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Author - Snigdha Sharma

The humanity is presently reeling under the onslaught of Novel Coronavirus (COVID-19). The World Health Organization (WHO) has declared it as a Pandemic on 11th March, 2020. Its impact remained unpredictable till Mid of March, 2020. However, it is confirmed that it is the most deceptive Pandemic the World has witness in recent times. The world economies have already crippled due to the same and is unknown as to when it will be able to recover from the vise-grip of COVID-19.

The Prime Minister of India, in order to contain the outbreak of COVID-19 in India, took a significant step on 24th March, 2020, by declaring a 21 days nation-wide lockdown, effective from 25th March, 2020. Following which the Ministry of Home Affairs (MHA) issued a set of guidelines to be adhered to during the period of lockdown. Such guidelines stated the list of businesses to remain closed during the period of lockdown and the services which shall be exempted from it. Even various State Governments issued notifications closing offices, businesses, factories, malls, multiplexes, in order to ensure social distancing amongst public.

Few essential services like, Banks, ATMs, pharmacies, etc. have been exempted vide the said guidelines, in order to carter the daily and essential needs of the public. The Central Government vide the above referred guidelines have direct all shops, commercial and industrial establishments to remain closed during the lockdown, however, it has attempted to promote and ensure work from home, to the extent possible in order to maintain business continuity.

Amongst the outbreak of COVID-19 in India, all industries, along with the real estate sector, have taken a massive hit. Presently, the real estate sector is in a deep standstill on the back of the global economic crisis, coupled with the COVID-19 situation. In addition to the same, this present situation has gravely impacted the commercial real estate segment, as majority of the businesses have already closed their office premises owing to the lockdown. Amidst such grim situation, business operating on leasehold commercial properties, finding it difficult to pay.

This Article shall analyse the various issues involved in a Commercial Lease in this given scenario and will seek to address such issues from a legal perspective.

The MHA on 29th March, 2020, issued an Order bearing No. 40-3/2020-DM-I(A), directing the landlords of workers/ migrants/ students living in their rented premises not to demand rent from them for a period of one month. Though this Order does not make any specific reference to Commercial Lessee, but such Lessees are seeming to be approaching their owners seeking suspension or waiver of lease rentals for the lockdown period. Additionally, on one hand few are invoking the ‘force majeure’ clause under their Lease Deed/Rental Agreement/Leave and License Agreement, and on the other hand, few are seeking relief under the ‘doctrine of frustration’ enshrined under Section 56 of Indian Contracts Act, 1872.

Force majeure- The term force majeure is basically considered as an act that a person has no control over and its rescues the parties to a contract to perform its obligations under the Contract due to the aftermaths of such act. Therefore, it can be inferred that, a force majeure event extends well beyond the ‘ACT OF GOD’ and includes policies and orders imposed by the Government. The Nationwide Lockdown imposed by the Government to contain the spread of COVID-19 can hence qualify as a force majeure event. Force majeure being a contractual concept, its application depends upon the inclusion of such clause in the contract. A contract generally defines all the parameters of a force majeure event along with the mechanism to be followed in such an eventuality. A relief under the said clause can be sought if such a relief has been explicitly included in the Lease Deed/Rental Agreement/ Leave and License Agreement. Ordinarily, a Lessee is excused from paying the lease rental in a force majeure event, if the Leased Property has been destroyed and/or rendered unfit for use by the Lessee. In most of the contracts, the parties avoid including blanket waiver of lease rentals during a force majeure event. Being a contractual concept, the wording of the Force majeure clause has to be carefully perused in order to determine the availability of relief under the same. In the absence of the said Clause, Lessee cannot seek waiver/suspension of lease rent due to a force majeure event. However, if the Contract has a provision of waiver/suspension of Lease Rental due to a force majeure event, then the Lessee can exercise its rights, following the mechanism laid down in the said clause.

Doctrine of Frustration- In the event when a contract does not have a specific mention of force majeure clause, the contracting parties can avail relief under Section 56 of the Indian Contracts Act, 1872, which deals with the Doctrine of Frustration. It deals with scenarios where the performance of the contract becomes impossible owing to certain unavoidable events i.e., “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”. Against this backdrop, it needs to be proved that the COVID-19 scenario falls within the ambit of Section 56 of the Indian Contracts Act, 1872, wherein the performance of contract has become impossible due to such an event. A mere economic crisis or difficulty may not be credible enough to invoke the Doctrine of Frustration. However, if the terms of the contract itself either expressly or impliedly contains a qualification/restriction 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. 

The Indian Courts have generally taken the view that the Doctrine of Frustration 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. Therefore, in the absence of a Force Majeure clause in the lease deed/ rental agreements/ leave and license agreement, it is highly improbable that a lessee can claim frustration of contract and seek waiver/suspension of lease rental as consequence of a Force Majeure event.

Concluding Note- Though the action of the Government in imposing a nationwide lockdown is causing a lot of hardship to the public at large and the business in India, but considering the havoc impact of COVID-19, such step taken by the Government is considered to imperative. The shortage of supplies and workforce being interrupted due to the lockdown will hinder from performing contractual obligations under the contracts. The question is whether this pandemic situation will permit the Lessee to invoke the force majeure provision in the event of non-performance under the contract. It is just to infer that, in the absence of an express Force Majeure clause in a Lease deed/ rental agreement/ leave and license Agreement, having a provision of waiver/suspension of lease rentals, the Lessee will have no other option, but to pursue the matter amicably. The Lessee may approach the Lessor requesting waiver or suspension of lease rentals, due to the complete shutdown of commercial activities by the Government. A cordial approach may be adopted by the Lessee until the Government issues any notification pertaining to the relaxation of commercial lease rentals. Any hasty and aggressive approach by the Lessee might result in termination of the contract by the Lessor or might breach the payment terms of the contract. 

¹ Refer to https://www.mha.gov.in/sites/default/files/Guidelines.pdf
² Refer to https://www.mha.gov.in/sites/default/files/MHA%20Order%20restricting%20movement%20of%20migrants%20and%20strict%20enforement%20of%20lockdown%20measures%20-%2029.03.2020.pdf
³ Refer T. Lakshmipathi and Ors. vs. P. Nithyananda Reddy and Ors. AIR (2003) SC 2427