Impact of the pandemic on lease agreements- an interplay between law of contract and transfer of property act

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Table of Contents

Introduction  3

I. will a lessee be able to apply the force majeure clause for the non payment of the rent in lease deeds due to covid-19?  3

II. Can the Lessee apply the Principle of Frustration of Contract for Non-Payment of Lease Rent in the absence of a Force Majeure Clause?  4

III. Transfer of Property Act and unforeseen circumstances: Applicability of Section 108(b)(e) 6

IV. What is the Way Forward for Lessees?  8

Introduction

These unprecedented times have grappled the world with catastrophic pandemic. Businesses everywhere are witnessing their lowest point. Some have even become bankrupt. The magnitude of uncertainty at the onset of COVID 19 has forced us to revisit the historical expression called the doctrine of force majeure. The businesses have to take a cold hard look towards managing their depleting resource. Even after the third wave of lockdown in India, ‘non-essential businesses’ cannot operate as usual. The lockdown has disrupted their access to the rented/leased premises. The operational cost thus is skyrocketing without an income. This article tries to analyse the situation faced by these lessee’s in our country.[1]

I. Will a lessee be able to apply the force majeure clause for the non payment of the rent in lease deeds due to covid-19?

When an event can neither be anticipated nor controlled, it termed as force majeure.[2] COVID-19 was an event we could neither foresee nor control; thus, by definition, it falls under the category of force majeure events. The principle of force majeure finds its basis in equity and reasonableness. The terms of the contract govern the parties. However, there can always exist a situation beyond the parties’ control, which render the performance impossible. Thus in those situations, it would be unreasonable to expect the party at a disadvantage to perform the contract or pay the damages.  The court can grant a waiver or suspend performance temporarily as it deems fit.[3]

The terms of the lease deed govern the parties involved.[4] In a situation where a force majeure clause is expressly mentioned in a contract between the lessor and the lessee, the invocation of this clause would be dependent on the ambit and scope of the wordings that defines a force majeure event.[5] If they have specifically included the word “pandemic”, then resorting to force majeure to get waiver or exemption from the obligation to pay rent etc., might be considered by the court. Typically, such clauses include acts of god and calamities, but the term pandemic isn’t used.[6] In these kinds of set up, the determination becomes factual and differs from case to case. If the lease agreements provide for government orders etc., then force majeure may be triggered.[7]

In case there is no particular provision that encapsulates the force majeure clause, the party may try to seek relief under §32 of the ICA.[8] §32 embodies contingent contracts, and performance is dependent on the happening or non-happening of a certain event. It is rendered void if performance becomes impossible.[9] However, the obligation to pay rent in a lease agreement is not dependent on any event, and thus the applicability of this section seems unlikely.

II. Can the Lessee apply the Principle of Frustration of Contract for Non-Payment of Lease Rent in the absence of a Force Majeure Clause?

In a predicament where the force majeure clause is missing from the contract, the parties usually resort to §56 of the ICA, which reifies the doctrine of frustration.[10] The lessee contends impossibility of performance of the contract. The pertinent question that arises before the court corresponds to the applicability of this doctrine in disputes regarding non-payment of rent in lease deeds.[11]

What constitutes the lease deed is embodied in §105 of the Transfer of Property Act, 1882 (hereinafter TPA).[12] Essentially it transfers the right for the enjoyment of the immovable property for perpetuity or a certain period in exchange for consideration given on specified instances.[13] This concept indicates the separation of ownership and possession of the immovable property of the transferor/lessor. Often, to determine if the agreement amounts to a lease deed, exclusive possession is used as a litmus test.[14]

For instance, A transfers the right to enjoy the property to B for a time period of 4 years in lieu of Rs 50,000 rent each month. The agreement specifies that the property can be utilised only for commercial purposes. Moreover, there are no restrictive clauses that show that A tries to retain any control over the immovable property. Moreover, the maintenance and utilities were to be facilitated and paid for by B. Intent of creating a lease deed is the primary determinant, and that is satisfied in this situation. Suppose a pandemic hits the world in the second year of the agreement, and a worldwide lockdown is ordered. During this time, B cannot use the property for any commercial purpose due to governmental orders but A still demands the rent. B refuses to pay the rent and goes to court for a waiver due to non-usage of the property. Can B find recourse under the doctrine of frustration?

This question has puzzled us since the beginning of the ongoing situation in the world. Many commercial contracts fell through after the pandemic.

In Ramanand v Dr Girish Soni, the Delhi HC did not accept the application for suspension or waiver of rent due to the lockdown.[15] The Rent Controller has passed an order of eviction against the tenant, and this tenant challenged the decree. The appellants/tenants argued force majeure for waiver of rent due to the lockdown. Firstly, the court examined that relationship between the lessee and lessor is regulated by the terms and conditions mentioned in the contract. In a situation where the force majeure clause is not there in the contract, the part usually argues §56 of the ICA. The doctrine of frustration is applicable when the act becomes impossible to perform due to an unforeseen event. In Raja Dhruv Dev Chand v. Raja Harmohinder Singh, among other things, the SC held that doctrine of frustration could not apply to completed transfers or conveyance.[16] §56 can only be used in cases of executory contracts. Thus it could not be used for the waiver of rent. This position of law was reaffirmed in Sushila Devi And Anr v. Hari Singh And Ors[17]. Further, In Hotel Leela Venture v Airports Authority of India, it was held that the doctrine of frustration cannot apply to executed contracts, and only the broad principles of this doctrine are applicable to lease cases.[18]

Therefore in our scenario, B will not be able to claim waiver under the doctrine of frustration because he was temporarily not being able to utilise that property commercially.

III. Transfer of Property Act and unforeseen circumstances: Applicability of Section 108(b)(e)

The judicial decisions aforementioned already establish the general rule that the principles of the frustration of a contract and force majeure as under the Indian Contract Act, 1872 does not apply to lease agreements. Only in situations where the force majeure clause is expressly mentioned in terms of the contract, the party will be able to argue his case for waiver or exemption under ICA.[19]

§108(B)(e) of the Transfer of Property Act, 1882 states that if any substantially important area of the immovable property is rendered permanently unfit for usage or wholly destroyed due to fire, the violence of a mob or an army, flood or tempest or other irresistible force then the lease deed shall stand void. [20]

In order for a party to derive any benefit under section 108(B)(e), three conditions must be satisfied-

  • An ‘irresistible force’ should exist
  • The property in contention becomes permanently and substantially unfit for use.
  • The lessor must have the knowledge of the lesse’s resolution to render the lease agreement void

Therefore, it becomes imperative to establish that the pandemic falls under the category of ‘irresistible force’ and has made the property ‘permanently unfit for usage. A perusal of this section helps us understand that it will only apply in the absence of any contractual stipulation. [21]

According to the Black’s Law Dictionary, the term force majeure is described as irresistible force. Scholars have not yet come across any judicial precedent where ‘irresistible force’ has been defined. However, the obiters of many cases give an indication that the courts have not differentiated between irresistible force and force majeure.[22]

The NDMA (National Disaster Management Authority) order issued on the 24th of March, 2020 might be used to put forward the argument that COVID-19 falls under the category of irresistible force which prevented the lessee from using the immovable property for commercial purposes.

The lessee’s obligation to provide notice of his decision to render the contract void to the lessor is significant. Under section 108(B)(e), the law puts a strict obligation on the lessee to give such a notice. Failure to provide notice would mean that the deed would be unaffected even after a force majeure event occurred. In Shankar Prasad v State of M.P, the leased property was destroyed by fire, but since the lessee failed to provide notice to the lessor, his obligation to pay rent did not cease. The underlying logic behind placing a strict burden is that until the lessee satisfactorily gives back the property to the lessor, he is deemed to be in possession and use of the property. The central question that remains before the court is whether the lockdown rendered the property permanently and fit for the lessee to use.[23]

In Ramanand v Dr Girish Soni, the court categorically held that the property’s temporary non-use would not make it eligible to be categorised as permanently unfit. Thus, the party cannot get exempted from paying rent under this provision of law.[24] It referred to a series of judgements to interpret the term ‘permanently unfit’.[25]

In this case, the factual matrix showed that even though the appellant sought suspension of rent due to a force majeure event, the tenant had no intention to surrender the contended property. Therefore the court provided some relaxation in payment to the tenant due to equitable principles, but no waiver was granted.

IV. What is the Way Forward for Lessees?

It has been established from the catena of judicial decisions that exemption and granting of waiver in lease deed during the pandemic will be dependent on the terms of the contract. If the contract is silent regarding the consequences of unforeseen circumstances, then the Transfer of Property, 1882 will be attracted. However, the short term non-usage of the property will not be allowed to fall within the permanently unfit category under §108(B)(e).[26] The Delhi HC has brought a lot of clarity to the burning question during the pandemic. All over the country, tenants, lessee’s are struggling with negotiations with the transferor regarding waiver suspension. Due to the absence of enforceable legislation in this situation, the best these tenants and lessee’s can approach the ‘equitable jurisdiction’ of the court with the hope that their plea is considered. We have to understand that the lessee isn’t entitled to get a waiver. Thus, they have no option other than requesting the lessor to postpone the payment. Any unilateral decision was taken by the lessee not to pay the rent might lead to suspension of the agreement as well as breach of the contract.[27]


[1] Clyde & CO, COVID-19 India: A curious case of Force Majeure, May 13th 2020 available at https://www.clydeco.com/en/insights/2020/05/covid-19-india-a-curious-case-of-force-majeure

[2] Jeevan Ballav  Panda & Satish Padhi, Applicability of Force Majeure and Frustration to Lease Deeds: A Critical Analysis in light of COVID-19, April 20th 2020 available at https://www.scconline.com/blog/post/2020/04/20/applicability-of-force-majeure-and-frustration-to-lease-deeds-a-critical-analysis-in-light-of-covid-19/

[3] Priyanka Adalkha, Covid-19 Force Majeure, ‘Doctrine Of Frustration’ In Property Lease, May 14th 2020 available at https://www.mondaq.com/india/litigation-contracts-and-force-majeure/933794/covid-19-force-majeure-doctrine-of-frustration39-in-property-lease

[4] Ramanand & Ors v Dr Girish Soni & Anr, Cm appl no. 10847/2020 (Delhi HC).

[5] Supra note 1.

[6] Ibid.

[7] Ibid.

[8] The Indian Contract Act, 1872, §32.

[9] Ibid.

[10]The Indian Contract Act, 1872, §56.

[11] Bar and Bench, Force Majeure, Frustration and ‘Other Irresistible Force’: Lease Agreements and COVID-19, April 4th 2020 available at  https://www.barandbench.com/columns/policy-columns/force-majeure-frustration-and-other-irresistible-force-lease-agreements-and-covid-19-2

[12]The  Transfer of Property Act, 1882, §105

[13] Subhashini Narayan, Applicability Of The Doctrine Of Frustration To Lease And License Agreements, June 8th 2020 available at https://www.mondaq.com/india/landlord-tenant–leases/948760/applicability-of-the-doctrine-of-frustration-to-lease-and-license-agreements#:~:text=In%20Sushila%20Devi%20And%20Anr,is%20taken%20by%20the%20completed

[14] Ibid.

[15] Supra note 4

[16] Raja Dhruv Dev Chand vs Harmohinder Singh & Anr, 1968 AIR 1024, (as per Shah).

[17] (1971) 2 SCC 288

[18]  1206/2012 (Delhi HC).

[19] Seema Jhinghan & Ankit Sahoo, Possibility of Non-Payment of Lease Rent Due to COVID-19, April 16th 2020 available at https://www.mondaq.com/india/litigation-contracts-and-force-majeure/918736/possibility-of-non-payment-of-lease-rent-due-to-covid-19

[20] Avikshit Moral, Impact of Covid-19 on leasing in India, October 1st 2020 available at https://www.ibanet.org/Article/NewDetail.aspx?ArticleUid=de845263-0158-46c9-a99f-18983c939505#:~:text=In%20circumstances%20such%20as%20the,section%2032%20of%20the%20ICA

[21] Aditya Mehta, To Pay Rent Or Not To Pay Rent? The Delhi High Court Rejects Plea For Suspension Of Rent During Lockdown, March 9th 2021 available at https://www.mondaq.com/india/contracts-and-commercial-law/1033168/to-pay-rent-or-not-to-pay-rent-the-delhi-high-court-rejects-plea-for-suspension-of-rent-during-lockdown

[22] Abhinav Shrivastava, The Impact of Covid on Lease Deeds, available at https://lexisnexisindia.wordpress.com/2020/04/13/the-impact-of-COVID-19-on-lease-deeds/

[23] Bar and Bench, Force Majeure, Frustration and ‘Other Irresistible Force’: Lease Agreements and COVID-19, April 4th 2020 available at  https://www.barandbench.com/columns/policy-columns/force-majeure-frustration-and-other-irresistible-force-lease-agreements-and-covid-19-2

[24] Payaswani Upadhay, Covid-19: Temporary Non-Use Won’t Make Rental Lease Void, Delhi High Court Says, May 23rd 2020 available at https://www.bloombergquint.com/law-and-policy/covid-19-temporary-non-use-wont-make-rental-lease-void-delhi-high-court-says

[25] Supra note 5 ; Subhashini Narayan, Applicability Of The Doctrine Of Frustration To Lease And License Agreements, June 8th 2020 available at https://www.mondaq.com/india/landlord-tenant–leases/948760/applicability-of-the-doctrine-of-frustration-to-lease-and-license-agreements#:~:text=In%20Sushila%20Devi%20And%20Anr,is%20taken%20by%20the%20completed

[26] Sangeeta Batra v M/s VND Foods (2015) 3 DLT (Cri) 422; Pawan Pathak Prakash v Bar Council of India, Writ Petition (Civil) No 10949 of 2020; Standard Retail Pvt Ltd v M/s G S Global Corp and Ors, Commercial Arbitration Petition (L) Nos 404 of 2020.

[27] Ibid.

Author: Harshit Verma

Editor: Kanishka VaishSenior Editor, LexLife India.

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