[Expert Corner] COVID-19 Pandemic: Repercussions on Lease Agreements by Bhumesh Verma & Abhishar Vidyarthi | Corp Comm Legal

Bhumesh Verma, Managing Partner, Corp Comm Legal
Abhishar Vidyarthi, V year law student of MNLU, Mumbai – Student Researcher

COVID-19 pandemic has pushed the entire world into an unprecedented crisis. All countries are undergoing severe consequences of the pandemic, ranging from healthcare to societal and economical problems. Additionally, the adoption of extensive lockdowns and social distancing requirements have directly impacted the commercial or contractual relations between parties.

One such concern is the fate of lease agreements and payment of rents between tenants and landlords. Several tenants have raised concerns against the payment of rents to the landlords based upon the consequence of the pandemic. This problem is intensified in situations where the tenants are not presently occupying the leased premises or are unable to cover the rent expenses due to financial constraints. For example, a lot of students take flats on lease to pursue college and in most cases the same flat is shared by more than one student. Most of these students had to return to their native places upon closure of their universities and the apprehension of nationwide lockdown.

The same problems have been faced by employees and migrant workers whose work has been stalled owing to the disruption of supply chains. In some cases, the lease agreements have expired but these individuals have been unable to vacate the premises.  The issue is heightened due to the economic ramifications caused by the pandemic as the same has made it difficult for individuals to cover the rent amounts.

The question that arises in this regard is whether the landlords are entitled to still levy the rent charges on these individuals.

In this regard, most legal discussions have been focussed on the question whether such tenants have any legal recourse against being forced to pay rent despite the peculiar circumstances. The Government has repeatedly pleaded landlords to not change rents from tenants during these troubled times. Pursuant to Section 10(2)(l) of the Disaster Management Act, 2005, the Government Order released by the Ministry of Home Affairs on 29th March 2020 directed the landlords to not charge rent or evict tenants during the pandemic.[1]

However, in law, the relationship between a tenant and landlord is purely a contractual agreement and it is the agreement that stipulates the respective assurances and obligations of both the parties. The relationship between tenant and landlord is governed by the Transfer of Property Act, 1882 (TPA), whereas the contractual agreement between them is governed by the principles enshrined in the Indian Contract Act, 1872. The parties have the freedom to include specific conditions and exclusions in their lease agreements. Therefore, the tenants need to look for contractual alternatives in order to find exceptions to their obligation to timely pay rents to their landlords.

1.     Legal Considerations in Question
Essentially, contractual disputes arising out of the non-performance of obligations during the pandemic are deliberated upon on the basis of contractual and common law reliefs available to the parties.
In this regard, the contractual relief available is the widely discussed provision of Force Majeure. Fundamentally, Force Majeure  refers to an exemption carved out to relieve a party from performing their contractual obligations, without any resultant breach of the contract. The underlying condition for its application is the occurrence of an event i.e. outside the control of the affected party and restricts their ability to fulfil their obligations under the contract. For parties to rely upon Force Majeure clause, they must show that despite making efforts to mitigate the circumstances, they failed to perform their obligation owing to the unforeseeable nature of the events.

COVID-19 pandemic has been already recognised as a Force Majeure event by Indian Finance Ministry by its order on 19 February, 2020.[2] However, it is vital to note Force Majeure is a contractual clause and its application and interpretation is contingent on the presence of the clause and its specific wordings in the lease agreements.

In most cases, lease agreements in India do not contain Force Majeure clause extending to pandemic like situations. In some agreements, it is present but the scope of the same is limited to damage or destruction of the property leading to its unavailability for use by the lessee. Therefore, the applicability of Force Majeure to lease agreements is limited to cases where the same is incorporated in the agreement by the parties.

In the absence of an express Force Majeure clause in the lease agreements, the second recourse available to the tenants is Section 56 of the Indian Contract Act which deals with the common law Doctrine of Frustration.[3] It has been held by the Supreme Court in Energy Watchdog vs Central Electricity Regulatory Commission and Ors that Section 56 can be relied upon in cases wherein an untoward act or fundamental change of circumstances totally disrupts the entire foundation of the relationship between the parties.[4]

In Satyabrata Ghose v Mugneeram Bangur & Co, it was also opined by the Apex Court that the scope of section 56 of the Contract Act is not solely limited to instances of physical impossibility.[5] The Court emphasised that the provision addresses impracticability of the performance of the act and thus would be triggered if the purpose of agreement conceived by the parties has become useless.[6] The purpose of a lease agreement is to allow the tenants to live and occupy the rented premises for the set period of time. Therefore, in cases where tenants have not been able to occupy the premises due to the lockdown restrictions the Doctrine of Frustration may be relied upon. However, it is important to note that the application of the Doctrine of Frustration renders the lease agreement void, thereby reliance on the same may be detrimental to the interests of individuals wanting to live in the rented premises post the pandemic is over.

Moreover, previously, the application of Doctrine of Frustration to lease agreements has been disputed on the grounds that lease agreements are engulfed in privity of estate.[7] For instance, in Court of Wards Dada Siba Estate v. Raja Dharan Dev Chand, the Court held that the Doctrine of Frustration is only applicable to purely commercial relationships and does not extend to agreements creating an estate under TPA.[8] Moreover, the specific law dealing with lease is Section 108(e) of TPA providing a narrower relief provision to the tenants wherein they can declare the lease agreements void in case the property is wholly destroyed or rendered substantially and permanently unfit for the purpose for which it was let.[9]
Therefore, there appear to be a conflict between the wider scope of Doctrine of Frustration under the Contracts Act and Section 108(e) of TPA. Being the more specific law with respect to lease relationship, the Courts may accord precedence to the Transfer of Property Act.

2.     Mitigating the legal considerations
Despite, the limitations discussed above, given the exceptional circumstances, principles of equity would require the landlords consider giving rent reliefs to the tenants in the event (i) the lease agreement has expired but the tenants are unable to vacate the premises due to the lockdown; (ii) tenants like migrant workers or college students have had to return back to their home states due to the closure of their work place or universities or (iii) the pandemic has made it impossible or impractical for the tenants to cover the rent charges. The last scenario is highly probable due to the present economic conditions in the society.

As more and more employees are being laid off or being paid reduced remuneration, their ability to perform their obligations under the lease agreements are wavering. The Supreme Court in Surendra Nath Bibra v Stephen Court Ltd, highlighted it will depend on the circumstances of each case, whether a tenant would be entitled to suspend payment of the rent or whether he should be held liable to pay proportionate part of the rent.[10] Therefore, particular circumstances of the tenants must be considered to determine their obligation to pay rents during the pandemic.

Recently, dealing with the question on payment of rents by a hospitality business during COVID-19, the Delhi High Court directed the prominent food chain Moti Mahal Delux-II to carry on paying interregnum monthly rent of Rs 3 lakh for the property situated in South Extension, South Delhi.[11] The Court based its decision on the following consideration: (i) financial constraints cannot be a ground to refuse payment of rent as there is uncertainty as to when the hospitality business would return to its robust position; (ii) the specific property in question was at a prime location; (iii) the landlord would be able to find another tenant and thus the tenant must choose between paying the rent or vacating the premises. However, the Court showed leniency and allowed the tenant to pay the rent of Rs 3 lakh per month in three instalments to the landlord.

The extension of a similar reasoning to lease agreements for the purpose of residence may not be appropriate. Firstly, unlike large commercial operations that are premised in maximisation of profits, lease agreements for the purposes of residence are related to the basic welfare and security of individuals, thus vacating them isn't justified. Secondly, the rationale that the landlords can easily find new tenants cannot apply to residential lease agreements as the pandemic has diluted the number of people looking for new accommodations on lease. Like in the Moti Mahal decision, wherein the Court allowed the tenants to pay the rents in three instalments, the liability of tenants to pay rents during the COVID-19 pandemic must be determined on a case to case basis.

In the event that the lease agreements contain a Force Majeure clause and the ambit of the same extends to pandemic like situations, then the same may be resorted to by the tenants to avoid payment of rents. In the absence of the same, the Court must determine the application of the Doctrine of Frustration to the lease agreements based upon the subjective circumstances at play. In determining the legality of the non-payment of rents by the tenants, the Court must consider factors such as (a) whether the pandemic has restricted the tenants ability to use or enjoy the leased property; (b) what is the location of the property and whether it is feasible for the landlord to find a new tenants; (c) whether the pandemic has made it practically impossible for the tenant to pay the rent; (d) what is the financial dependence of the landlord on the rental income; and (e) whether alternatives such as delayed payments or phased payments can be considered.

However, as most of the tenants want to safeguard their relationship with the landlord and continue occupying the rented premises post the pandemic, the parties must resort to amicable methods to resolve their disputes. Both, tenants and landlords are better off mutually negotiating and exploring the options of making amendments to the lease agreement under Section 62 of the Indian Contract Act. In the aftermath of the pandemic, it will not be an easy task for landlords to find new tenants, therefore, the best way to approach the issues arising out of payment of rents under the lease agreements is through amicable negotiations.

[1] Order No. 40-3/2020-DM-I(A), Ministry of Home Affairs, Government of India, (29 March 2020)
[2] Force Majeure Clause (FMC), Office Memorandum No. F.18/4/2020-PPD, Ministry of Finance, (19 February 2020)
[3] Satyabrata Ghose v. Mugneeram Bangur & Co, AIR 1954 SC 44
[4] Energy Watchdog vs Central Electricity Regulatory Commission and Ors. (2017) 14 SCC 80
[5] Satyabrata Ghose v. Mugneeram Bangur & Co, AIR 1954 SC 44
[6] id.
[7] Raja Dhruv Dev Case in T. Lakshmipathi and Ors. vs. P. Nithyananda Reddy and Ors. AIR (2003) SC 2427]
[8] Court of Wards Dada Siba Estate v. Raja Dharan Dev Chand, AIR 1961 P H 143
[9] Section 108(e), Transfer of Property Act, 1882
[10] Surendra Nath Bibra v Stephen Court Ltd, AIR 1966 SC 1361.
[11] HC asks prominent food chain to continue paying rent for South Delhi premises, 12 May. 2020.

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