By - Aarushi Saxena, Associate at Qui Prior Law Associates
Commercial tenants as well as landlords are facing hardship in these current unprecedented times of Covid-19. From a legal point of view, any remedies available to lessors/ landlords and lessees/ tenants in the current issue of non-payment of rent due to lockdown will be determined as per the contract between the parties. However, in the practical sense, both lessors/ landlords and lessees/ tenants must work together harmoniously to find a solution which is acceptable to both, such as deferment of payment of rent. Taking an extreme stance by either party will lead to future complexities in resuming business.
Effect of Force Majeure clause in Commercial Lease?
A commercial lease agreement may contain a force majeure clause which gives a legal right to any of the parties to perform or not to perform its undertaking upon the occurrence of a specified event in the force majeure clause. A force majeure clause entitles a party to legally suspend or to not to perform an undertaking by a party (without the same amounting to an express breach of an undertaking by the said party) for the duration of the force majeure event. Therefore, the contractual agreement between the tenant and landlord must be thoroughly reviewed by a legal professional to understand whether the tenant is within its legal right to suspend payment of rent for the time being.
However, if there does not exist a force majeure clause in the commercial lease agreement, the courts have consistently ruled that the concept of frustration of contract, embodied under Section 56 of the Indian Contact Act can be applied. The section provides 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. Therefore, if the object of the contract is lost, the contract is frustrated.
Will the doctrine of frustration of contracts under Section 56 apply to Commercial Leases?
The interpretation of a lease deed with respect to the rights of the lessor and lessee is primarily governed by the Transfer of Property Act, 1882 (“TPA”). As per settled law, the TPA shall exceed the general statute, i.e., the Indian Contract Act, since it is a special statue. Hence, Section 108 of the TPA which governs the rights and liabilities of lessor and lessee shall have precedence over Section 56 of the ICA.
As per Section 108(e) of the TPA, a lease is voidable at the option of the lessee only if the property is wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let (by fire, tempest or flood, or violence of an army or of a mob, or other irresistible force).
Further enforcing the above provision, it was held by the Hon’ble Supreme Court, in the case of Raja Dhruv Dev Chand v. Raja Harmohinder Singh 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.”
The above landmark case law allows for the ‘avoidance’ of payment of rent at the option of the lessee. However, it also required that the property should be rendered “destroyed or substantially and permanently unfit”, which is not the situation today with the Covid-19 lockdown.
Further, in the same judgment it has also been held that the Doctrine of Frustration as is given under Section 56 would not be applicable in leases as it is a completed conveyance different from an executory contract and events which discharge a contract do not invalidate a completed transfer.
Therefore, Section 108(e) of the Transfer of Property Act, 1882 and various judicial pronouncements with respect to “avoidance” of the lease at the option of the lessee do not include the inability of the lessee to use the premises due to a pandemic.
There is an unlikelihood of getting relief under Section 56 of the Indian Contract Act owing to the tall benchmark set for interpretation of ‘impossibility’ of performance. Furthermore, the current scenario is also hit by the provisions of the Transfer of Property Act, 1882, which require that the property is destroyed or rendered unfit for the purposes for which it was let for the lease to be voidable at the option of the lessee. The mere inability to use the premises will not be sufficient to do the same.
It is therefore, advisable for the parties to themselves come forward and act on humanitarian grounds, and renegotiate for a reduced rental during the subsistence of the government lockdown. An addendum to the agreement must be executed regarding the renegotiated rental rates with the help of a legal professional.