Leases, Force Majeure and Frustration– The Way Forward
Bhavya Sriram Partner and Kripa Sankari R. Attorney with VB Legal, Advocates advise revisiting contracts and the law to avoid present legal tensions in future.
Force Majeure and its Applicability?
Force majeure events are those beyond the control of the parties to the contract, which typically free parties from fulfilling contractual obligations, when prevented by such an event. While commonly mistaken to mean an “act of God” the expression force majeure extends beyond natural calamities to labour unrest, lockdowns, governmental actions etc., which are of course man-made. While the lockdown scenario that the nation was under may certainly be brought under the broad concept, what is important to note here is that it is a creature of contract between parties. Therefore, to be available as a tool of relief to a contracting party, force majeure must be expressly provided for and appropriately defined in the contract.
Doctrine of Frustration
Generally, where contracts do not have force majeure clauses, parties rely on the doctrine of frustration set out under Section 56 of the Indian Contracts Act, 1872 (“ICA”). Simply put, a contract to do an act which becomes impossible becomes void. However, on examination by courts, the question of applicability of the Contracts Act was answered in the negative since the Transfer of Property Act, 1882 (“TP Act”), being a special statute, would supersede the ICA in application to lease agreements.
The Apex Court has dealt with this matter in the case of Dhruv Dev Chand vs. Harmohinder Sing [AIR 1986 SC 1024] and later in Sushila Devi vs. Hari Singh [1971 AIR 1756]. The Supreme Court clarified that once a valid lease comes into existence it becomes a completed conveyance under which the lessee gets an interest in the property. There is a clear distinction between a completed conveyance and an executory contract. Events which discharge a contract do not invalidate a concluded transfer and therefore the said doctrine of frustration will not apply to leases. Instead, Section 108(B)(e) of the TP Act comes into application, which has two fundamental conditions to be satisfied for a lease to become void, a) in the event of a fire, tempest or flood, or violence of an army or of a mob, or other irresistible force, and b) any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let.
Clearly, this lays down a very narrow premise, which in our opinion, a lockdown / pandemic does not satisfy. In light of the fact that both the doctrine of frustration under the ICA and Section 108 of the TP Act do not come to the aid of parties to a lease the absence of a well drafted force majeure clause in a lease agreement results in a gaping lacuna and leave parties with no option but to follow through with the terms of the lease or face litigation for default.
The Delhi High Court in the case of Ramanand & Ors. vs. Dr. Girish & Sons (CM Appl. 10847/2020, order dated 21st May 2020) cleared the air on the applicability of Section 56 of ICA, and Section 108(B)(e) of TP Act. As elucidated above, the court held that Section 56 of ICA will not apply to lease agreements, and further, the applicability of Section 108(B)(e) of the TP Act is subject to the lease premises being substantially and permanently unfit for leasing. Notably however, the court also observed that in the absence of a contractual stipulation, the tenant may generally seek suspension of rent by invoking the equitable jurisdiction of the court due to temporary non-use of the premises.
Measures by State Governments:
In Telangana and Maharashtra, the State Government had issued orders (under the Disaster Management Act, 2005) directing landlords to defer rent collection for a period of at least three months in the wake of the Covid-19 crisis. The orders specifically direct landlords to not evict tenants due to non-payment of timely rent. This shifting of burden cannot be taken lightly, and it would certainly have taken a toll on affected landlords.
Even if offices, stores, restaurants are closed and have no footfall, the lessees are still very much using the leased premises to store their furniture, equipment, computer servers and the such. Seeking a waiver on grounds of non-usage of premises is therefore not viable. While landlords may have had the upper hand here, the best strategy was for parties to take a pragmatic, cautious approach taking into account practical exigencies to avoid unnecessary disputes. For instance, some parties opted for deferred payment of rent as a middle path that gave relief to lessees, while ensuring realization of rent eventually. After all, dealing with an existing lessee may be an easier task than to scout for a new tenant in the present climate.
Looking Ahead: Revisiting Contracts and the Law
Whether favouring the lessee or the lessor, it is important that there be contractual clarity going forward so parties can be prepared either way. Many lessors may now insist on a carve out from force majeure clauses, obligating timely rent payment even in the event of a pandemic or lockdown, while on the other hand it would in the best interest of lessees to seek relaxations from contractual obligations in such an event. Furthermore, pandemic insurance cover may also become a standard policy taken by commercial lessors and lessees moving forward.
Coming back to the present, many existing lease arrangements either have no force majeure provision, or do not specifically address the present situation. The only option for the parties is to rely on the remedies provided under law, both legislative and judicial. While it may seem reactionary in nature, the ripple effects of this pandemic’s spread had to be experienced to be known. Now, one cannot unring this bell, and it is time for the legislature to step in with suitable measures.