REAL ESTATE LAWS DURING THE COVID-19 OUTBREAK: OBLIGATIONS OF PARTIES TO LEASE DEEDS / RENT AGREEMENTS
The impact of COVID-19 on trade is so significant that small businesses have already begun to cave under the pressure. Dwindling resources across the economy are making lessees very susceptible to defaulting on their lease payments. Both landlords and tenants want to know the extent of their obligations and liabilities in these trying circumstances. This article addresses some of the frequently asked questions on the impact of COVID-19 on lease deeds.1. Whether a force majeure clause or the doctrine of frustration can help parties to the lease deed avoid their obligations at present? Force majeure means superior strength or an act of god. The Supreme Court has held that where reference is made to "force majeure", the intention is to save the performing party from the consequences of anything over which he has no control.” [See (1961) 3 SCR 1020: AIR 1961 SC 1285]. The defence of force majeure can only be taken if parties have this clause present in their lease agreement.
In India, the law of contracts does not
directly deal with force majeure. In its place is the “doctrine of frustration”
under the Indian Contract Act. As per the doctrine, if 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, then that contract becomes
void [See S. 56, Indian Contract Act 1872].
The question however is whether a lessee can
seek relief from their lease obligations using either force majeure or the
doctrine of frustration. It appears that the answer to this question is in the
negative. The reason is that the Hon’ble Supreme Court in Raja Dhruv Dev Chand
v. Raja Harmohinder Singh has held that there is a distinction between a
completed conveyance, such as a lease, and an executory contract [(1968) 3 SCR
339]. It was later held, on the basis of this decision that the “doctrine of
frustration” under Section 56 of the Indian Contract Act was only for
contracts, and not lease deeds. [See Sushila Devi v. Hari Singh, (1971) 2 SCC
288]. The doctrine cannot be used by parties to gain relief from their
obligations under lease deeds through these doctrines.
Therefore, unless a lease deed
has a specific force majeure clause which deals with a situation like that
created by the novel coronavirus and offers some relief to the parties, a
lessor or lessee cannot turn to the force majeure or the doctrine of frustration
to relieve themselves of their liabilities under the lease deed.
Is there any relief available under the Transfer of Property Act?
Lease deeds being a completed conveyance of
property, are not covered by the Indian Contract Act 1872, but the Transfer of
Property Act, 1882. In the list of rights and liabilities of the parties to a
lease, the Transfer of Property Act mentions that “if by fire, tempest or
flood, or violence of any 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”. [See S. 108(e), Transfer of
Property Act, 1882].
Judicial precedents of various High Courts
indicate that this provision is only applicable when the property is wholly destroyed or rendered substantially and permanently unfit. [1969
SCC OnLine All 154; 1959 SCC OnLine P&H 164] Even if the novel coronavirus
outbreak meets the definition of irresistible force, it cannot be said that the
properties are now permanently destroyed or unfit for use.
Thus, there does not exist any
provision under the Transfer of Property Act, 1882, which would help parties
avoid their liabilities under the lease deed.
What are the COVID-specific duties of the lessor and lessee in commercial
Based on the terms of the deed between the
parties, the duties of the occupier during the coronavirus outbreak will vary.
The two most common scenarios are:
Maintenance and Hygiene to be Carried Out by
the Landlord: In buildings having common spaces with units leased to multiple
parties, it will most likely be the landlord’s duty to maintain the premises
and ensure hygiene and regular cleaning. In these situations, or where the deed
states that the owner of the premises is to care for the hygiene and
maintenance, the duties of the commercial occupier will be limited. The
government has given express guidelines for ensuring safety and containing the
spread, and while it may be the duty of the commercial occupier to ensure that
all employees comply with the guidelines, the cleaning and maintenance of the
premises will be the responsibility of the landlord.
Maintenance and Hygiene to be
Carried Out by the Current Occupier: In large premises,
factories, operation units or where the occupier is the sole tenant of a
premises, the terms of agreement between the parties are often that the
premises’ day-to-day upkeep and maintenance will be done by the occupier. In
such circumstances, a commercial occupier will be liable for all cleaning,
hygiene and safety protocols, and government guidelines being followed.
Parties are thus advised to
carefully review the terms of their agreements to see whose liability it is,
the lessor or lessee, to implement the guidelines and ensure proper safety and
hygiene of the occupants of the premises.
Do tenants have to pay rent under the current circumstances?
With the unavailability of any relief under
contract and property laws, lease holders are having to turn to COVID-specific
relief notifications being announced by the state and central governments. The
provisions have been made less stringent for some groups, such as migrant
workers and students. The Ministry of Home Affairs on March 29, 2020 passed an
“Wherever the workers, including the migrants,
are living in rented accommodation, the landlords of those properties shall not
demand payment of rent for a period of one month. If any landlord is forcing
labourers and students to vacate their premises, they will be liable to action
under the Disaster Management Act, 2005.” [See Order No.
40-3/2020-DM-I(A) issued by Ministry of Home Affairs, Government of India,
under section 10(2)(I) of the Disaster Management Act, 2005].
The one-month period of exemption since this
notification is now over, and further government clarification is now awaited.
Further, commercial lease holders have not been accorded any specific
protection. At the same time, while all states are trying to ensure that their
vulnerable groups are not harassed for rent, states such as Delhi have also
made general requests to all landlords to not harass tenants for rent during
this period and try and be accommodating. Such advisories are persuasive, but
not a complete bar to collection of rents.
As most leases do not allow
tenants to withhold rent in any circumstances, and the present situation does
not get covered under Section 108(e) of the Transfer of Property Act (discussed
above), unless one falls under one of the vulnerable groups protected by
government notifications, the obligation to pay rent remains.
By Shiv Mangal Sharma
Advocate Supreme Court