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Covid-19 And Commercial Lease Agreements

The Novel Coronavirus (COVID -19) has raised many questions on its consequences over the contractual obligations between the Parties. Generally, in all valid agreements, it is an obligation set upon the contracting parties to complete their parts of the obligations against all odds as far as possible – however, the presence of a well-drafted and negotiated Force Majeure (FM) Clause may help the parties in being either fully or partially relieved from performing some of their obligations.

Impact On Lease Agreements – Suspension Of Rent On The Basis Of Force Majeure Event

One out of the multiple queries and doubts is the concern of landlords/ lessors and their tenants/lessees over their Lease Agreements. This is because of the impairment of the payment of rent by the lessees caused by situations following the lockdown Order of the Government of India.

Before going into the question of whether there is any remedy available in the lease Agreement to either exempt or reduce the rentals payable by the lessees, we need to first be informed of the following scenarios:
  1. Does a valid contract exist between the Parties?
  2. Does the contract have any Force Majeure Clause?
  3. What is the nature and scope of the Force Majeure Clause in the contract?

Section 32 Of The Indian Contract Act, 1872 - Considerations In A Contract With A Force Majeure (FM) Clause

  1. Whether Upon Consideration Of The Fm Clause In The Agreement, Does Covid – 19 Qualify As A Force Majeure Event

    1. Some contracts may clearly capture detailed events/ well elucidated to avoid any ambiguity – e.g. outbreaks, pandemic, disease or governmental prohibition or governmental restriction, lockdown or any similar language.
    2. Process to be undertaken during and after the FM event
    3. Short term/long term implications of such an event on the contractual obligations of the parties, and
    4. Relief mechanism to balance the needs of both the parties like – termination or suspension of rights and obligations or specific exclusion for waiver of rent or deferred payment after the FM event ends.

      The Delhi High Court has in case of M/s Halliburton Offshore Services Inc. v Vedanta Lmt. and Anr.[1] stayed invocation of bank guarantee and observed that lockdown is prima facie in the nature of force majeure.

      Some contracts have loosely drafted FM Clause which may not have a detailed list of events, however, it may include phrases like any other act outside the control of the parties or any other similar event. In such cases, the scope for invoking the force majeure clause will depend upon the clause wording; specific events mentioned it and also the parties’ understanding at the time of making the contract.

      In the case of Ramanand & Ors. v. Dr Girish Soni & Anr.[2], the Delhi High Court noted that in the absence of a contract or a contractual stipulation with regards to the force majeure event, the tenant may generally seek suspension of rent by invoking the equitable jurisdiction of the Court due to temporary non-use of the premises. The Court also took note of the
      1. nature of leased premises and
      2. the financial status of the parties
       
  2. Whether There Is A Link Between The Force Majeure Event And The Performance Of Obligation Of The Parties

    The terminology used in the FM clause in any contract will largely decide whether the FM event will absolve the party invoking the clause of all or only partial obligations.
    It may be noted that:
    • Courts will refer to the usage of words like prevented, hindered’, interfered with, etc. and use different standards in analyzing the impact of force majeure that would excuse performance.
       
    • Any event that only affects the profitability of a party causing adverse business conditions to a contract may not constitute a valid force majeure event unless there is an express language incorporating the same in the contract.

      Therefore, while the lessee may be economically impacted ( in terms of generation of income for the payment of lessor), the same would generally not be enough to avoid payment obligation under a lease contract.
  3. Whether The Fm Clause Explicitly Excludes Payment Obligations Within Its Ambit

    Even if through the wordings of the FM Clause, it is proved that COVID 19 or the accompanying factor s do qualify as a force majeure event under a contract, the second question would be to review whether the clause includes/ excludes the payment obligations of the Parties.

    Most leases obligate the tenant to continue to pay rent even during FM event and do not provide a blanket waiver from payment of lease rentals on the occurrence of every Force Majeure event.

    As Force Majeure is a contractual right, the express wording of the clause have to be carefully assessed and the lessee cannot, as a matter of right, invoke non-payment due to a Force Majeure Event in the absence of a supporting clause and/or a specific rent waiver agreed under the contract. Although it may be seeming unfair to the lessees because while negotiating the contract, no one could possibly imagine a situation like COVID 19 and the lockdown restrictions by the Governments but the doctrine of fairness is nothing but a duty to act fairly and reasonably.

    It is a doctrine developed in administrative law to ensure rule of law and to prevent failure of justice where the action is administrative in nature. But, it certainly cannot be invoked to amend, alter, or vary an express term of the contract between the parties.

    It is one thing to say that a statutory contract or for that matter, every contract must be construed reasonably, having regard to its language. But to strike down the terms of a statutory contract on the ground of unfairness is entirely different. [3]

    If the lease agreement does provide for stoppage of rent or suspension of all obligations during a Force Majeure period without any qualifications or riders, then the lessee should immediately exercise its right by issuing a letter to the lessor invoking Force Majeure event and intimating cessation of its obligation to pay lease rental during the period the Force Majeure event continues.
     
  4. Whether The Notice Requirements To Invoke The Fm Clause Are Clearly Carved Out In The Contract

    A well-drafted force majeure clause would also include a requirement that the party invoking the clause provide written notice of the force majeure to other parties to the contract. Hence, the Party claiming relief under the FM clause will not be automatically suspended of its obligations – it has to follow the notice requirements, time period, alternative modes of performance of contract, etc. agreed in order to invoke a Force Majeure notice.

Section 56 Of Indian Contract Act, 1872 - Considerations In A Contract Without A Force Majeure (Fm) Clause

The Parties may then refer to the Doctrine of Frustration under Section 56 of the Indian Contract Act (ICA) or the applicable clauses of Transfer of Property Act. The question is whether frustration can apply where there is only a temporary inability for the parties to perform their obligations under the lease. The situation we are faced with right now is that the rest of the lease remains valid and enforceable but that the obligation to pay rent is frustrated by COVID-19.

Under a lease of law there is a transfer of the 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, tempest, flood, violence of an army or a mob, or other irresistible force, the lease may, at the option of the lessee, be avoided. The Supreme Court of India had previously held that 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 left to him.[4]

If the purpose of the commercial lease agreement was to do business in exchange of consideration, then even if the employees/workers are working from home, the servers still continue to be located in the premises which support the functioning of the business. Hence, it can be a strong argument that the closure of leased premises does not affect the use or occupation of the leased premises. There is obviously no change in place of business for commercial and legal purposes by the lessee during the lockdown period.

Analysis
It is important to note that in certain contracts, falsely invoking the defence of force majeure or one of the alternative defences just listed can alone constitute a breach of contract leading to more potential problems. Since the Government of India has not issued any relaxation for payment of rent, negotiating with the landlords and subsequent amicable discussions between the Parties is the best way in the absence of Force Majeure provisions in their lease agreements.

End-Notes:
  1. O.M.P. (I) (COMM) & I.A. 3697/2020
  2. CM APPL. 10848/2020
  3. Mary vs State of Kerala & Others, Civil Appeal No.9466 of 2003
  4. Dhruv Dev Chand vs. Harmohinder Singh and Others, AIR 1968 SC 1024

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