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COVID-19 FORCE MAJEURE, ‘DOCTRINE OF FRUSTRATION’ IN PROPERTY LEASE

April 13, 2020

By Priya Adlakha and Tulip De

 

While a lot is being discussed world over, about the repercussions of Covid-19, the pandemic declared by the World Health Organization, with regard to global economic breakdown, income losses, recession, lay-offs etc., businesses are also worried about their running cost, consequences of termination of their existing agreements of services, lease, rent etc.

Rent relief is one such aspect, which all the tenants are looking forward to, so that their business does not sink and can sail though this present global financial crisis. Therefore, the common anxiety among all the landlords and tenants is the invocation of ‘Force Majeure’ clause in the lease deeds.

‘Force Majeure’, is a concept under the common law and is as such not codified in most of the common law countries like India. It finds place in Section 56 of the Indian Contact Act, as a Rule of Frustration, which reads as ‘An agreement to do an act impossible in itself is void. 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, becomes void when the act becomes impossible or unlawful.

Therefore, some legal issues which have cropped up in this situation are ‘Whether the tenants can take the shield of ‘Force Majeure’ clause in their lease deeds/agreements to get rent relaxation’? ‘In case the ‘Force Majeure’ clause in not there in the deed, whether the ‘Rule of Frustration’ provided under Section 56 of the Indian Contact Act (ICA) will apply’?

To answer the first question, it is important to understand the applicability of ‘Force Majeure’ or ‘Rule of Frustration’ clauses in the lease deeds and answer the second question. It is a settled position of law that Section 56 of the ICA is not applicable on lease deeds. Lease deeds are governed under Section 108(e) of the Transfer of Property Act, 1882, (TPA) which is a special legislation relating to transfer of property by mortgage, lease, sale etc. and shall prevail over a general clause/Act (Section 56 of the ICA). Under Section 108(e) of the TPA, if by any irresistible force, the property is substantially or 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. Therefore, the deed itself can be declared void at the hands of the lessee, if the property cannot be used as stated above. In that case, the tenant has to give a notice to the landlord and handover the possession of the property to the landlord. However, there is no provision under Indian law for suspension of lease deed for any time period on account of ‘Force Majeure’.

The Hon’ble Supreme Court in the case titled as ‘Raja Dhruv Dev Chand vs Harmohinder Singh & Anr.’ 1968 3 SCR 339, held that “under a lease of law there is a transfer of 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. This rule is incorporated in s. 108(e) of the Transfer of Property Act and applies to leases of land, to which the Transfer of Property Act applies, and the principle thereof to agricultural leases and to leases in areas where , the Transfer of Property Act is not extended. 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 let to him. The appeal fails and is dismissed with costs.

In Airports Authority Of India vs Hotel Leelaventure Ltd. 2016, the Hon’ble High Court of Delhi, while hearing an appeal arisen from the award passed in the arbitration proceedings inter alia held that “When a lease is executed, there is transfer of property. The lessee is put in possession and it may be said after the lessee is put in possession that there is nothing yet to be done. Therefore, Section 56 would not apply because condition (b) would not be fulfilled, there being nothing yet to be done by either party”. “Sections 108(e) of the Transfer of Property Act, 1882 is a special law and it excludes the general law i.e. Section 56 of the Contract Act”. “Even assuming that Section 56 of the Indian Contract Act applies to leases, the lessee has to surrender the lease and pay the Royalty (MGA) upto the date of handing over of the possession. The respondent cannot continue in possession and seek discharge from the payment of Royalty (MGA). Even under Section 108(e) of the Transfer of Property Act, the lessee upon exercising the option to treat the lease as void, is bound to surrender the possession and make the payment of the rent/premium upto the date of the surrender.”

However, in a situation where an Agreement to lease is executed, which is neither registered nor acted upon, whether the ‘Force Majeure’ clause is there or not, Section 56 of the ICA shall be applicable (if its requirements are fulfilled) and under the Rule of Frustration, the agreement shall be void. Reference is made to ‘Sushila Devi And Anr. vs Hari Singh And Ors., AIR 1971 SC 1756, wherein, the Hon’ble Supreme Court held that the law of frustration as embodied in Section 56 of the Contract Act applies only to a contract that is, an agreement to lease, and does not apply to leases.

Coming back to the first question, if there is any specific clause in the lease deed, which says that the rights and obligations of the parties as well the terms of the agreement/deed shall remain suspended in case of any ‘Force Majeure’ which includes and epidemic, pandemic or disease, the tenant may invoke that clause to get rent relief.

Therefore, it is important for both the tenants and landlords to review their lease Deeds. If no such clause exist, then is dependent upon mutual relationship, nature of business, likely impact of Covid-19 and bargaining capacity.

It is important to mention here that UK Government has passed a special legislation Coronavirus Act, 2020, to deal with all the powers and contingencies related to this pandemic, which came into effect on March 25, 2020. Schedules 82 and 83 of this Act, deals with the protection provided to the tenants from landlords’ right to re-entry/forfeiture of commercial premises on account of non-payment of rent during the relevant period. The relevant period in this Act, is stated to be the day following the day when the Act came into force till June 30, 2020 or such later date as may be specified by the relevant national authority in regulations made by statutory instrument. These Schedules are applicable on England, Wales and Northern Ireland.1

So far, no such Act, ordinance or notification is passed by the Indian Government. The orders/advisories issued by the State Governments and Executives relating to rents are in respect of poor laborers, migrants for residential premises, having no applicability on commercial leased properties. Though the Maharashtra Industries Department has passed an order, allowing industries to delay lease rental payments without penalty, however it is in respect of all payments due to Maharashtra Industries Development Corporation and not for the private sector.

A lot of requests are coming from big establishments including cinemas, malls, retails, hospitality industry, seeking government intervention to pass orders for rent relaxations for leased premises. Let us see how the Government reacts to such request, so that the businesses do not reach to the level of complete breakdown and also the welfare of the families, whose only source of livelihood is the rental income, is not jeopardized. Therefore, if not complete waiver, some middle solution can be thought of by the tenants and landlords, so that the courts are not flooded with such kind of litigation.

  1. http://www.legislation.gov.uk/ukpga/2020/7/part/1/enacted

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