The impact of COVID-19 on trade is so significant that small businesses have already begun to cave under the pressure. Dwindling resources across the economy are making lessees very susceptible to defaulting on their lease payments. Both landlords and tenants want to know the extent of their obligations and liabilities in these trying circumstances. This article addresses some of the frequently asked questions on the impact of COVID-19 on lease deeds.
Force majeure means superior strength or an act of god. The Supreme Court has held that where reference is made to "force majeure", the intention is to save the performing party from the consequences of anything over which he has no control.” [See (1961) 3 SCR 1020: AIR 1961 SC 1285]. The defence of force majeure can only be taken if parties have this clause present in their lease agreement.
In India, the law of contracts does not directly deal with force majeure. In its place is the “doctrine of frustration” under the Indian Contract Act. As per the doctrine, if 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, then that contract becomes void [See S. 56, Indian Contract Act 1872].
The question however is whether a lessee can seek relief from their lease obligations using either force majeure or the doctrine of frustration. It appears that the answer to this question is in the negative. The reason is that the Hon’ble Supreme Court in Raja Dhruv Dev Chand v. Raja Harmohinder Singh has held that there is a distinction between a completed conveyance, such as a lease, and an executory contract [(1968) 3 SCR 339]. It was later held, on the basis of this decision that the “doctrine of frustration” under Section 56 of the Indian Contract Act was only for contracts, and not lease deeds. [See Sushila Devi v. Hari Singh, (1971) 2 SCC 288]. The doctrine cannot be used by parties to gain relief from their obligations under lease deeds through these doctrines.
Therefore, unless a lease deed has a specific force majeure clause which deals with a situation like that created by the novel coronavirus and offers some relief to the parties, a lessor or lessee cannot turn to the force majeure or the doctrine of frustration to relieve themselves of their liabilities under the lease deed.
Lease deeds being a completed conveyance of property, are not covered by the Indian Contract Act 1872, but the Transfer of Property Act, 1882. In the list of rights and liabilities of the parties to a lease, the Transfer of Property Act mentions that “if by fire, tempest or flood, or violence of any 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”. [See S. 108(e), Transfer of Property Act, 1882].
Judicial precedents of various High Courts indicate that this provision is only applicable when the property is wholly destroyed or rendered substantially and permanently unfit. [1969 SCC OnLine All 154; 1959 SCC OnLine P&H 164] Even if the novel coronavirus outbreak meets the definition of irresistible force, it cannot be said that the properties are now permanently destroyed or unfit for use.
Thus, there does not exist any provision under the Transfer of Property Act, 1882, which would help parties avoid their liabilities under the lease deed.
Based on the terms of the deed between the parties, the duties of the occupier during the coronavirus outbreak will vary. The two most common scenarios are:
Maintenance and Hygiene to be Carried Out by the Landlord: In buildings having common spaces with units leased to multiple parties, it will most likely be the landlord’s duty to maintain the premises and ensure hygiene and regular cleaning. In these situations, or where the deed states that the owner of the premises is to care for the hygiene and maintenance, the duties of the commercial occupier will be limited. The government has given express guidelines for ensuring safety and containing the spread, and while it may be the duty of the commercial occupier to ensure that all employees comply with the guidelines, the cleaning and maintenance of the premises will be the responsibility of the landlord.
Maintenance and Hygiene to be Carried Out by the Current Occupier: In large premises, factories, operation units or where the occupier is the sole tenant of a premises, the terms of agreement between the parties are often that the premises’ day-to-day upkeep and maintenance will be done by the occupier. In such circumstances, a commercial occupier will be liable for all cleaning, hygiene and safety protocols, and government guidelines being followed.
Parties are thus advised to carefully review the terms of their agreements to see whose liability it is, the lessor or lessee, to implement the guidelines and ensure proper safety and hygiene of the occupants of the premises.
With the unavailability of any relief under contract and property laws, lease holders are having to turn to COVID-specific relief notifications being announced by the state and central governments. The provisions have been made less stringent for some groups, such as migrant workers and students. The Ministry of Home Affairs on March 29, 2020 passed an Order that:
“Wherever the workers, including the migrants, are living in rented accommodation, the landlords of those properties shall not demand payment of rent for a period of one month. If any landlord is forcing labourers and students to vacate their premises, they will be liable to action under the Disaster Management Act, 2005.” [See Order No. 40-3/2020-DM-I(A) issued by Ministry of Home Affairs, Government of India, under section 10(2)(I) of the Disaster Management Act, 2005].
The one-month period of exemption since this notification is now over, and further government clarification is now awaited. Further, commercial lease holders have not been accorded any specific protection. At the same time, while all states are trying to ensure that their vulnerable groups are not harassed for rent, states such as Delhi have also made general requests to all landlords to not harass tenants for rent during this period and try and be accommodating. Such advisories are persuasive, but not a complete bar to collection of rents.
As most leases do not allow tenants to withhold rent in any circumstances, and the present situation does not get covered under Section 108(e) of the Transfer of Property Act (discussed above), unless one falls under one of the vulnerable groups protected by government notifications, the obligation to pay rent remains.
By Shiv Mangal Sharma
Advocate Supreme Court