Payment of Rent under Commercial Leases during COVID-19

Organisations in India often lease out workplaces to run their business and provide workspace to their employees. However, the sudden outbreak of COVID-19 led to a lockdown imposed by Government of India from March 24, 2020,[1] due to which organisations have not been able to utilise their leased workspaces for approximately 2 (two) months. As such, many organisations are exploring the possibility of exemptions from their rental obligations under their lease deeds.

In India, unlike the Coronavirus Act of United Kingdom,[2] there has been no government order or notification granting exemption to lessees from payment of rent in respect of commercial properties. In light of the above background, this article discusses the approach which may be considered by lessees in case of commercial rent payments as per their respective contracts and under the Transfer of Property Act, 1882 (“TPA”).

Contract Act and Lease Deed

A lease deed is a contract between the lessor and the lessee which sets out the rights and obligations of the parties in respect of the leased premises. One such contractual right is related to a force majeure[3] clause.

To begin with, the lessees should examine whether their lease deed contains a force majeure clause.  In the event that such a clause is included in the lease deed, the lessees must check  whether the clause covers events such as pandemic, epidemic, restrictions by government or other authority, reasons beyond the control of the parties, etc. If the answer is positive, then the lessees should examine the rights granted to the affected parties in such a scenario; whether the  lease deed allows for the suspension of rent payments or only provides for deferment of such payments till such force majeure events exist. To summarise, it is vital for the parties to consider the scope and ambit of a force majeure clause while executing a lease deed.

Tatva Legal, Hyderabad has a specialized team of lawyers who, amongst other services, advise on real estate transactions covering various aspects of the transaction such as drafting contracts for commercial leasing, real estate advisory services and conducting title due diligence.

In absence of any force majeure clause in the lease deed, the lessee may avail relief under Section 56 of the Indian Contract Act, 1872 (“ICA”) which deals with frustration of contracts on account of supervening impossibility to perform an act. However, it must be clarified at the very outset that Section 56 of the ICA applies only to an executory contract, that is, a contract where the performance or part thereof is still required to be completed by a party. Where a lease deed falls under the category of executed contracts, parties cannot take recourse to Section 56 of ICA. This position has been upheld by the Supreme Court of India in a plethora of cases, including the landmark judgments in Raja Dhruv Dev Chand vs Raja Harmohinder Singh & Anr.,[4] and Sushila Devi And Anr. vs Hari Singh And Ors.,[5] wherein it has been reiterated that Section 56 of the ICA is not applicable to executed lease deeds.

Rights under the Transfer of Property Act

Where no force majeure clause exists in the lease deed, the lessees may also consider Section 108(B)(e) of TPA.[6] The aforesaid provision inter alia states that if there is no contract to the contrary between the parties, and the leased premises has been “rendered substantially and permanently unfit” for the purposes of the lease because of any “irresistible force”, then the lease deed could be considered void at the discretion of the lessee.

Therefore, considering the impact of COVID-19 and the persuasive value of various government orders[7] it may be argued that COVID-19 qualifies as an irresistible force. However, the lessee, to take benefit of Section 108(B)(e), must also prove that COVID-19 along with its effects has rendered the leased premises “substantially and permanently unfit” for use. This has been reiterated recently by the Delhi High Court in Ramanand & Ors. vs. Dr. Girish Soni,[8] which observed:

“Until and unless there is a complete destruction of the property, Section 108(B)(e) of the TPA cannot be invoked. In view of the above settled legal position, temporary non-use of premises due to the lockdown which was announced due to the COVID-19 outbreak cannot be construed as rendering the lease void under Section 108(B)(e) of the TPA. The tenant cannot also avoid payment of rent in view of Section 108(B)(l).”

The Delhi High Court relied on the landmark judgments of the Apex Court in the T. Lakshmipathi and Ors. v. P. Nithyananda Reddy and Ors.,[9] and Shaha Ratansi Khimji & Sons v. Kumbhar Sons Hotel Pvt. Ltd. & Ors.[10] and held that the lockdown imposed due to COVID-19, does not qualify to be an event that “renders the leased premises substantially and permanently unfit” for use as required under 108(B)(e). However, the Delhi High Court did take an equitable approach considering the situation and impact of the pandemic on the parties and decided that grounds of equity allowed the lessee to only ‘defer’ the payment of lease rent but not waive the same.

Concluding Remarks

In view of the aforesaid, it can be said that there is no effective legal remedy under the TPA or ICA for the lessees to waive or suspend lease rents due to COVID-19. Even though we have judicial dicta granting equitable relief to the lessees, however, it is at the discretion of the courts and depends on the facts and circumstances of the particular case. Therefore, the following may be considered:

• The lessees should first comprehend their rights and obligations pertaining to a force majeure event under the lease agreement itself and then act according to the terms of such clause.
• The lessees may approach the lessors and request for waiver or deferment of lease rents and the parties may commercially negotiate such terms.

Further, we are yet to witness how the Apex Court decides on the plea of non-payment of rent in absence of a force majeure clause and under TPA, but it seems unlikely that the aforesaid settled position will be altered, especially in the absence of any government orders or notification exempting the payment of lease rents under commercial leases.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal, Hyderabad.

[1]Order No. 40-3/2020-DM-I-A, dated March 24, 2020, issued by Ministry of Home Affairs, Government of India.

[2] The Coronavirus Act, 2020 was enacted in United Kingdom which allows the lessees to defer the lease rents and safeguards them against eviction by the landlords on account of such deferment of lease rents.

[3] According to Black’s Law Dictionary, a force majeure means an event or effect that can be neither anticipated nor controlled.

[4] AIR 1968 SC 1024

[5] AIR 1971 SC 1756

[6] Section 108(B)(e) of the TPA provides that 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 is 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, provided that, if the inquiry is occasioned by a wrongful act or default of the lessee, he shall not be entitled to avail himself of the benefit of this provision.

[7] For instance, Office Memorandum No. F18/4/2020, dated February 19, 2020, issued by the Ministry of Finance Government of India and the Office Memorandum No. 283/18/2020-Grid Solar, dated March 20, 2020, issued by the Ministry of New & Renewable Energy, Government of India.

[8] Ramanand & Ors. vs Dr. Girish Soni, RC. REV. 447/2017

[9] (2003) 5 SCC 150

[10] (2014) 14 SCC 1