avoid/defer their monthly rents, as the case maybe, by taking proper legal advice and recourse. However if there is no clause covering the present situation and calling for waiver or suspension of rent, then it would be a grave risk to avoid such payments and the courts would decide the permission of suspension, depending on facts and circumstances of each case.

 All said and done it appears that the most unnoticed clause in the Agreements that of Force Majeur, will be the protagonist in all the fresh agreements and addendums in times to come.

By: Advocate Pooja Thakkar
The author can also be reached at poojathakkar810@gmail.com

 

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on 28 May 2020
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