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Understanding The Impact Of Force Majeure On Lease Agreement

As India proudly marches towards the goal of flattening the curve of the epidemic the threat has prompted responses most notably, lockdown, which has fundamentally changed the nature of certain legal relationships between individual/s.

This makes it pertinent to examine the legal intricacies which might arise among different stake holders which are involved in these relationships. The aim of this article is to examine one such relationship, i.e. of lessor and lessee. Under these unusual circumstances, it becomes expedient to examine whether Doctrine of frustration will have any impact on covenant of lease.
  1. Application Of Contract Act, 1872 On Lease Agreement

    The concept of 'Lease as explained under Section 105 of the Transfer of Property Act is transfer of an immovable property by means of a registered instrument. The instrument elaborates the condition under which the property is let out to the other party. The parties to the lease agreement are called as Lessor, the one who owns the property, and the person to whom such property is leased out is called Lessee. 

    An agreement which contains the clause related to Force Majeure, is governed under Chapter III of the Contract Act, 1872 i.e. Contingent Contracts. Section 31 of the Indian Contract Act defines Contingent Contracts and Section 32 of Indian Contract Act, 1872 deals with the enforcement of the contingent contract.

    Therefore, those contracts which contain the Force Majeure, such agreement would be dealt in line with the Section 32 of the Contract Act. However, in agreements where force majeure clause remains absent, doctrine of frustration is relied upon in order to de hors the contract and any liability arising under from it.

    Supreme Court in Energy Watchdog v. Central Electricity Regulatory Commission and Ors. upheld the reasoning whereby it stated that a contract shall be held to be frustrated under Sec. 56 of Contract Act if it becomes impossible to perform or the very foundation on which the contract is premised has changed. The agreement of lease, however, is distinct in nature from that of the Contract Act and is governed by Transfer of Property Act.
     
  2. Doctrine Of Frustration And Lease Agreement

    Section 56 of Contract Act deals with situation of impossibility of an agreement, which exonerates the party to the contract to discharge itself from the agreement but the same is not applicable in the case of lease agreement, which is beyond the purview of Contract Act. The case of Dhruv Dev Chand v. Harmohinder Singh, is a peculiar one in its own sphere for it set out a fine distinction between a general agreement and an agreement for lease.

    In this case Hon'ble Apex Court had examined the application of provisions of Contract Act, 1872 upon Lease Agreement. It was held that doctrine of frustration under section 56 of Indian Contract Act, 1872 does not apply to lease agreement. The court herein had drawn the difference between a lease agreement and other kind of agreements.

    On a fine perusal of the above judgment it can be concluded that the principle of frustration, as enshrined in English Law, does not apply to scenarios in India.

    The Supreme Court in Kidar Lall Seal and Anr. v. Hari Lall Seal has held that in situation where there is general law and special law, the special law will have an overriding effect on the general law. The Transfer of Property Act being a special law will override the provisions of Contract Act.
     
  3. Lease Agreement And Force Majeure

    Section 108(B) (e) of the Transfer of Property act lays down that conditions under which lease agreement shall be rendered void.

    Section 111(b) of the TPA allows parties to consent to the determination of the lease upon the happening of an agreed event (such as a force majeure event). It is also pertinent to note that general law of force majeure is inapplicable to lease deeds, this does not prevent parties by way of contract to agree to certain protections in the event of occurrence of a force majeure event. It is pertinent to note that the Apex Court, in the matter of Saha Ratansi Khimji v. Kumbhar Sond Hotel Pvt. Ltd.  has held that merely because the subject matter of lease has been destroyed would not frustrate the lease agreement per se.

Therefore, on fine reading of the above judgment it can be construed safely that the lease agreement is not an ordinary agreement as it involves rights related to immovable property, unlike other contracts, it would not be frustrated merely because the subject matter of the agreement has been destroyed. It is also pertinent to note that such relationship between lessee and lessor will continue to subsist even in situations where subject matter has been completely destroyed.

It is upon the lessee to declare the contract void and get rid himself from the shackles of obligations arising under the contract of lease. Furthermore, in Shankar Prasad and Ors. v. State of M.P. and Ors (ILR [2013] MP 2146), this position of law puts an obligation upon the lessee to inform the lessor about such damage, until then the Lessee is bound by the agreement.

In the case of Raptakos Brett & Co. Ltd v. Ganesh Property the court laid down the proposition that when a lease comes to an end by efflux of time or by notice of termination or by any such means whereby the right of the lessee becomes forfeited, under such circumstances the right of the lessee is reduced to that of a tenant, the lessee is bound under Sec.108 (q) of the Transfer of Property Act to transfer the possession of such property to the lessor without any delay.

Further, in the case of Bhawanji Lakhamshi and Ors. v. Himatlal Jamnadas Dani and Ors. the Court was of the view that in situations where rent has been accepted by the landlord after the expiry of the tenancy then acceptance of rent may waive the right of the lessor to evict the lessee. But in the same case it was further held by the court that if there is absence of intention of the lessor to extend the lease agreement then it cannot be presumed that he lease agreement can be extended.

It is in this context, it becomes pertinent to examine the rent obligations arising as per lease agreements during this lockdown, the Delhi High court, in its recent judgment, has discussed this in a vivid manner. It seems rather difficult that lockdown due to COVID-19 will fall under the ambit of the section 108 (e) of the Transfer of Property Act, 1882. It still remains the question of fact whether COVID-19 will fall under the ambit of irresistible force or not.

The authors so far have not come across any definition of the term 'irresistible force” or have prescribed the criteria that what would amount to 'irresistible force'. However in order to understand the inclination of Courts towards the lockdown due to COVID-19, verdict of Delhi High court can be referred wherein it has stated that lockdown is of nature of force Majeure.

Furthermore, Black's Law Dictionary defines force majeure, inter alia, as a “superior or irresistible force”. Therefore, in cases wherein Force Majeure clause is incorporated in lease agreements, there they will be governed by the general rules of contract interpretation and will be strictly interpreted. The principle of contra proferentem will be used in case if any such ambiguity arises.

This principle basically states that an ambiguous term will be construed against the party responsible for its inclusion in the contract. The rule of “ejusdem generis” is also important as it can be used as a tool for the interpretation of Force Majeure arising under Transfer of Property Act, 1882. It primarily means “of same class”. In simple words , when general words follows a specific list of events, the general wording will be interpreted in light of the specific list of events.

Conclusion
Therefore, it can be presumed that lease agreement will not be barred or restricted by Sec. 108 (e) of the Property Act. The decision in Court of Wards Dada Siba Estate and Ors. v. Raja Dharan Dev Chand makes the law clear in this regard by stating that rule of frustration would not apply to agreements where rights have already been created in favour of the lessee as the agreement of lease are not purely contractual in nature.

It is apparent from plethora of judgments that even though the subject matter of the lease agreement gets destroyed, the lessee shall be obliged under agreement until the lessee exercises the rights under section 108 (e) of Transfer of Property Act. The court in Shankar Prasad and Ors. v. State of M.P. and Ors have clearly held that in such situation financial difficulties cannot be used as shield to escape from the liabilities arising under this agreement and concerned party shall be liable to pay. 

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