COVID-19, Chaos and Commercial Leases

COVID-19, Chaos and Commercial Leases

This article is intended to give our views as to whether a lessee of a commercial property can take shelter under the laws involving force majeure to resist rentals during the Coronavirus pandemic.

The general view taken in various media seems to suggest that no rent would be payable in the light of the ongoing pandemic, and we have attempted to examine if such understanding is in line with the applicable laws.

The term force majeure has been dealt with over a century ago by McCardie J. in Lebeaupin v. Crispin [1920] 2 K.B. 714, which was cited by the three-bench judge of Supreme Court of India in Dhanrajamal Gobindram Vs Shamjikalidas and Co.

In Lebeaupin, McCardie J stated that force majeure is an act that a person has no control over and it is intended to save a performing party to a contract from the repercussions of such an act.

At the outset, it must be clarified that the concept of force majeure extends well beyond an “act of god” (natural calamities such as earthquakes, typhoons etc), and also includes man-made circumstances such as government policy.

Therefore, it is quite clear that the order of the government to lockdown the entire country to limit the spread of COVID-19 would certainly qualify as a force majeure.

The question that therefore specifically arises is whether a force majeure clause in a commercial lease would extend to exemption/abatement of the payment of monthly lease vis-à-vis a commercial property during this lockdown period.

Force majeure is a contractual concept and the application of a force majeure clause depends upon the inclusion of the clause in a contract, in view of it being a contingency. This is governed by Section 56 of the Indian Contract Act.

In this regard, the Supreme Court in Satyabrata Ghose v. Mugneeram Bangur & Anr held,

“When such an event or change of circumstance occurs which is so fundamental as to be regarded by law as striking at the root of the contract as a whole, it is the court which can pronounce the contract to be frustrated and at an end” .

We would necessarily have to examine whether at all Section 56 would to applicable to a lease. The answer to this appears to be in the negative, as the interpretation of a lease agreement is governed primarily by the Transfer of Property Act, 1882, which is special statue, and it is settled law that a special statute would trump a general statute (see UP State Electricity Board v. Hari Shankar Jain).

The issue of whether or not rent is payable by the lessee due to a force majeure can be found in Section 108(e) of the Transfer of Property Act. In considering the scope of the applicability of the Transfer of Property Act, the Supreme Court in Raja Dhruv Dev Chand v. Raja Harmohinder Singh held that,

“Where the property leased is not destroyed or substantially and permanently unfit, the lessee cannot avoid the lease because he does not or is unable to use the land for purposes for which it is let to him.”

It would also be worthwhile reviewing the views of the various High Courts in this regard. The Bombay High Court held that the destruction of the tenanted structure does not extinguish the tenancy and the right of occupation of the tenant under the contract of tenancy between the parties. (see Hind Rubber Industries Pvt. Ltd. v. Tayebhai Mohammedbhai Bagasarwalla and Ors).

The Calcutta High Court had also taken a similar view in holding that the lease is not determined automatically even if the property is wholly destroyed (see Jiwan Lal and Co. v. Manot and Co. Ltd).

The Delhi High Court and the Madras High Court have also held that in the case of the tenancy premises being wholly destroyed or rendered substantially and permanently unfit by fire etc., if the lessee does not exercise the option to treat the lease to be void, he will remain liable to pay the rent (see Chamber of Colours and Chemicals Private Limited v. Trilok Chand Jain and Sri Amuruvi Preumal Devasthanam v. KR Sabapathi Pillai and Ors).

However, a learned Single Judge of the Madras High Court in another matter had opined held that there was no provision regarding the obligation of the tenant to pay rent after the property was destroyed/unfit for use. Therefore, the lessee was entitled to abatement of rent (see Kodi Idi Kondaiyan Chettiyar v. P Sivasamy and ors). This is a significant departure from the various other precedents in this regard.

The above precedents of both the Supreme Court and various High Courts allows for an “avoidance” of the lease at the option of the lessee. However, it preconditions the same with the property being rendered “permanently unfit”, which certainly is not the situation today with the COVID-19 lockdown.

The position of temporary abatement does not seem to find support in these precedents. The expansion of the scope of the Section 108(e) in light of the present pandemic will undoubtedly play out in our courts in the next few weeks, and would create interesting jurisprudence especially when the application of equity kicks in.

The likely stance taken by lessors would be that their obligation under all commercial leases is to provide possession to the lessee. In such a scenario, when the fitness to occupy the premises becomes impossible due to a temporary change in law, due to no fault of the lessor, it would not disentitle the lessor from enjoying the proceeds of the lease.

This view finds significant reinforcement from the fact that the premises continues to be in possession of the lessee along with the lessee’s furniture and fittings, and the lessor’s rights devolve by law upon the lessee, and there is no suspension of these rights.

There is obviously no change in “place of business” for commercial and legal purposes by the lessee during the present lockdown period.

There have also been views stating that immunity to pay rentals may be derived from other Acts dealing with the present pandemic. In examining this in India, the present pandemic is governed by either the Disaster Management Act, 2005 or the Epidemic Diseases Act, 1897.

Section 73 of the Disaster Mangement Act provides immunity for any action under this Act only to such authorities that make or implement such directions. It does not provide any immunity to or from private individuals/entities/companies.

The Chairperson of the National Executive Committee issued an order dated March 29 that landlords of workers/migrants/students living in their rented premises shall not demand rent from them for a period of one month.

This order also does not come to the aid of lessees of commercial properties. Insofar as the Epidemic Diseases Act is concerned, the immunity provided therein appears to be provided in a narrow sense to state that Section 4 would apply to any authority that has imposed any restrictions under this Act, and does not appear to come to the benefit of commercial lessees in the present situation.

In considering the position in other jurisdictions, the UK government passed The Coronavirus Act 2020, which became law on March 15. This Act suspended a landlord’s ability to take forfeiture action for business tenancies in England and Wales, so that business tenants who cannot pay their rent will be protected from forfeiture.

These measures prevent evicting a business tenant due to non-payment of rent during the period of the applicability of the Act.

There is no such Act or ordinance in India. In fact, the omission of business/commercial tenants in the various categories of relief declared by the Government of India would not advance the cause of commercial tenants.

There has been various steps taken by parties to renegotiate the terms of the lease under these circumstances, but it must be noted that presently there appears to be no obligation on the landlord to positively consider the same, even under a cloud this pandemic.

Despite the legal position, it would serve well in the interest of landlords to consider the way in which the wind blows in these circumstances, and accommodate the trying commercial pressure of these times.

Arun C Mohan is a Partner and Keerthikiran Murali is a Senior Associate at Mohan Associates.

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