The COVID-19 outbreak and the resultant nationwide lockdown have severely impacted performance of obligations, whether contractual or otherwise, across the country. Most entities/individuals are exploring the option of pleading frustration of contract1 or invoking force majeure2 clauses to suspend or obtain a relaxation on their contractual obligations. In this post, we examine the recent decision in Ramanand & Ors. v. Dr. Girish Soni & Anr.,3 where the Delhi High Court rejected an application for waiver or suspension of rent on account of the lockdown.
The Appellants/Tenants sought suspension of rent during the lockdown period. The application was taken out in a review petition filed by the Appellants/Tenants challenging a decree of eviction passed by the Rent Controller, in respect of a property, which was given on rent to the Appellants/Tenants for commercial purposes. An interim order was passed in the revision petition, whereby the Delhi High Court stayed the eviction decree on the condition that the Appellants/Tenants would pay a sum of INR 3.5 lakhs as monthly rent to the Respondents/Landlords. Subsequently, in view of the lockdown, the Appellants/Tenants sought waiver of the monthly rent or at least suspension, postponement, or part payment of the rent. The Appellants/Tenants pleaded that the lockdown is a force majeure event, which was beyond their control and had led to complete disruption of their business.
At the outset, the Court held that the relationship between a landlord and tenant, a lessor and lessee and a licensor and licensee is governed by the terms of their respective contracts and the question of a waiver, suspension or any remission in rental payments would depend on the terms and conditions stipulated in each contract.
Section 32 of the Indian Contract Act, 1872 ("Contract Act") - Force Majeure
The Court held that waiver or non-payment of monthly rent under contracts, which have a force majeure clause would be governed by Section 32 of the Contract Act.4
Relying on the definition of 'force majeure' as given in Black's Law Dictionary5 and the decision of the Supreme Court in Energy Watchdog v. CERC & Ors.,6 the Court held that a tenant can claim some sort of a waiver or suspension of rent only if the contract contains a clause to this effect. It held that a force majeure clause in a contract could also be a contingency under Section 32 of the Contract Act, which may allow the tenant to claim that the contract has become void and surrender the premises. However, the Court held that if the tenant wishes to retain the premises and there is no clause giving any respite to the tenant, the rent or the monthly charges would necessarily be payable.
Section 56 of the Contract Act - Frustration of Contract
The Court examined cases where there is no force majeure clause or remission clause in the contract and the tenant attempts to invoke the doctrine of frustration of contract or 'impossibility of performance'. The doctrine of 'impossibility of performance' is codified in Section 56 of the Contract Act, which inter alia provides that a contract to do an act, which becomes impossible after the contract is made, becomes void when the act becomes impossible.
The Court referred to a decision of the Supreme Court in Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr.,7 wherein the Supreme Court inter alia held that Section 56 of the Contract Act applies only to executory contracts and not completed conveyances or transfers. The Delhi High Court relied on this judgment for the proposition that a lease is a completed conveyance though it involves monthly payment and hence Section 56 of the Contract Act cannot be invoked to claim waiver, suspension or exemption from payment of rent.8
The Court also referred to its earlier decision in Hotel Leela Venture Ltd. v. Airports Authority of India,9 wherein, relying on Raja Dhruv Dev Chand (supra), it held that neither the doctrine of frustration nor the broad principles thereof apply to a lease, as only executory contracts are capable of being frustrated, not executed contracts.
Relying on the aforesaid decisions, the Delhi High Court reiterated that Section 56 of the Contract Act does not apply to a lease agreement and other similarly situated contracts, which are 'executed contracts' and not 'executory contracts'.
Provisions of the Transfer of Property Act, 1882 ("TPA") relevant to lessor-lessee relationships
The Court examined Section 108 of the TPA which sets out the rights and liabilities of a lessor and a lessee in the absence of a contract.10 Relying on some decisions of the Supreme Court11 wherein the aforesaid section was interpreted, the Delhi High Court held that temporary non-use of premises due to the lockdown cannot be construed as rendering the lease void under Section 108(B)(e) of the TPA, and therefore the tenant cannot avoid payment of rent in view of Section 108(B)(l) of the TPA.
Suspension of rent
The Court also considered whether suspension of rent due to temporary non-use of the premises could be granted by invoking the equitable jurisdiction of the Court. It held that this question would depend on the facts and circumstances of each case.12 The Court held that where the premises were occupied and a monthly pre-determined amount was to be paid purely as rent or lease amount, the manner in which pandemics such as COVID-19 are likely to affect such an arrangement, would depend on the nature of the contract.
In the present case, the Court observed that neither Sections 32 and 56 of the Contract Act nor Section 108(B)(e) of the TPA were applicable. In order to determine whether the suspension sought could be granted, the Court considered various factors such as the nature of the property, financial and social status of the parties involved, the monthly rent fixed by the court, absence of contractual conditions that permitted non-payment or suspension of rent and absence of any executive orders protecting the Appellant/Tenant. After assessing the aforesaid factors and keeping in mind that reasonable compensation ought to be provided to make up for the loss caused to the landlord due to delay in execution of the eviction decree, the Court rejected the application for suspension of rent. The Court also noted that though the tenant sought suspension of rent on the basis of a force majeure event, the tenant did not intend to surrender the premises. However, the Court did provide some relaxation in the schedule of payment, on account of the lockdown.
Following the COVID-19 outbreak, tenants all over the world are struggling to negotiate with their landlords for suspension or waiver of rent. Due to loss of business and employment, tenants are facing severe hardship in paying rent. The Singapore Government is encouraging landlords to be lenient with tenants who are unable to pay rent by ordering a remission of property tax.13 In India, various state governments such as Maharashtra, Delhi and Karnataka have also sought to protect the interests of tenants. On the other hand, the Supreme Court refused to entertain a petition, which sought exemption to advocates from payment of rent for their offices/chambers during lockdown and accordingly the said petition was withdrawn by the petitioners therein.14
The grant of suspension/waiver of rent in case of leased property will depend upon the terms of the contract between the parties. If there is no contract, the relevant provisions of the TPA will be applicable and the conditions thereunder will have to be satisfied. The relevant provisions of the TPA are useful only if the lease is sought to be voided, and the TPA does not contemplate suspension of rent in such a situation. In the absence of appropriate, protective and enforceable legislation, executive orders, or contractual terms, parties may seek to invoke the equitable jurisdiction of the court, but this will be subject to satisfaction of various factors, including those taken into account by the Delhi High Court in the present case. This decision by the Delhi High Court is welcome insofar as it provides clarity in respect of a burning issue across the country. Tenants/lessees would be well-advised to examine their contracts and ascertain whether they are entitled to seek waiver of or suspension on payment of rent. If not, negotiations with the landlord are likely to produce relatively desirable results rather than approaching the courts.
1 For an analysis of the concept of frustration of contract, please see https://corporate.cyrilamarchandblogs.com/2020/04/frustration-of-contract-in-the-time-of-sars-cov-2/.
2. For an analysis of the concept of force majeure, please see https://corporate.cyrilamarchandblogs.com/2020/04/force-majeure-in-the-times-of-covid-19/.
3. Order dated May 21, 2020 passed in RC. REV. 447/2017
4. Section 32 of the Contract Act provides for enforcement of contracts contingent on the happening of an event and if such an event becomes impossible, then the contract becomes void.
5. An event or effect that can be neither anticipated nor controlled. The term includes both acts of nature (e.g. floods and hurricanes) and acts of people (e.g. riots, strikes and wars)
6. (2017) 14 SCC 80
7. AIR 1968 SC 1024
8. T. Lakshmipath and Ors. v. P. Nithyananda Reddy and Ors. (2003) 5 SCC 150; and Energy Watchdog v. CERC & Ors. (2017) 14 SCC 80
9. 2016 (160) DRJ 186
10. Section 108 (B)(l) provides that a lessee is bound to pay the premium or rent to the lessor. Section 108(B)(e) provides that the lease shall be void, at the option of the lessee, if any material part of the property is wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let due to fire, tempest, flood, violence of an army or mob, or other irresistible force.
11. Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr. AIR 1968 SC 1024; T. Lakshmipath and Ors. v. P. Nithyananda Reddy and Ors. (2003) 5 SCC 150; and Shaha Ratansi Khimji & Sons v. Kumbhar Sons Hotel Pvt. Ltd. & Ors. (2014) 14 SCC 1
12. Surendra Nath Bibran v. Stephen Court AIR 1966 SC 1361
13. Refer to The COVID-19 (Temporary Measures) Act, 2020
14. Order dated April 30, 2020 passed in Writ Petition (Civil) Diary No. 11055/2020 (Aljo K. Joseph v. Union of India & Anr.); See also https://www.barandbench.com/news/litigation/lawyers-are-not-entitled-to-any-special-consideration-to-be-entitled-for-rental-exemption-during-lockdown-sc
Originally published June 5, 2020 .
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.