Force Majeure and “Covid-19” – Its Impact on Commercial Property Rental Agreements

Aditya Pratap is a lawyer in the Bombay High Court. He can be reached at aditya@adityapratap.com.

“Force Majeure” or “Act of God” is a clause that is incorporated in almost every contract. It implies any unforeseen event or circumstances, beyond the control of man, that renders the performance of any contract impossible. Examples of ‘force majeure’ events could be war, civil strife, natural disasters or governmental actions that frustrate the contract and render it impossible to perform by either party.

Commercial property rental agreements, for offices and restaurants, do contain such ‘force majeure’ clauses. Restaurant and retail businesses, which pay the highest rentals, tend to incorporate force majeure clauses in their contracts which would suspend rent payment should any force majeure event occur. Interpreting such clauses assumes importance in the context of Covid-19, which has led to lockdowns and shut-downs across India.

Covid-19 in India – Closure of Commercial and Office Premises

The onset of SARS Covid-19 pandemic in India has spooked Central and State Governments into ordering a 21-day country-wide lockdown starting 25th March 2020. Invoking Section 144 of the Code of Criminal Procedure, 1973, orders have been issued directing closures of restaurants, offices, and all retail establishments barring pharmacies, groceries and other essential services. As a consequence, while business has come to a halt, the outflow of rentals may continue, causing losses in the process.

With the closures of restaurants and retail establishments, a major question arises – how to pay the rent? If the force majeure clause of the rental agreement contains a force majeure clause, then the tenant is likely to invoke it and suspend the rent payment. In such circumstances, the landlord is faced with a dire situation – either forgo the rent or deduct it from the security deposit.

Arguments of the Tenant – Suspend the Monthly Rentals

Worried about rentals in the absence of revenue, restaurant and retail tenants can argue that SARS Covid-19 is a ‘force majeure’ event. They can rely upon Section 56 of the Indian Contract Act, 1872, which states that a contract to perform an impossible act is void. They may rely upon Section 56 to argue that closure and lockdown notices under Section 144 Cr.P.C. has rendered business operations impossible to perform, thereby amounting to ‘Force Majeure‘.

Arguments of the Landlord- Continue Rent Payment:

On the other hand, the principal concern of every landlord is the timely and continuous payment of rent. Therefore he may argue that Section 144 notices are temporary in nature and do not affect long-term continuity of the restaurant or retail business. Further landlords may try to argue that restaurants can resort to alternatives such as ‘food delivery’ or ‘takeaways’ should the lockdown persist.

By relying on such arguments, Landlords may even try deducting rent from the security deposit, should the lockdown persist. They can also argue that it is the duty of every business to save for the rainy day. Further, so long as the restaurant continues to occupy the premises with their furniture, kitchen equipment and stock-in-trade, the premises continues to be ‘in use’, thereby meriting continued rent payments.

Section 56 of the Indian Contract Act, 1872 – Doctrine of Frustration of Contract:

Section 56 of the Indian Contract Act, 1872 states that an agreement to perform an impossible act is void. Further, if an act becomes impossible to perform at a later date after the contract has been executed, then also it will be hit by Section 56 and become void.

In the case of a ‘Leave and License’ contract of a restaurant or retail business affected by the lockdown, the Tenant can always resort to Section 56 and argue that since the business has stopped on account of lockdown, he need not pay any rent till it lasts. He can further argue that SARS Covid-19 is a force majeure event that is beyond the control of any party and hence, the consequential lockdown is a valid ground to temporarily suspend the agreement.

Judicial Verdict – Doctrine of Frustration does not Apply to Leases of Land:

In the case of Dhruv Dev Chand vs. Harmohinder Singh and Others, AIR 1968 SC 1024, the Hon’ble Supreme Court held that the Doctrine of Frustration under Section 56 of the Indian Contract Act would not apply to leases of land. It, however, held that if the leased property is destroyed by fire, tempest, flood or violence, then the tenant has the option to declare the agreement void or non-performable under Section 108 of the Transfer of Property Act, 1882. This does not happen in cases of plague and the lockdown restrictions are of a temporary character which does not affect the long-term usefulness of the property.

Therefore, in cases of Covid-19 lockdown, commercial tenants may cite the doctrine of frustration under Section 56 and seek remission in rent payable during the lockdown period. However, landlords may rely upon the Supreme Court ruling to claim that since the Doctrine of Frustration of Contract does not apply to leases of property, it would not apply to leave and license agreements also, which form the basis of most commercial rental contracts.

The Distinction between Lease and Leave and Licenses:

However, the law may take a different stand when a ‘leave and license’ contract is involved. It is important to note the distinction between ‘lease’ and ‘leave and license’. In ‘leave and license’ transaction, the possession of the property remains with the owner (or licensor) while the tenant (licensee) has limited permission to enter and use the property for a specific purpose (restaurant or shop). If the restaurant business is unable to function on account of lockdown, the tenant may claim remission or waiver of rents so long the situation persists.

A Likely Spike in Arbitration Cases – Landlord-Tenant Disputes

Leave and License Agreements do contain arbitration clauses to resolve landlord-tenant disputes. Such arbitration clauses can resort to the ‘fast track procedure’ contained in Section 29B of the Arbitration and Conciliation Act, 1996. Under the fast track procedure, the arbitral tribunal appointed by the parties can conduct the proceedings in a quick and summary manner and pass the arbitral award (or judgment) within six months.

Thus, in order to resolve any disputes over rent payment and security deposit, which are likely to arise on account of the SARS Covid-19 lockdown, landlords and tenants can resolve to ‘fast track arbitration’ under Section 29A of the Arbitration and Conciliation Act, 1996. This will ensure efficacious dispute resolution within six months with limited costs and fees incurred.

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Advocate Aditya Pratap
About Advocate Aditya Pratap 60 Articles
Aditya Pratap is a lawyer practising in Mumbai. He argues cases in the Bombay High Court, Sessions and Magistrate Courts, along with appearances before RERA, NCLT and the Family Court. For further information one may visit his website adityapratap.in or view his YouTube Channel to see his interviews. Questions can be emailed to him at aditya@adityapratap.com.