Effect of Covid-19 Pandemic on Commercial Leases

The Coronavirus COVID-19 pandemic has hurt the economy pretty badly. Many businesses are in ruins and many are on their last legs. The governments world over have been forced to take steps to contain the pandemic.

The Coronavirus COVID-19 pandemic has hurt the economy pretty badly. Many businesses are in ruins and many are on their last legs. The governments world over have been forced to take steps to contain the pandemic. However, these measures have seriously affected one  of the biggest casualties of this crisis since along with the accompanying lockdown, there exists the dire state of affairs within the real estate sphere. Just in 2019 the market for leased commercial real estate has grown by leaps and bounds. Parties were pre-leasing under construction properties just to save themselves from the increased lease rentals once the properties were ready. Office spaces were available at a real premium. What had been considered as the best real estate sector to invest in, just a few years ago is suddenly not all that attractive anymore.  The reason is due to the lockdown and the economic downturn, due to which the commercial real estate sphere, is facing heavy stress.

Effect of Covid-19 on Commercial Real Estate

So what exactly has happened? To begin with, the commercial real estate sphere has been redefined and there is a paradigm shift happening. The reasons for this are many. To begin with, several usinesses, especially consumer goods companies who were operating from stores inside the best malls and complexes in the countryand were under the impression that this is their best investment are now left in the lurch. They have been closed for almost two months, since before the lockdown started and they don’t know when they will be allowed to operate again because even when the lockdown is lifted they might be asked to stay shut as closed spaces like malls and complexes, which tend to get crowded, may not be safe even after the lockdown is revoked. Even when they are allowed to open they might not receive the same business/footfall because it will be a long time before people are confident enough to return to places like malls and other commercial spaces the way they went there in pre Covid-19 times. Then there is the case of large organisations that operated out of huge complexes where thousands of people were employed and working. However, many of these organisations have realised that many of their employees can be asked to work from home as the work is not affected, as they realised during lockdownand is muchsafer if employees don’t need to come to office on an everyday basis. Furthermore,  even when they do come to office not all will have to come at the same time. Suddenly these companies don’t need these huge office spaces and thus  want to cut cost by shifting to smaller premises. Then there is the crunch faced by many businesses due to the economic downturn thereby forcing organisations to renegotiate their rent. As we speak there are hundreds of companies including real estate sensitive organisations like coffee shop chains, restaurant chains, FMCG retail chains etc. which have sent notices to their property owners to renegotiate rent and even waive rent for the lockdown period. All these factors along with a general negative mood in the markets have seriously hampered the Commercial Real Estate sphere.

What Can Be Done?

Now, we are faced with a situation wherein commercial leases are being renegotiated and breached leading to pandemonium in the market. Everyone is looking for a way out of the situation. Landlords are in a fix because they don’t want to let the parties off from their liabilities under the lease and tenants either want the lease renegotiated or even cancelled. Then there are many who are looking towards the government to provide some kind of relief, however, the chances of that happening are grim and further, even if some relief is announced, getting the same won’t be easy since government always imposes checks and balances in place, which thereby makes it a difficult task to benefit from their schemes. So what are going to be the repercussions of this on the commercial leases and what measures can be taken to hold the situation?

  1. Smart renegotiation of leases: Some leases need to be renegotiated since there is no way out of that. However how the said renegotiation happens is of the paramount importance. The lease needs to be renegotiated in a way wherein the parties should not feel completely taken for a ride in the process. Both parties will have to make compromises. The landlords will have to come down from their high horses and accept the reality of life and the fact that they cannot dictate terms the way they did before. Tenants who are desirous of continuing to work also need to realise that they cannot misuse the situation and expect unreasonable rebates from the landlord. For this the best option is to take help from experts in the field and come up with a solution in which both parties can get the best possible outcome from the new situation. This is not easy but this way, the business is saved and so is the lease and thus this is the best solution from a long run perspective as well.
  2. Moratorium on Lease: Another solution is that while not completely terminating the lease, the parties by mutual consent may put a moratorium on the lease. This is something which Singapore has also implemented as a law. In this, the lease is put on hold and the tenant is allowed not to pay rent for a reasonable period of time if its businesses are closed or badly affected by the lockdown and once the business and work is back on,, the lease can also restart. However, it is pertinent that the party seeking this relief is actually unable to do business due to Covid-19 restrictions and not some other reason. In Singapore the tenants are required to provide a statutory notice to invoke the law made in this regard and seek moratorium and the landlord is legally obliged to impose moratorium for a period allowed under the law in place there. There also, the inability to pay rent or do business should be attributed to Covid-19 and its effects only and not any other reason.
  3. Termination of Lease for Force-Majeure: Normally leases contain a Force-Majeure clause which entitles a party to be excused or discharged from its contractual obligations as a result of an extraordinary event or circumstance beyond their control which prevents or delays performance. Under normal circumstances, courts and parties have been very narrow and restrictive in allowing the use of this clause only to the extent provided for in the lease itself. However, looking at these extraordinary and unprecedented times parties which are actually affected severely and maybe even irreparably by the pandemic can be allowed to terminate the lease under this clause, thereby extinguishing any liability they may have under the lease. This, while undesirable, is still better than the frustration of the lease. The Hon’ble Supreme Court in the case of Dhruv Dev Chand vs. Harmohinder Singh and Ors. opined that: “……. that possession of the demised land was not given to the lessee, and the landlord was on account of riots unable to deliver possession. Obviously on that finding the tenant was entitled to claim refund of the rent paid. But the Court proceeded to consider the question "whether the doctrine of frustration applies to a contract of lease of agricultural lands" and recorded an answer that the doctrine of frustration applies to leases. The Court observed at p. 13 - "that the doctrine of frustration does apply to leases, but even if it is does not apply in terms to a contract of lease of agricultural land the broad principle of frustration of contract applies to leases". We are unable to agree with that observation, and the observation at p. 11 that "According to Indian law, sales of land as also leases are contracts". Under a lease of law there is a transfer of right to enjoy that land. If any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purpose for which it was let out, because of fire, tempest, flood, violence of an army or a mob, or other irresistible force, the lease may, at the option of the lessee, be avoided.

    Thus in this instance the court allowed that the contract can be avoided upon the option of the lessee, which is something that applies to our present circumstances.

  4. Frustration of Lease: The last major repercussion would be frustration of the lease due to the inability of the parties to carry on with the lease. In this scenario also, leases, especially those without a Force-Majeure clause will have to be terminated as frustrated. While this is the least desirable scenario, at least this way the parties will have a closure and they can then get back into the market and without being embroiled in a dispute which may not do any good to anyone. The Hon’ble Supreme Court has affirmed this view in the case of Sushila Devi and Ors. vs. Hari Singh and Ors. In this case the court observed that: “From the facts found in this case it is clear that the plaintiffs sought to take on lease the properties in question with a view to enjoy those properties either by personally cultivating them or by sub-leasing them to others. That object became impossible because of the supervening events. Further the terms of the agreement between the parties relating to taking possession of the properties also become impossible of performance. Therefore we agree with the trial court as well as the appellate court that the contract had become impossible of performance”.

    These are just some of the measures which can be undertaken by the parties to salvage the situation to the best possible extent under the current circumstances. However, it’s important that if this is what is going to happen, parties must take help from professionals who can help them in this transition with minimum risk and ensure that they  are not walking into a legal trap in which they will be entangled later on.

What Happens Next

This does not do away from the fact that many such commercial leases will end up in courts or arbitrations because parties would rather fight it out in courts than settle the matters amongst themselves. It is just a bi-product of this situation which cannot be escaped. However, the situation is so novel that it is going to be difficult to know how courts would react. The problem is that there is no precedent for such a situation in history, especially at the scale at which it has occurs  this time. People don’t know what to say and courts don’t know what to expect. One of the biggest things to happen is the use of the Force-Majeure clause in new and novel ways. Courts in India and the world over have till date been very skewed in their view of this clause and unless  your business or goods or offices were burnt in a bushfire or washed away in a flash floods or literally buried by a land slide the courts were not inclined to allow the invocation of this clause. There have been instances where factories or offices were closed for a few days sue to an outbreak of flu within the premises and parties were unable to fulfil their liabilities. The courts in such circumstances blamed the parties for lack of proper facilities and measures in their offices and denied them to take recourse of the Force-Majeure clause. However, the courts will have to seriously rethink this stand and be a little broader in its definition of Force-Majeure.

Conclusion

In the end there is always the unexpected, like this very pandemic, which no expert can predict and that will have to be dealt with as it comes. However, as responsible people, businesses and entities we need to do our bit. We need to be reasonable and we need to be ready to adjust. There are some adjustments which are going to be short term in nature and then there are some long term measures which will have to be taken. However, if parties co-operate and understand each other this shall also pass.