Section: C
Category: Legal Essay
Paper Code: LE-CD-03
Page Number: 385 -391
Date of Publication: February 10, 2021
Citation: Clarissa D’Lima, Payment of Rent in Commercial Lease Contracts in Context of the COVID Crisis, 1, AIJACLA, 385, 385-391, (2021), https://www.aequivic.in/post/aijacla-payment-of-rent-in-commercial-lease-contracts-in-context-of-the-covid-crisis-1.
Details Of Author(s):
Clarissa D’Lima, Student, Kirit P. Mehta School of Law, NMIMS Deemed-to-be University, Mumbai
ABSTRACT Even as the country unlocks itself and gets back on track to resume economic activities, the uncertainties that cropped up due to the lockdown imposed to combat COVID-19 continue to linger in different areas of our daily activities. The contractual relations related to interest in property are similarly ridden. This essay explores the debate on which of the parties to a lease agreement is obliged to bear the burden of the losses caused due to the halt in business activity. The essay explores the judicial stance expressed so far with a focus on the ruling of the Delhi High Court in the case of Ramanand v. Dr. Girish Soni and thereby culls out the important observations made by the Court on the existing judicial opinion on this matter. The need for mutual consensus between the parties to a lease agreement in the context of differences like lease agreements has been highlighted while considering the need to avoid digging up issues that can hinder the formation of such consensus in times of crisis resolution. KEYWORDS COVID-19, Lease, Leave and License Agreement, Rent, and Tenant.
INTRODUCTION
Leases and Leave and License Agreements are the common forms of agreements in India that lead to a transfer of the right to the enjoyment of property from the owner of the property to the beneficiary of the concerned contract. With the fall in the income of the masses due to the lockdown imposed to curb the spread of the pandemic, there has been widespread discussion on whether tenants can forego the payment of rent. This confusion exists in every kind of tenancy agreement, be it in the case of tenancy of a small shop in a marketplace or the agreement to rent a shop in a mall. While it may seem that the shutting down of the place of business on account of the lockdown renders the subject property futile and thus the payment of rent should be exempt, this cannot be settled in a unilateral manner where rental income is one of the main sources of income for landlords. Besides, one may also have to consider that though the property has not been put to use for a certain period, the incidental expenses to maintain certain kinds of properties may continue to be a weight on the landlord’s expenditure.
It is seen that not every lease contract is based on a written formal agreement. In some cases where there is a written agreement, the agreement may not include a force majeure clause with specific reference to a pandemic as a force majeure event. These issues have also given rise to doubts on whether a lease agreement can be subject to provisions of the Indian Contract Act which excuse the non-performance of a contract. This essay will analyze the current judicial stance on this issue concerning lease agreements in light of the landmark judgments combined with the observations put forth in the recent ruling of the Delhi High Court in the case of Ramanand and Others v. Dr. Girish Soni. And Another.[1]
DEFINING LEASE
Under Section 105 of the Transfer of Property Act, 1882, (“the Act”) lease refers to a transfer of a right to the enjoyment of immovable property for a specified time or perpetuity in exchange for a consideration which may be tendered periodically or as per the terms of the transfer.[2] The definition of “lease” under this act brings out the following essentials ingredients of lease:
· It is an agreement made in exchange for consideration
· There is an interest created in the property on account of such consideration.
· Such interest may be enjoyed for a defined time-frame or in perpetuity.
Ideally, a lease contract should be in a written form, however, in case of the existence of an oral agreement, Section 106 of the Act provides that a lease for agriculture or manufacturing is presumed to be made for one year and is terminable by either party with prior notice of six months. As per this section, any lease made for any other purpose is presumed to be made on a month-to-month basis and is terminable based on a prior notice of fifteen days.[3] However, commercial and residential lease agreements are usually made for a longer time spanning over several years based on the purpose of the lease.
In addition to the above essentials, Section 107 of the Act mandates that a lease agreement made for one year or exceeding one year or reserving a yearly rent has to be duly registered.
RIGHTS OF LESSOR AND LESSEE
The rights and liabilities of the lessor and lessee are to be determined based on the terms of the lease contract. Where there is no formal written contract in place, the rights and liabilities are as spelled out in Section 108 of the Act. The rights enumerated therein aim to provide the lessee with possession of property with due entitlements to enjoy the property without any interruption as long as the lessee adheres to the payment of rent and performance of the agreed terms. The lessee, on the other hand, is expected to maintain the premises in good condition, communicate an increase in the value of any interest in the property which is not known to the lessor, and honor the agreement concerning payment of lease rent and termination of the contract.[4] The noteworthy provision of this section in light of the current discussion is 108 B(e), which states that the lessee may opt for the contract of lease to be void in case the subject property becomes “substantially or permanently unfit for the purpose for which it was let”, provided that such circumstances have not been occasioned by any wrongful act of the lessee[5].
In the case of Thomas v. Moram Mar Baselious Ougen I, Catholics Metropolitan[6], where the tenanted building was destroyed in a fire, the Kerala High Court observed that though the lessee had the option to treat the contract of lease as void, it did not mean that the lessee could squat on the land or require the landlord to build a new structure. The Court considered that where the lease was meant for enjoying the property, the destruction of the property would bring an end to the subsistence of the lease.
GROUNDS FOR NON-PAYMENT OF LEASE RENT
With the lockdown cutting down people’s regular income and with commercially leased spaces not being put into use, voices are calling for the scrapping of rent payments. However, when it comes to abiding by the terms of a contract, this may not be as easily done as said. Even in the absence of a written rental contract the payment of rent cannot be forgone without mutual consensus between the contracting parties. It is also not viable to expect the government to bring in a diktat on this matter as the nature of lease agreements vary from case to case. Hence, the current focus is now on reading the stance of the Judiciary in disputes arising out of such circumstances. While the Supreme Court dismissed a plea seeking directions to be made for enforcement of the Ministry of Home Affairs’ order dated 29th March, wherein landlords were asked to avoid collecting rent from laborers and students[7], the latest case ruled on this issue remains that of Ramanand v. Girish Soni[8], wherein the Delhi High Court held that in the facts of this case, where the tenant sought a waiver of rent on account of the lockdown, the tenant could not be exempted from payment of rent.
It may be noted here that the circumstance of this case are unique and thus cannot provide a cookie-cutter solution to all similar disputes. The judgment in the present case was given on a Revision Petition filed before the Delhi High Court against the order of the Civil Judge-Cum-Rent Controller, dated 18th March 2017, for eviction of the tenant on the grounds of bonafide use by the landlord under the provision of the Delhi Rent Control Act. The eviction order was then challenged before the Delhi High Court which allowed the tenant to use the premises by imposing a stay on the eviction order in September 2017, on the condition that the rent payable would be Rs.3.5 lakh as opposed to the previous paltry sum of Rs. 300 paid under the original agreement.[9] Owing to their unwillingness to leave the premises during the lockdown, the tenant filed a revision petition against the order and also filed an application seeking wavier of the rent payable, as fixed by the Civil Judge, for one month on the grounds of non-use of the premise during the lockdown.
The High Court disposed of the application of the tenant ruling that the tenant was already enjoying the benefit of paying lower than market rent for the premises despite using the premises even when an order of eviction had been passed. The High Court also observed that no executive order of the government providing for any kind of relief would apply to the facts of the case and thus the tenant was called upon to discharge the payment of Rent for March 2020.
The High Court in this case also affirmed the judicial stance on the application of two important provisions of the Contract Act to lease agreements. Dealing with the application of Section 32 of the Indian Contract Act, the High Court relied on the Supreme Court judgment in the case of Energy Watchdog v. CERC[10] to affirm that if the lease agreement provides for a force majeure clause, then such clause would be interpreted in the light of Section 32 of the Indian Contract Act (which provides for enforcement of contingent contracts) and the tenant may be allowed to claim waiver of rent depending on whether the force majeure clause provides for such waiver in the given circumstances. However, this also means that the tenant would have to surrender the premises as the contract is then considered to have become void once Section 32 is invoked. In case the tenant is not willing to part with the possession of the premises then the tenant cannot claim reliance upon Section 32 to forego payment of rent as the contract then continues to subsist.
Concerning the application of Section 56 of the Indian Contract Act (Agreement to perform an impossible act), the High Court relied on several landmark cases, including the case of Hotel Leela Venture Ltd. v. Airports Authority of India[11], and reiterated the judicial position that Section 56 would not apply to lease agreements because lease agreements are contracts that have already crossed the stage of execution and thus invoking the doctrine of frustration of contract under Section 56 is not possible as there is no pending action to be performed by either party once the lease deed is signed.
The High Court also assessed whether the tenant is entitled to any relief under section 108 B(e) of the Transfer of Property Act and held that there could be no such relief granted as long as the rented premises continue to exist without any damage or destruction.
The Delhi High Court in its judgment has mentioned that there exist different types of lease agreements and these need to be dealt with on a case-to-case basis. The types of the tenancy and lease agreement enlisted in the judgment are as follows:
“ (i) Oral tenancies with a month to month payment of rent;
(ii) Short term tenancy agreements with a monthly rent payable;
(iii) Long term leases with force majeure clauses;
(iv) Lease agreements which are structured as revenue sharing agreements and;
(v) Lease agreements which are like monthly payments as a percentage of the sales turnover.”[12]
Since the observations made by the Delhi High Court, in this case, are highly fact-specific as illustrated, it may not be appropriate to uphold this position as the final word on the issue, especially when there exist different types of agreements as noted by the Court. Oral tenancy agreements and agreements that contemplate monthly lease are more common in smaller commercial spaces and the difficulties arising in such agreements are best left to the wisdom of the contracting parties so that they can be resolved in a shorter period. The current crisis may also provide an opportunity for oral agreements to be formalized in a written form to avoid such ambiguities from sabotaging the relationship between the parties in case of a similar crisis in the future.
In the case of revenue sharing lease agreements, which have gained popularity in the commercial leasing space owing to the recent slowdowns in the Real Estate sector[13], there may be a need to negotiate on the minimum rent guarantee if the parties have agreed to such terms. Negotiations may also take place on lines of increasing the revenue sharing rate for a future period in exchange for relaxation in payment at present to toil over the current setback.[14] This model of leasing is now being considered as alternatives to the conventional model of lease agreements in the wake of the crisis, as these agreements provide for more equitable sharing of risks[15]
CONCLUSION
The COVID crisis has brought about a low for all sectors of the economy and people across the country. When it comes to payment of lease rent, as examined in this article, there seems to be no equitable balance that can be brought about in the interest of the tenants and landlords if one continues to stick to the position of the existing judicial precedents.
The tenants may not have a strong ground to forgo payment of rent if there is no force majeure clause in the lease agreement that covers the situation of a pandemic in its scope. We may see stark differences in different types of tenancy agreements on this point, for instance, if we compare a commercial lease agreement like that of large cinema houses in which the tenant has some leeway to escape rent liability for the period of the lockdown owing to the presence of a force majeure clause[16], to an oral lease agreement for commercial purpose, we will realize that there cannot be a uniform approach in all cases.
Hence, if parties to a lease agreement choose to settle the issue of payment of rent based on mutual compromise and understanding, it can bring about the most time-saving and efficacious solution as opposed to letting the issue snowball into a legal dispute. In cases where the parties have existing complications concerning the tenancy and these have further been aggravated owing to the crisis, mediation can provide an effective remedy. Arbitration may also be taken up in cases where the monetary rental commitments involve a larger sum of consideration and other complexities, depending on the financial standing of the parties, as long as there is no dispute to title or possession of the property.
While the matter continues to be between the parties to settle, one may consider the waiver of late payment charges, ensuring payment of an adequate sum for the discharge of maintenance charges, and adjustment of dues against the security deposit. Beyond these possible adjustments, the problem of parties taking advantage of the situation to avoid the discharge of dues, prolonging the period of stay beyond the agreed dates, and landlords using the situation for eviction of tenants can also cause simple disagreements to escalate into disputes. What remains to watch in the larger context is how the Judiciary addressed the crisis and whether the crisis causes it to bend toward equity to bring about a more balanced stance to suit the situation. On the other hand, while the government distances itself from regulating private contractual relations, some relief in the collection of property taxes can be introduced to incentivize the landlord to seek amicable terms of settlement with the tenants. However, it may be noted such reduction of property tax is likely to be of aid only for those owning small commercial spaces while larger offices and malls may not have much to gain as their rental burdens are much more than their statutory outgoings in the form of taxes and cess. Whatever is the means adopted by parties or the state machinery, the end goal of restoring an individual’s economic well-being, as well as, that of the country needs to take precedence over the escalation of disputes.
[1] Ramanand and Others v. Dr. Girish Soni. And Another R.C Rev. 447/2017 decided on May 21, 2020.
[2] Transfer of Property Act 1882.
[3] Transfer of Property Act 1882.
[4] Transfer of Property Act 1882, Sec. 108.
[5] Transfer of Property Act 1882, Sec 108B (e).
[6] Thomas v. Moram Mar Baselious Ougen I, Catholics Metropolitan AIR 1979 Ker 156.
[7] PTI, SC Dismisses Plea Seeking Compliance of MHA's Order on Rent During Lockdown, EtRealty (Sep. 2020, 06, 09:18 PM), https://realty.economictimes.indiatimes.com/news/regulatory/sc-dismisses-plea-seeking-compliance-of-mhas-order-on-rent-during-lockdown/75567736.
[8] Ramanand v. Girish Soni R.C Rev. 447/2017 decided on May 21, 2020.
[9] Vasanth Rajasekaran and Shweta Vashist, Force Majeure, Lockdown & Lease Rent: Delhi High Court Provides Clarity, Mondaq (Sep. 2020, 29, 03:00 PM), https://www.mondaq.com/india/litigation-contracts-and-force-majeure/942966/force-majeure-lockdown-lease-rent-delhi-high-court-provides-clarity.
[10] Energy Watchdog v. CERC 2017 (14) SCC 80.
[11] Hotel Leela v. enture Ltd. v. Airports Authority of India 2016 (160) DRJ 186.
[12] Ramanand v. Dr. Girish Soni, R.C Rev. 447/2017 decided on May 21, 2020., ¶11.
[13] Shuchi Bansal and Suneera Tandon, Tenants Continue to Spar With Malls Over Rental Agreements, Livemint, (Sep. 2020, 10, 09:48 PM), https://www.livemint.com/industry/retail/tenants-continue-to-spar-with-malls-over-rental-agreements-11591805693114.html.
[14] BusinessToday.in, DLF to Waive up to 100% of Base Rent for Tenants amid Coronavirus Crisis, Business Today, (sep. 2020, 11, 07:23 pm), https://www.businesstoday.in/current/corporate/dlf-to-waive-up-to-100-of-base-rent-for-tenants-amid-coronavirus-crisis/story/406913.html.
[15] supra note 15.
[16] Coronavirus Updates: ICICI Bank, PVR, NRAI Seek Rent Waiver from Landlords , Business Today, (Oct. 2020, 17, 05:45 PM), https://www.businesstoday.in/sectors/banks/coronavirus-updates-icici-bank-seeks-rent-waiver-from-landlords/story/401259.html.