ENIGMA OF TENANCY CONTRACTS AMIDST COVID-19 CRISES

INTRODUCTION

The outbreak of Covid-19 has lead world economies to an unprecedented standstill. Liquidity crunch, sluggish market demand, mass unemployment and disruptions leading the nation into recession are only the tip of the iceberg of some of the repercussions. Taking the grave situation into the account, nationwide lockdown and curfews were implemented with an aim to reduce the spread of this virus.


The implementation of lockdown and sluggish economic activities lead to cash crunch in the hands of people that arose new challenges for tenants whose businesses was struggling to survive or the students who did not have any source to pay further rents for their accommodation or the migrant workers who lost their daily wages due to which they tried avoiding or minimized their exposure to rental pay outs.


INDIAN LAWS AND A SILVER LINING FOR TENANTS

The two most common questions that arise in a war between landlord and tenants in this regard during the lockdown period have been :

1. Invocation of force majeure in rental contracts; and

2. Whether the tenants can suspend their obligation to pay rent in cases where there is no pre - agreed contractual provisions


In view of these common questions, the relevant provisions that applies under the Indian Contract Act, 1872 and Transfer of Property Act, 1882 are as follows :

  1. In the event of an express or implied clause in a contract, agreements are governed under Section 32 of the Indian Contract Act, 1872

  2. Force Majeure events occurring outside the purview of the agreements are dealt with under Section 56 of the Indian Contract Act, 1872 (popularly referred to as Frustration of Contract).

  3. The doctrine of force majeure is also recognised in Section 108(B)(e) of the Transfer of Property Act, 1882 and Rights and Liabilities of the lessee are enumerated under Section 108(B)(l) of the Transfer of Property Act,1872

Amid the pandemic, the much forgotten ‘Force Majeure’ provision in contracts and leases has gained traction and attention. Force majeure’ largely refers to a clause that is included in contracts to remove liability for natural or unavoidable scenarios such as act of god, natural calamity, war, strike, riots, crimes, etc. that interrupts the expected course of events and prevent the parties to the contract from fulfilling the obligations. However, the same has to be communicated by the party and cannot be claimed ex-post facto.


In this regard, Delhi High Court in the landmark case of Ramanand & Others vs. Dr. Girish Soni and Another [RC REV 447 of 2017] inter alia ruled that force majeure should be interpreted strictly based on the terms of the contract. It also answered issues relating to suspension of payment of rent by tenants owing to the COVID-19 lockdown crisis and the legal questions surrounding the same. The High Court held that there can be no standard rule that can be prescribed to address these cases, however, it stated that, some broad parameters can be kept under consideration, in order to determine the manner in which the issues that arise can be resolved. In the realm of contracts, the respective rights and obligations of the parties would be determined by the terms and conditions of the contract itself. Henceforth, the question of waiver, suspension or any remission in the rental payments would operate differently for each category of agreements.


The court further held that in the absence of contracts or contractual stipulations the provisions of the Transfer of Property Act, 1882 (hereinafter, "TPA") would govern tenancies and leases. Accordingly, the doctrine of force majeure is recognised in Section 108(B)(e) of the TPA. Further, rights and liabilities of the lessee are enumerated under Section 108(B)(l)

In view of the these provisions, the Hon'ble Court concluded that in view of the above settled legal position, temporary non-use of premises due to the lockdown which was announced due to the COVID-19 outbreak cannot be construed as rendering the lease void under Section 108(B)(e) of the TPA. The tenant cannot also avoid payment of rent in view of Section 108(B)(l).


Lastly, In cases such as the outbreak of a pandemic, the grounds on which the tenants or lessees could seek waiver or suspension of the monthly rents, under contracts which have a force majeure clause would be governed by Section 32 of the Indian Contract Act, 1872 (hereinafter, "ICA") and Section 56 of the Indian Contract Act, 1872. The fundamental principle in exercising this provision would be if the contract contains a clause providing for some sort of waiver or suspension of rent, only then the tenant could claim the same.


For invoking section 32, a party to a contract which contains a Force Majeure clause must prove the following:

(a) that the event which caused non-performance must be included in the force majeure clause;

(b) the non-performance was caused due to the said event;

(c) the non-performance was beyond the party's control and

(d) that there existed no alternative mode of performance.


Whether the tenants can suspend their obligation to pay rent in cases where there is no pre –agreed contractual provisions would depend on the facts and circumstances of each case. The doctrine of suspension of rent is a principle that has evolved from common law as administered by English Courts which permits a tenant to suspend payment of rents to the landlord under certain circumstances. In contracts, where there is a profit-sharing arrangement or an arrangement for monthly payment on the basis of sales turnover, the tenant/lessee may be entitled to seek waiver/suspension, strictly in terms of the clause. Such cases would purely be governed by the terms of the contract itself. Thus, the entitlement of the client in such a situation is not governed by any overriding force majeure event but by the consequence of the said event.


CONCLUSION

Covid-19 has proved to be a game changer in many aspects whether in favor of landlords or tenants. The current legal provisions surrounding the principles of force majeure or frustration of contract due to ‘impossibility’ remains to be visualized. The consequences of each case as to whether their obligations to the contract could be avoided during the times of covid-19 continues to depend on the benchmarks of each case.