Force Majeure and Commercial Rent Agreements for Office Spaces, Restaurants and Shops in times of the COVID – 19 lockdown

In the wake of the COVID – 19 pandemic, an important question has arisen: do tenants have to continue paying rents for office spaces in IT parks or commercial buildings even though the country is in a state of lockdown? Do restaurants or shops that pay heavy amounts as rent or license fee every month have to continue to do so despite no revenue? What are the reliefs available to them?

We have analyzed the provisions of law that may assist tenants in such times.

Force Majeure

A force majeure event can be defined as an event or effect that can neither be anticipated nor controlled, especially an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to. The term includes both acts of nature such as floods, earthquakes, tsunamis as well as acts of people, such as riots, strikes and wars.  Force majeure provisions import the principle that upon the occurrence of an event or circumstance that is not reasonably within the control of and would not have been avoided or overcome by a party, which prevents or delays that party from performing some or all of its contractual obligations, that party will be relieved from liability which might otherwise arise as a result of that party’s failure to perform those affected obligations. A right of termination due to force majeure is not automatic; in accordance with the general principles in this area, it depends on what the clause says (some have delay to performance followed by termination after a period for example).

Can the COVID – 19 classify as a force majeure event?

Under Indian law, one of the first decisions to deal with the concept of force majeure was the Madras High Court decision in Edmund Bendit and Anr. vs Edgar Raphael Prudhomme. In this case, the Court cited with approval the passage from Matsoukis v. Priestman and Cowherein the definition given by an eminent Belgian lawyer of force majeure as meaning “causes you cannot prevent and for which you are not responsible” was adopted.

However, in common law countries such as India, a force majeure clause cannot be read into a contract when it does not exist. As a result, in cases where tenancy agreements have a force majeure clause, needless to say, the same can be relied upon by the tenant to seek rent relief. However, in the event there does not exist a force majeure clause in the contract, the tenant will have to seek recourse under other legal provisions.

The test for seeking to rely on a force majeure clause is:

  • The event that gave rise to a party’s non-performance under the contract falls within the definition of force majeure in the contract, that is, the event is covered by the force majeure clause, and the non-performance was caused by the relevant event.
  • The event and the non-performance were due to circumstances beyond a party’s control [Dhanrajamal Gobindram v. Shamji Kalidas & Co].
  • There were no reasonable steps that could have been taken to avoid or mitigate the event or its consequences. [Mamidoil – Jetoil Greek Petroleum Company SA Moil – Coal Trading Company Limited vs. Okta Crude Oil Refinery]
  • The party seeking to rely on the clause may also need to show it was not aware, at the time of entering the contract, that the circumstances giving rise to the event of force majeure was likely to occur.

The Supreme Court of India (“Supreme Court”), in the case of Industrial Finance Corporation of India Limited vs Cannanore Spinning & Weaving Mills Limited and Others has held that ‘where the event is of such a character that it cannot reasonably be supposed to have been in contemplation of the contracting parties when the contract was made, they will not be held bound by general words, which though large enough to include, were not used with reference to the possibility of that particular contingency which afterwards happened. It is on the principle that the act of God is in some cases said to excuse the breach of a contract. The Latin maxim lex non cogit ad impossibilia means that the law does not compel a man to do that which he cannot possibly perform.’ This defence is thus available even in the absence of a force majeure clause in the contract.

Frustration of a Contract

Under Indian law, the doctrine of frustration of contract is an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and, hence, comes within the purview of S. 56 of the Indian Contract Act (“Contract Act”).

Frustration will apply when an unforeseen event makes it impossible – through no fault of either party – to perform the contract but the contract has not catered for that. The unforeseen event is so fundamental that it strikes at the root of the contract and far beyond what was contemplated by the parties when they entered the contract. It renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of signing the contract.

The legal effect of a finding that a contract is frustrated is that all parties are discharged from their obligations. It is a high threshold, but in current circumstances, the Indian courts might be more open to frustration arguments.

While there is no direct judicial precedent, however, a decision from Hong Kong indicates that it may not be that straightforward. In Li Ching Wing v Xuan Yi Xiong, popularly known as the “SARS” case, the court found that a 10-day isolation order by the department of health did not allow a tenant who had taken premises for a two year period to terminate the tenancy agreement by arguing that it had been frustrated by the unexpected outbreak of such a deadly virus. However, each case will depend on the facts. The scenario would have possibly been different if the tenancy agreement and the isolation order was for a longer period of time.

The fact that the Government of India has notified the COVID – 19 pandemic as a ‘notified disaster’ under the Disaster Management Act, 2005 on March 14, 2020 may serve as a strong argument.

Some Practical Solutions

In the case of Dhruv Dev Chand vs. Harmohinder Singh and Others, the Supreme Court held that the doctrine of frustration under Section 56 of the Contract Act would apply if the leased property is destroyed by force majeure, then the tenant has the option to declare the agreement void or non-performable under Section 108 of the Transfer of Property Act, 1882. While the COVID-19 pandemic has not led to the destruction of property, however, given the crisis is unprecedented, commercial tenants may cite the doctrine of frustration under Section 56 and seek remission in rent payable during the lockdown period and it is likely that courts consider such an argument.

Leave and License Agreements usually contain arbitration clauses to resolve landlord-tenant disputes. Such arbitration clauses can resort to the ‘fast track procedure’ contained in Section 29B of the Arbitration and Conciliation Act, 1996, under which the arbitral tribunal appointed by the parties can conduct the proceedings in a quick and summary manner and pass the arbitral award within six months.

In deciding whether and how to enforce their rights, landlords and tenants should consider the following practical solutions that may provide short term relief for both landlords and tenants:

Review of the agreement: Landlords and tenants should carefully review their leases for the specific language of force majeure clauses, rights to rent abatement, and other provisions that may be applicable during these difficult times.

A rent reduction or rent deferment: Temporary rent reductions or rent deferments could provide some much needed breathing room for tenants during this crisis. The amount of reduced or deferred rent could be paid back in instalments during the remainder of the lease, or the lease could be extended to account for the months of reduced or deferred rent.

The security deposit: A possible solution during the current COVID-19 pandemic is to look to apply the tenant’s security deposit toward upcoming rent payments with the understanding from the tenant that the security deposit will need to be replenished once this crisis is over.

By

Sakshee Kumar, Abhay Nevagi & Associates

info@anevagi.com