LEASE AGREEMENTS AND COVID-19

By : Adv.K.Shahzad, Partner, Alishahz Legal LLP –

Corona Virus Disease-2019, in short called as Covid-19, has resulted in almost stagnation of the activities of the human beings all over the world. The unexpected outbreak of the epidemic and the resultant lockdown in the countries became a bolt from the blue for most of the businesses. Not only the projections of the businesses became in turmoil, but also even the very existence of many of the businesses is at stake.

Most of the businesses, and a huge number of people dwellings, function on leased premises, and of prominently on tenancy agreements with the landlords. As businesses are faced with uncertainty, what would be the fate of the tenancy agreements, or are the businesses required to pay the rent for the closed period; business houses may ask. Is Force Majeure clause applicable to the tenancy agreements, or are the businesses entitled for the declaration of the tenancy agreement as void, on the ground of frustration of contract? What is the take of law on the same?

Force Majeure – Force Majeure clauses are usually contained in the contracts, including in that of the tenancy contracts, which negates the performance of the obligation of the parties upon the happening of certain events like flood, fire, tempest, earthquake, pandemic etc. Force Majeure clauses cover the things which may be classified as act of god, and consequent to the occurrence of such events, the parties would be under the situation unable to perform their obligations under the contract.

Though the term Force Majeure is not defined in the Indian Contract Act, Section 32 of the Indian Contract Act permitting a party to decide on the obligation to do or not to do a thing upon the happening of an uncertain future event, lays foundation for the parties to decide on the performance or non-performance of the obligation in case of the occurrence of such godly acts. The parties may mutually decide not to perform the obligation under the contract in case of any unforeseen circumstances like flood, fire, tempest, earthquake, pandemic etc. happens. Section 111(b) of the Transfer of Property Act, also grants a similar right for a party to terminate the lease on the happening of a future uncertain event.

Tenancy agreements wherein the pandemics are covered under the Force Majeure clause (as some parties may argue that pandemics if not specifically mentioned in the agreement would not come under the category of godly acts, in such cases, the same would be subject to the facts, circumstances and intention of the parties to the contract), and that the tenancy agreements specifically provides that the party may terminate the agreement or go for stoppage of rent for the particular, on account of the occurrence of such events, the tenant shall issue notice to the landlord, expressing his intention of exercising the option, and subject to the applicability of other provisions regarding the termination, the tenancy agreements may be terminated between the parties.

Frustration of Contract – Frustration of Contract or impossibility of performance by a party has its foundation under Section 56 of the Indian Contract Act. 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, becomes void when the act becomes impossible or unlawful. Hence in order to declare a contract to be void under the clause Frustration of Contract, it is necessary that the very substratum of the contract should be lost or destroyed to such an extent that the party to the contract become in a such a position of impossibility in performing the act.

Needless to say that, the inability of the tenant to pay the rent on account of the loss in the business or due to the poor performance of the business, is not a ground to claim abstention from paying the rent. It is true that the very occurrence of the pandemic and the resultant declaration of the lockdown, affected the functioning of the business, for the reason, which cannot be attributable to the tenant. Howsoever, the possession of the leased premises by the tenant is not in any way affected with. The very foundation of the tenancy agreements lies on the possession of the leased premises by the tenant rather than for what purpose he use the same. The character of the tenancy agreements does not rest upon the functioning of the business by the tenant, but upon the creation of the possessory rights over the leased premises.

Position under Transfer of Property Act– Lease is defined under Section 105 of the Transfer of Property Act. Section 108(e) of the Transfer of Property Act says that – if by fire, tempest, flood or violence of an army or of a mob, or other irresistible force, any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let, the lease shall, at the option of the lessee, be void. This provision is applicable in the absence of any contract or local usage to the contrary.

The event of outbreak of pandemic is not expressly covered under the above said provision, but there may arise doubts as to the inclusion of the pandemic under the phrase ‘other irresistible force’. What are irresistible forces is not defined under the act; and hence going by the ejusdem generis principles of the laws of interpretation, the pandemic may be included under the phrase ‘other irresistible force’.

And if the pandemic is covered under the phrase ‘other irresistible force’, can the lease be declared as void by the lessee?

Apart from the occurrence of the particular event, Section 108(e) of the Act also requires that any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purposes of the lease. Hence going by the second part of the provision, it speaks that the event of the force majeure shall result in the destruction of the material part of the property or shall render the property ‘substantially and permanently’ unfit for the purpose of the lease. As we all know that the declaration of the lockdown is only for a particular period or until the pandemic situation is put to control. It neither results in the destruction of the leased premise nor renders the leased premise substantially and permanently unfit from its usage. Apart from the occurrence of the event, the emphasis is upon the destruction or permanent unfitness of the leased premise and not upon the inability of the lessee in using the premise as intended for. Further, it is to be borne in mind that the losses in business shall never be a ground for the termination of lease or for the non-payment of rent, unless the party agrees to the contrary in their agreement. Hence in the absence of any specific clauses to that of the termination of lease, upon the occurrence of the event of pandemic, a lessee cannot declare the lease as void.

Conclusion

Although the declaration of the lockdown, handicapped the lessees from using the premises for the purpose of the lease, in the absence of any specific provisions in the lease agreements, no law grants authority to the lessee to withdraw from the payment of the rent or consideration for the lease or to terminate the lease at his option. Every agreements including tenancy agreements are intended to create a win-win situation for both the parties, and since the tenants have become unable to enjoy the benefits of the lease, for the reason not attributable to them, the tenants may invite the landlord for a negotiation and revision of the terms of the tenancy agreements on moral grounds, and it is unlikely that the landlords will turn their face against the request of the tenants, as the unfortunate event affected the entire mankind on the globe, such that a rearrangement in every aspect of the life of the human beings is necessitated.

(The above are purely personal take on the subject and shall not, in any case, be termed as an advise)