Covid-19: Temporary Non-Use Won’t Make Rental Lease Void, Delhi High Court Says
Rent would be payable by tenants who wish to retain the premises and where the contract doesn’t explicitly provide for suspension of monthly charges, the Delhi High Court has held.
The question as to whether the lockdown would entitle tenants to claim waiver or exemption from payment of rent or suspension of rent, is bound to arise in thousands of cases across the country, the court noted. And so, even though the facts of the case didn’t require it to, the court pointed to potential commercial lease agreements where disputes are likely to arise as a result of Covid-19.
The Delhi High Court enunciated the principle for four situations:
- Where a contract has contemplated force majeure situations that could lead to relief on payment of rent.
- Where the contract has no force majeure clause.
- Where no contract exists.
- And, where there is a profit-sharing agreement.
For the first kind, if the contract contains a clause providing for some sort of waiver or suspension of rent, only then the tenant could claim the same, the court has pointed out. Depending on the wording of force majeure clause, the tenant may be able to claim that the contract has become void and surrender the premises. In the absence of any such explicit language in the contract, tenants will be liable to pay rent.
Most force majeure clauses in lease agreements have some deviation or the other, Sajit Suvarna, head of real estate practice at DSK Legal, told BloombergQuint. The language ranges from a pandemic, to the premises being unfit for use even temporarily and some are fairly broad to say, if the premises become uninhabitable.
There’s a difference between premises being uninhabitable versus the same being inaccessible. So the outcome in each case could be different depending on what the agreement provides for. These kind of nuances will determine whether any relief can be granted.Sajit Suvarna, Partner, DSK Legal
There could also be contracts that don’t have a force majeure clause- that’s the second kind. Such agreements will be governed by the principle of frustration of contracts, the order said. Relying on precedents laid down by the Supreme Court, single judge bench of Justice Prathiba Singh held that this principle won’t apply to lease agreements.
…a lease is a completed conveyance though it involves monthly payment and hence, section 56 [Frustration of Contract] cannot be invoked to claim waiver, suspension or exemption from payment of rent.
Delhi High Court Order
The court has rightly said that frustration means that the contract has become impossible to perform, independent advocate Sitesh Mukherjee said.
Lockdown at worst may last for a few months, and so longer-term contracts such as those for construction of infrastructure projects like roads, power plants, or even long-term commercial leases, etc. would be difficult to bring into its ambit.Sitesh Mukherjee, Advocate
It would be difficult to argue frustration in cases of long-term contract on account of a limited period of disruption in performance of obligations by parties, he added.
But, there could be a third scenario where there is no contract between a landlord and tenant. In such cases, the provisions of Transfer of Property Act would apply, the court said. But for a successful force majeure argument under this law, there has to be complete destruction of the property. The destruction caused by the force majeure event must be permanent in nature.
And finally, where profit-sharing arrangement exists for monthly payment on the basis of sales turnover, relief to the tenant will be strictly in terms of the clause. The tenant could claim that there were no sales, no profits and thus the monthly payment is not liable to be made.
“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, being that there were no sales or profits,” the Delhi High Court ruled.
If none of these four grounds exists, tenants can still seek relief by invoking the court’s equitable jurisdiction, the order said. In this case, on the basis of this power, the court relaxed the payment schedule for the tenant.