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Possibility of Non-Payment of Lease Rent Due to COVID-19

Amidst the outbreak of novel coronavirus (“COVID-19”) and its consequential countrywide lockdown, shutting down majority of the commercial, industrial and retail activities, the much forgotten ‘Force Majeure’ clause in contracts and leases is now receiving close scrutiny. In simple terms, ‘Force Majeure’ events relieve a party from performance of its contractual obligations, without any consequential breach of the contract, provided such performance is adversely impacted by events outside the control of an affected party such as act of God, natural disaster, war, strike, lockout, epidemic, Government orders, etc.

The Ministry of Home Affairs vide its order dated March 29, 2020, in exercise of its powers conferred under Section 10(2)(l) of the Disaster Management Act, 2005, directed all State/Union Territory Governments and State/Union Territory Authorities to take necessary actions and issue necessary orders, inter alia, for waiver of rent for workers by landlords for a period of one month. However, the Government has not yet issued any order/notification with respect to suspension or waiver of lease rentals for commercial lease contracts entered into by businesses.

In the absence of any relief or clarity by the Government on the performance of obligation to pay lease rentals under commercial lease agreements, business entities and retail outlets are struggling with no sales and revenue but still saddled with ongoing rent and employee payment obligations and are vigorously evaluating the ‘Force Majeure’ clause under their respective agreements. This newsletter attempts to respond to some of the frequently asked questions related to payment of rent during the present COVID-19 crises.

Can the Lessee Apply a Force Majeure Event as a Reason for Non-Payment of Lease Rent?

Relief from payment of rent due to a ‘Force Majeure’ event can only be availed if such a relief is explicitly provided under the lease agreement. Generally, lease agreements excuse the lessees from payment of rent during a Force Majeure event if there is a damage or destruction of the property leading to its unavailability for use by the lessee and they do not provide blanket waiver from payment of lease rentals on occurrence of every Force Majeure event. As Force Majeure is a contractual right, the express wordings of the clause has 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. 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.

Can the Lessee apply the Principle of Frustration of Contract for Non-Payment of Lease Rent in the absence of a Force Majeure Clause?

While Force Majeure is not specifically covered under the Indian Contract Act, 1872, (“IC Act”), reference to the concept of force majeure can be derived from Section 32 and Section 56 of the IC Act. If the contract itself either impliedly or expressly contains a term, according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt under Section 32 of the IC Act. If however an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered into their agreement, the contract can be held to be frustrated under Section 56 of the IC Act.  [refer Energy Watchdog vs Central Electricity Regulatory Commission and Ors. (2017) 14 SCC 80]. But it is pertinent to note that Section 56 is applicable only if the contract does not have an explicit Force Majeure clause.

The Indian courts have generally taken the view that Section 56 of IC Act is not applicable when the rights and obligations of the parties arise under a transfer of property under a lease. The doctrine of frustration belongs to the realm of law of contracts and it does not apply to a transaction where, not only privity of contract but a privity of estate has also been created in as much as lease is the transfer of an interest vis-à-vis the immovable property within the meaning of Section 5 of the Transfer of Property Act, 1882 [refer Raja Dhruv Dev Case in T. Lakshmipathi and Ors. vs. P. Nithyananda Reddy and Ors. AIR (2003) SC 2427].

In view of the foregoing, in the absence of a Force Majeure clause under the lease agreement, it is unlikely that a lessee can claim frustration of contract (which eventually leads to termination of the contract and may, therefore, not assist the lessee in the long run) and seek waiver of lease rental as consequence of a Force Majeure event.

What is the Way Forward for Lessees

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 who 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.

For more COVID 19 related articles, please refer to https://lexcounsel.in/articles-2020/ and for COVID 19 related legal updates, please refer to https://lexcounsel.in/newletters/newsletters-2020/.