Saturday, April 20, 2024

Covid-19 & Tenancy Pacts: On a Tight Leash

The pandemic has led to many questions about leasing and renting of premises. Most are governed by laws such as the Transfer of Property Act, Contract Act and Easements Act. By Shruti Agarwal

The Covid-19 pandemic and the nationwide lockdown as a result of it have led to concern among those who are finding it difficult to pay their monthly rent or lease about the legal options to get around this situation.

This is especially so in the case of leases or tenancies of premises taken for commercial purposes. As these premises are not being used at all and the income from business is abysmal or nil, compounded with the uncertainty looming large over resumption of normalcy, what are the options available for a lessee or a tenant who is unable to pay rent? Would the much-discussed force majeure clause in an agreement apply? What if an agreement does not contain the force majeure clause? What if the agreement is not one of lease but of mere “leave-and-license”? The following scenarios are possible:

  • Where a lease deed does not contain a force majeure clause: There is no legal provision by which the lessee may suspend payment of rent for the period of lockdown. The only option is termination of the lease agreement by taking recourse to Section 108(B)(e) of the Transfer of Property Act. This Section provides that if by an “irresistible force”, any material part of a property is rendered “substantially and permanently unfit for the purposes for which it was let”, the lease shall be void. Whether the restrictions imposed by the government in view of Covid-19 would come within the scope of “other irresistible force”, and whether the benefit of Section 108(B)(e) can be taken by a lessee in this situation would be subject to judicial interpretation in an appropriate case.

The Supreme Court held in Raja Dhruv Dev Chand vs. Raja Harmohinder Singh (1968) that the Contract Act will not apply to a lease agreement as this pact is governed by the Transfer of Property Act and is a completed conveyance as opposed to a contract.

It is important to note that if there is an impairment of the lessee’s ability to use the property, the law imposes a strict obligation to give notice under Section 108(B)(e) to the lessor. Once this notice is sent, the lease agreement between the parties stands terminated.

  • Where a lease deed contains the force majeure clause: In such a case, the le­ssee’s rights to suspend payment of rent during the period of lockdown or to terminate the lease agreement altogether, will derive strictly from the force ma­jeure clause itself. For example, some agreements provide that obligations under the agreement can be put on hold until the force majeure event is resolved. Some agreements provide for limitations in time after which either party may cancel the agreement with written notice to the other. Others require the agreement to remain in effect until the force majeure event is resolved. Therefore, one has to look into the specific meaning and intent of the force majeure clause in the agreement itself.
  • Where an agreement is not a lease deed but an ordinary agreement governed by the Contract Act, 1872: In this situation, the affected party may take recourse to Section 56 of the Contract Act, which relates to the principle of frustration of contracts. Section 56 provides that an agreement to do an act impossible in itself is void. Alternatively, a contract to do an act which becomes impossible, after the contract is made, is void.

In Satyabrata Ghose vs. Mugneeram Bangur & Co., the Supreme Court laid down the following principles pertaining to frustration of contracts embodied in Section 56:

—The word “impossible” does not mean physical or literal impossibility.

—The contract can be held to be frustrated if its performance is “impracticable” and “useless” from the point of view of the object and purpose of the parties, though the performance is not literally impossible.

—If the untoward event totally upsets the very foundation upon which the parties entered into agreement, the contract can be held to be frustrated.

Therefore, whether a case justifies the invocation of Section 56 of the Contract Act will have to be judicially determined by the facts and circumstances. The doctrine of frustration embodied in Section 56 can be invoked by the affected party to suspend payment of rent during the lockdown and/or terminate the agreement altogether. Prior written notice to that effect is mandatory and advised.

  • Where an agreement is not a lease deed but a “leave-and-license” agreement governed by the Easements Act: Here again, where the license agreement does not have a force majeure clause, Sec. 62(d) Easements Act may come to the licensor’s aid. Sec. 62(d) pertains to  deemed revocation of a license where the property is destroyed or by “superior force” so permanently altered that the licensee can no longer exercise his right. This seems similar to Sec. 108(b)(e) of the TPA (“irresistible force”).

Whether the restrictions imposed by the government in view of the Covid-19 pandemic would come within the scope of “such superior force” etc., and whether the benefit of Section 62(d) can be taken would be subject to judicial interpretation in an appropriate case.

Where the license agreement contains the force majeure clause, the parties’ rights will derive strictly from the force majeure clause itself.

It is certain that the present situation will throw open the floodgates of legal disputes between landlords/lessors at one end and tenants/lessees on the other. But one wonders whether the traditional path of litigation would be a feasible solution in the present times when courts are closed or functioning in a limited way due to the lockdown. How long will it be till fresh cases filed see resolution?

The solution may perhaps lie with the parties who could consider settling the dispute amicably. Would it be commercially prudent for a landlord/lessor to risk termination of the tenancy or lease agreement given the fact that there may be only a bleak possibility of getting a new tenant/lessee at the same rental or lease amount for a foreseeable period of time?

It is, therefore, advisable for the parties to negotiate and agree to a temporary waiver or reduced rental and revise their arrangement once the economy and paying capacity of the lessee/tenant picks up.

—The writer is Advocate-on-Record, Supreme Court

Lead picture: UNI


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