India: Drafting Rental Agreements For The Retail Sector

The outbreak of COVID-19 has impacted almost all the sectors of the Indian economy, including the retail segment. While businesses have come to a standstill, retailers are struggling to find a way out from the losses that are now multiplying at a fast pace. Rent is also one of the pivotal aspects that is bothering the retailers nowadays.

As social distancing becomes the new norm, retailers of all sizes are facing the wrath of decreased demand, supply-chain disruptions, payment of rent, and even mandatory closures. Here are some of the common issues plaguing the retail industry in the times of distress and some legal aspects to be remembered while renegotiating lease agreements.

To apprise, a commercial lease agreement is a formal document executed between a landlord and a tenant to rent business property, which is governed by the rent control legislation of a particular State. The agreement allows both parties to formalise the lease and their relationship through a legally-recognised document.

A commercial lease agreement assumes that the property is being used for business purposes. The property can be used for an office, building, independent retail stores, and stores in a shopping complex or malls. Typically, the offline retail sector relies on the commercial lease model that works well for brands and developers.

Impact of COVID-19 on Indian retail businesses

The outbreak of COVID-19 pandemic and the resultant lockdown have significantly affected the retail business. Not only the employees working in the sector, but the business owners are also severally hit by the catastrophe. Most stores, except for the ones dealing in the essential goods have been shut across the country.

The retail stores delivering essential goods are also not left out as they too were not allowed to sell any non-essential items/goods, which normally have higher profit margins. These factors, including the shift of the masses towards online retail avenues, are leading to a cash crunch amongst the retailers, thus making it extremely difficult to pay the rent to the shop owners/landlord.

The fate of the landlords/mall owners is no better, considering their loan repayment obligations. However, the landlord's reluctance on the invocation of Force Majeure clause by the tenants can be justified in certain cases, where the premises have been kept operational by running servers. These ensure that the employees are efficiently working from home.

Important cases that offer a legal overview

Recently, the Delhi High Court, in the case of Ramanand and Ors. vs Dr GirishSoni and Anr. (Rent Control Revision Petition No. 447/2017), inter alia, held that mere temporary inability to access and use the premises cannot give the rights to the tenant to suspend payment obligations unless the contract provides for the same.

This judgment relied on the Supreme Court judgment in Energy Watchdog vs CERC (2017) 14SCC 80, where the Supreme Court for the tenancy contracts held that if the contract contains a clause providing for some sought of waiver or suspension of rent, only then the tenant could claim them.

In this case, the Supreme Court had explained the difference between Section 32 of the Indian Contract Act, 1872 and Section 56 of the Indian Contract Act, 1872. The Court held that in case the contract itself contains an express or implied term relating to a Force Majeure condition, the same shall be governed by Section 32 and not Section 56 of the Indian Contract Act, 1872.

These ratios of our Courts highlight the fact that unless the contract between the landlord and the tenants are clear in respect of suspension or waiver of rent for a certain period, the tenants will not get a reprieve from the courts as a matter of asking. The judiciary also considers other circumstances and factors to determine whether the tenants are entitled to any relief of suspension of rent, which includes the nature of the property, financial status of the parties, amount of rent, and contractual obligations.

Legal aspects to consider while renegotiating agreements

Considering the country-wide situation and no relief from the government on the waiver of any part of the rent, the retailers have already started looking at the option of rent negotiation, size negotiations, and consolidation of office spaces with their landlords.

It has become very important for both the landlords and the tenants to survive in the industry amid such trying times. Moreover, it is important to negotiate and walk the lane together as the aftermath of this lockdown will also have a grim impact on the business.

In such a situation, the lease agreements are required to be revived, relooked and redraftedvery carefully. The importance needs to be given to the nature of the business that will be conducted in the premises for deciding the commercials. Also, one should carefully access whether the rental model will be a full lease (which includes operating expenses, taxes, insurance), net lease (operating expense are excluded in the rental rate) or a percentage lease (base rent plus a monthly percentage of the gross revenue).

The parties, while redrafting their lease agreements, can agree for a revenue-sharing rent model, which will enable the retailers to dispense with the age-old practice of fixed or minimum guaranteed rentals.

Apart from the commercials that may be negotiated between the parties to the agreement, it is important to seek professional intervention to draft the agreements for safeguarding the interest of the parties. During the lockdown period, several retailers have considered it appropriate to file an application for suspension of rent. They can seek such suspension in the wake of the fact that the pandemic is a Force Majeure event. However, the materiality of the Force Majeure clause depends on the interpretation and construction of respective terms and clauses.

Few retail giants are over leveraging and using their power to negotiate with the landlords to escape from their lease obligations. In such a situation, the key to success will be communication, as termination of the lease would not prove to be the best way forward. Finding a new tenant during such times would be a herculean task, considering the shift to e-commerce.

The landlords will have to review their contracts, ensure that they understand their rights in these unusual times, opt for short-term arrangements by providing base rent abatement, and recoup the lost rentals when the economy rebounds.

Originally published by 99acres.

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.