Introduction
The current COVID-19-induced nationwide lockdown has been in continuance nearly for four months in different phases and counting. This is certainly an unprecedented situation that we all have seen, till date. The economic impact of the Coronavirus pandemic, has forced all business houses, big or small, to look at ways to save costs. Rent occupies a fair share of the business cost. It pinches even more, when one is required to pay rent for space which is not being physically used. Despite the recent resumption of work under Unlock 3.0, it would be very difficult for tenants to pay outstanding rent while facing continuous harassment from their landlord. It, is however, needed to be understood if, as a matter of right, tenants can suspend rent for the period when the premises remain inaccessible.
Therefore, some legal issues which have cropped up in this situation are ‘Whether the tenants can take the shield of ‘Force Majeure’ clause in their lease deeds/agreements to get rent relaxation’? ‘In case the ‘Force Majeure’ clause in not there in the deed, whether the ‘Rule of Frustration’ provided under Section 56 of the Indian Contact Act (ICA) will apply’?
Although there are several Supreme Court and High Court judgments, which lay down the position of law on contingent contracts under Section 32 of the Indian Contract Act, 1872, (ICA) and frustration of contracts / impossibility of performance, as summarised under Section 56 of the ICA and Section 108 of the Transfer of Property Act, 1882 (TOPA), most still find it difficult to understand the scope and correlation of these provisions of law.
Delhi High Court Judgement on payment of Rent during COVID-19
In the recent case of Ramanand and Ors (RC. REV. 447/2017 Ramanand and Ors v. Dr Girish Soni and Anr), the order passed by the Delhi High Court on May 21, 2020 (Order), pools in jurisprudence of the past and clears the air around the question of whether the present lockdown would entitle tenants to claim waiver, or seek exemption from payment of rent. The position that the current situation cannot be viewed clearly, has been fortified by the Order.
The Order predominantly deals with two situations. One, where the lease agreements contain a force majeure clause and the other, where lease agreements do not contain a force majeure clause.
- The Force Majeure clause in rental or lease agreements:
The Order states that whether a lessee can seek suspension of rent due to inability to run its business, would depend on whether such situations and consequences are explicitly provided for in the lease agreements. If the force majeure clause does not envisage such a situation and does not provide for a waiver or suspension of rent, then, it would not be possible for the lessee to avoid payment of lease rent.
A very important aspect that the court has clarified, is that there are many contracts which have a force majeure clause but provide a right to the lessee only to terminate the contract and do not envisage a situation, where the lessee can suspend payment of rent. In such cases, it would not be open to the lessee to contractually demand suspension of rent. The lessees can, however, only opt to terminate the lease.
- Tenancy Agreements not containing a Force Majeure clause:
In case of lease agreements and other similar contracts (which are in the nature of executed contracts), which do not contain a force majeure clause, the Delhi High Court has reiterated the well-established position that the provisions of Section 108 of the TOPA shall apply and not Section 56 of the ICA.
Further, the court has stated that the threshold for applicability of Section 108 of the TOPA is extremely high and it deals only with situations where the property is rendered permanently unfit or is completely destroyed. The Order further clarifies that temporary inability to use the property would not fit within the threshold of Section 108 and therefore, if lease agreements do not contain a force majeure clause, lessees / tenants would not be in a position to take any statutory recourse and seek suspension or waiver of rent, in the present lockdown situation.
- Suspension of Rent due to COVID-19, on a case-to-case basis:
The Delhi High Court has inter alia held that mere temporary inability to access and use the premises, cannot allow a tenant / lessee to suspend payment obligations, unless the contract provides for the same. The court also clarified that if a lessee seeks remission or suspension of rent on the grounds of equity, then, the facts and circumstances in each case will have to be assessed, while determining whether a tenant is entitled to any such relief.
- Payment of Rent in case of Revenue Share Agreements:
The court has also envisaged a scenario of revenue share agreements. It has stated that if the payment of rent is linked to profits under rental agreements, then, the tenant may be entitled to seek a waiver of payment of rent, if the tenant has not made any profits due to the lockdown.
Although the court did not deal with the aspect of minimum guaranteed rent, which generally forms a part of such revenue sharing rental agreements, considering the ratio laid down by the Delhi High Court, if there is a minimum guaranteed rent in such contracts and if suspension of rent is not envisaged, then, such minimum guaranteed rent would be payable by the lessee.
Therefore, the Order passed by the Delhi High Court will dispel doubts of many and bring much required sanctity to the chaos in the minds of the tenants.
Frequently Asked Questions
With the uncertainty of this rapidly evolving pandemic, if you’re a business tenant or a commercial landlord you may be wondering what impact Coronavirus may have on your lease and your obligations. In light of the same, below mentioned FAQs might help you thinking about the positive steps you can take.
What if you’re a tenant affected by Coronavirus?
Q. If Coronavirus has impacted your sales, supply chain or staff, you might be struggling financially. Perhaps all your staff have had to self-isolate, and you’re not actually occupying your premises. Do you still have to pay the rent?
A. The straightforward answer is yes, except in the very rare event that your lease or tenancy agreement allows for suspension of rent in these circumstances.
If you’re using a serviced office, your agreement might include a force majeure clause. However these agreements are usually a licence rather than a lease and you should check the terms and conditions of your agreement with the serviced office provider.
Q. Apart from paying the rent, do I have any specific obligations to the landlord if I’m not actually occupying the property?
A. Quite possibly, yes. You may have to inform the landlord if you’ll be leaving the property unoccupied for a certain period of time and you might need to put appropriate security arrangements in place to safeguard the property. Generally speaking, the tenant’s obligations in the lease will continue to apply and the landlord has no duty to offer any concessions to the tenant in respect of their obligations in the lease.
What if you’re a landlord affected by Coronavirus?
Q. Perhaps you’ve had the unwelcome news that one or more of the tenants in your building has employees infected by Coronavirus. Can you prevent them accessing or using the building?
A. Put simply, no. The ‘quiet enjoyment’ covenant in your lease means you can’t prevent the tenants from accessing or occupying their premises.
Q. But what if you feel you should shut down the property for health and safety reasons, to reduce the risk of spreading the virus?
A. Landlords are typically allowed to set reasonable regulations for the management of the building and require the tenant to comply with these. Therefore, landlords may introduce reasonable regulations regarding the management of the building (i.e. limiting access to common parts of the building which do not provide access to individual tenants’ premises) to stop the spread of any virus.
However, tenants are responsible for the health and safety in relation to their premises and employees. Therefore, as a landlord you are unlikely to be able to require the tenant to follow regulations which are at odds with the tenant’s right to quiet enjoyment or the tenant’s obligations to their employees.
Q. Are you still obliged to provide services to your tenant if there’s a Coronavirus outbreak on-site?
A. It depends on the terms of your lease, but usually landlords are granted relief from the obligation to have to provide services in circumstances beyond their control.
For example, it may be reasonable to say you’re not putting someone on the reception desk because the risk of them being infected by Coronavirus is beyond your control.
Typically, if you don’t provide the services, the tenant doesn’t pay for them (through the service charge). But some businesses, such as a hotel, cannot effectively run without key services such as reception or cleaners. Your lease will usually state that where the services are permitted to be suspended, you must restore those services as soon as you can.
Q. Talking of safety, are landlords obliged to keep tenants safe? If there’s an outbreak in my building, will I have to organise deep cleaning?
A. Typically, the lease will have a list of key services you have to provide, such as ensuring the building is structurally safe, but the provision of many of the other services is likely to be at your reasonable discretion. How often you clean the common areas of the building is more likely to be discretionary.
It’s best to work on the basis that you should take reasonable actions to provide the services in accordance with the principles of good estate management, and naturally you don’t want to gain a reputation for being careless or irresponsible. So yes, it may be that many landlords will be or should be making contingency plans for deep cleaning, and closing areas that don’t need to be accessed.
Advice for both parties
Considering that the lessees do not have a right to seek waiver or suspension of lease rentals in the absence of an explicit Force Majeure clause supporting such waiver/suspension, the lessees will have no option but to issue notices to their respective lessors requesting waiver or suspension of lease rentals owing to the unprecedented situation of complete shutdown of commercial activities by the Government of India. Unless the Government issues any relaxation from payment of rent in the near future, cordial negotiation with the landlords for waiver or suspension of lease rentals is the best way forward for the businesses which do not have explicit supporting Force Majeure provisions in their lease agreements. Unilateral decision not to pay rent may lead to termination of the lease agreement by the lessor for breach of the agreed payment terms and therefore amicable discussions among parties is the best way forward.