Legal obligations under Lease Agreements during COVID-19 Pandemic

At the time of writing this article, severe economic clouds of uncertainty are looming over the entire world economy. The financial advice across the board is to cut down expenses and save cash.

At the time of writing this article, severe economic clouds of uncertainty are looming over the entire world economy. The financial advice across the board is to cut down expenses and save cash. For large business houses after employment / labour costs and the cost of borrowings from banks, lease rentals are usually the 3rd highest fixed expense every month.

With several jurisprudence stories circulating, one that seems to be most controversial is the tenants’ declaration that the lease rent should be waived off or significantly reduced for several months or may the lease be abandoned due to the Covid19 crisis. Let’s have a look at this situation under the Indian law.

Lease agreements / Leave & License agreements / informal lease agreement all are governed by The Transfer of Property Act, 1908 and the Indian Contract Act, 1872.

The main contention is the fact whether the Covid19 crisis is a crisis that would qualify as a Force majeure or an event that would supersede everything else and frustrate the purpose and intent of the Lease agreements in force?

To understand this, let’s review the information as follows:

The Transfer of Property Act, 1908:

What is rent or lease under the Indian Law – Under Section 105 - A lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised…. to the transferor by the transferee, who accepts the transfer on such terms

The exceptional circumstances are mentioned under Sec 108 (e )- if by fire, tempest or 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:

The Indian Contract Act, 1872 & Definition of Force majeure:

Force majeure translates literally from French language as superior force or Vis major according to a Latin term that means "chance occurrence, unavoidable accident. ."It describes an irresistible natural occurrence that causes damage or disruption and that is neither caused by nor preventable by humans even when exercising the utmost skill, care, diligence, or prudence.

Section 56 of the Indian Contract Act speaks about agreements that are frustrated – the relevant part is reproduced here - 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.

If we consider the above information together, the following facts emerge: 1) The lessee holding a property under a valid lease deed is the owner of the property for the limited period and purpose as defined under the law. 2) The agreement under Sec 56 defining the doctrine of frustration is not satisfied since the current crisis has delayed & temporarily delayed the benefits available from the property. As we see the current crisis – the Covid19 threat is ominous and long but not indefinite and definitely not a situation where no return to normalcy is expected. 3) Force majeure is in play but for a limited period and not in a manner that will irreversibly change the economic situation.

Under the Indian Law lease agreements are further taken out of the purview of frustration of a contract as defined under Section 56. In Raja Dhruv Dev Chand v. Harmohinder Singh and Anr AIR 1968 1024 the Hon’ble Supreme Court, has held …..By its express terms s. 56 of the Contract Act does not apply to cases in which there is a completed transfer. 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, …….., or other irresistible force, the lease may, at the option of the lessee, be avoided. 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”.

If we take the above facts in mind, we can infer that:
  1. The Lease property is being held by the lessee as a limited time owner and so any short term disturbances would not affect the ability of the property to generate profits. Just like the lessor is not a partner in the profits of the lessee similarly would not have a role in the losses generated due to non-utilization in the current crisis.
  2. The Section 56 doctrine of frustration of the contract would not be applicable as per established law and also the fact that the disruption is a delay & not the termination in the usage of the property.
  3. Force majeure is applicable for a limited period & not an event that takes away the ability to utilize the lease premises by the lessee.
Conclusion

Compromise and compassionate discussion between a landlord and tenant during this crisis would be the best way to approach any lease rental disputes. Unless the Indian government comes up with a new law / ordinance defining the fate of lease properties during the Covid19 crisis or the lease deed executed has a very specific clause relating to a contagion or lockdown circumstances, the responsibility to pay the rent would remain the legal obligation of the Lessee.