COVID-19, Lockdown and Commercial Impact series: The impact on Employment and Tenancy Contracts

This article delves into the impact of the lockdown and related circulars issued by the government on employment and tenancy contracts and also debates practical options for parties to navigate through such contracts.
Athif Ahmed, Goda Raghavan, Advaidh Nelakanttan
Athif Ahmed, Goda Raghavan, Advaidh Nelakanttan

As part of the AK Law Chambers COVID-19 Series, we have already analysed the legal position of force majeure, frustration and the constitutionality of the lockdown itself. This article delves into the impact of the lockdown and related circulars issued by the government on employment and tenancy contracts and also debates practical options for parties to navigate through such contracts.

Issues under Employment Contracts

The Ministry of Home Affairs (MHA) had issued a circular (“The Circular”) dated 29.03.2020 under the Disaster Management Act (Section 10(2)(l)), directing State Governments and Union Territories to pass appropriate orders to ensure that all industries and shops and establishments pay wages to all workers without any deductions. It further ordered that wherever workers are living in rented accommodation, landlords shall not demand payment of rent for one month and that any violation of the order would attract punitive measures under the DM Act.

Subsequently, a series of writ petitions were filed under Article 32 of the Indian Constitution, challenging the constitutionality of The Circular before the Hon’ble Supreme Court of India by various employers on the grounds of being violative of Article 14 and Article 19. In one of the batch petitions, Hand Tools Manufacturing v. UOI, the apex court, on 15.05.2020, ordered that no coercive action should be taken against employers for failing to comply with The Circular and the matter was adjourned for the Centre to put on record the policy behind The Circular.

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In a recent turn of events, vide circular dated 17.05.2020 the MHA has ordered The Circular would cease to have effect from 18.05.2020. It is yet to be seen whether the government would take any coercive measures for the interim period between the date of the Circular viz., 18.05.2020 and the date of the ceased order viz., 29.03.2020.

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Given that the 29.03.2020 circular is no longer applicable, employers are free to pay wages to employees as per their contractual obligations. However, in cases of companies looking to retrench workers or cut down wages, as many companies such as Zomato, Swiggy and several others have done recently, there are certain options worth considering that would be beneficial for both parties:

1. Mutually executing a renegotiated clause in relation to payment, restructuring of the payment or may even consider offering employee stock options in lieu of salary.

2. If the employer wishes to terminate the employment, then the employer will be bound by the termination clause and notice period as per the employment agreement.

Issues under Commercial Lease/Tenancy Agreements

The words used interchangeably for waiver of liability in relation to payment of rent under the tenancy contracts are ‘force majeure’ and ‘frustration’. Reference is also made to the clarification issued by the Ministry of Finance of India through an office memorandum[1] which states that:

"2. A doubt has arisen if the disruption of the supply chains due to spread of corona virus in China or any other country will be covered in the Force Majeure Clause (FMC). In this regard it is clarified that it should be considered as a case of natural calamity and FMC may be invoked, wherever considered appropriate, following the due procedure as above."

The first option for the parties is to revisit their contracts assess whether the force majeure clause is worded widely to cover such an unforeseen, limited period lockdown on account of a pandemic within its ambit. However, in India, courts have held that the principle to be kept in mind while interpreting a force majeure clause is that it must be narrowly construed. The apex court has also observed that “Parties to an executable contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate, for example, a wholly abnormal rise or fall in prices which is an unexpected obstacle to execution. This does not in itself get rid of the bargain they have made.”

The second option is to rely on Section 56 of the Indian Contract Act, 1872 (“ICA”) which, if applicable, would go on to “void” the entire agreement, unlike a force majeure clause, which puts on hold the contract for an interim period. The application of Section 56 of the ICA will vary from one lease agreement to another depending on the nature and the terms of the agreement.

The third option, but a rare one, is for parties to rely on Section 108(e) of the Transfer of Property Act which states that a lease is said to have become void at the option of the lessee, if any material part of the leased property be wholly destroyed or rendered substantially and permanently unfit because of an irresistible force. Although the order of MHA for a lock down pursuant to COVID-19 may be termed as an irresistible force, the same may not have caused any damage to the properties or has made a property permanently unfit. Thus, the applicability of this provision would vary from a case to case basis.

The jurisprudence on the law of force majeure and frustration in India and England are not very far apart. The courts of England and Wales have held that for a force majeure clause to be applicable, performance must become “physically or legally impossible, not merely more difficult or unprofitable.” Similarly, worsening of economic conditions may not generally constitute force majeure.

It is also pertinent to point out that in the United Kingdom, the House of Lords had specifically held that an interruption of 20 months in a 10 year lease is not significant to destroy the entire contract i.e to say a contract will not be frustrated if the change is only temporary or transient.

During the outbreak of SARS, a Hong Kong District Court held that a 10 day isolation/lockdown order due to SARS will in no way frustrate a lease in its entirety and that even though the outbreak of SARS was an unforeseeable event the same did not significantly change the nature of the outstanding contractual rights of obligations of the parties.[2]

Consequently, it cannot be said that merely because the revenues has reduced for the lessee for the several months of lockdown on account of COVID-19, the ability to pay rent for a substantially longer termed contract, of the lessee, has not been prevented. The lessor has still made available the premises and performed his part of the obligations. A mere notice invoking the protection of the force majeure clause may not be the straight jacket protection to all lessees across the country.

Thus, while drawing similarities from how various common law jurisdictions have handled similar situations, it is reasonable to conclude that COVID-19 being a temporary change may not frustrate an entire contract.

Leases that expire during this period:

Many lease agreements may be close to expiry or may have expired during this lockdown period and in some situations, the lessees would have promised to vacate the premises during this period. However, due to the order of MHA dated 24.03.2020 barring most commercial and private establishments from operation due to the lock down, the lessees would be in no position to handover vacate premises.

When the lessees remain in possession of the premises after the determination of the lease with the consent of the landlord, the same is called ‘holding over tenancy at will’, the effect of which has been dealt with in Section 116 of the Transfer of Property Act. It is in the absence of an agreement, wherein the lessor/landlord assents to the lessee continuing in possession or accepts rent from the lessee. The lease maybe renewed from either year to year or from month to month. Thus, the lessees who are forced to remain in possession of the premises can either seek the landlord’s assent to remain in possession for the interim period or can explore pacific means of negotiating terms for waiving the rent for the interim period.

However, when the lessees who remain in possession of the premises after the determination of the lease without the consent of the landlord, the same is called ‘tenancy by sufferance’ i.e a lessee who is in possession of the property after the expiry of the lease. The presumption under law is that a tenant at sufferance is, therefore, one who wrongfully continues in possession after the extinction of a lawful title, that there is little difference between him and a trespasser and that the lessee may remain in unlawful possession until he is evicted when the landlord resorts to legal remedies. Thus, a tenant by holding over is said to be in a better position than a tenant by sufferance which has to borne in mind by all the lessees, whose leases are coming to an end during the interim. It is important that the lessee seeks the lessor/landlords permission to remain in possession of the land to avoid legal troubles.

However, what may come to the rescue of even tenants by sufferance during this period would be the provisions of the Epidemic Diseases Act. Section 4 of the Epidemic Diseases Act states that no suit or legal proceedings shall be initiated against any person or anything done in good faith intended be done under this Act.

Whereas a landlord/lessor who is forcefully wanting a lessee to vacate their premises during this time period, Section 3 of the Epidemic Diseases Act stipulates a penalty for person disobeying regulations or made under the Act and shall accordingly be charged under Section 188 of the Indian Penal Code, 1860 for disobedience of an order duly promulgated by a public servant. Thus, the lessee who is a tenant by sufferance can also remain in possession of the property for the interim period.

Goda Raghavan is a Partner; Advaidh Nelakanttan and Athif Ahmed are Associates at AK Law Chambers.

[1]Office memorandum F.18/4/2020-PPD dated 19.02.2020 issued by the Ministry of Finance, Department of Expenditure Procurement Policy Division.

[2] Li Ching Wing v. Xuan Yi Xiong, (2004) 1 HKLRD 754.

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