November 24, 2020

COVID-19, Force Majeure And Lease Agreements

Introduction

Force Majeure in the general sense of the term means something superior or irresistible. A force majeure clause excuses one or both parties from their obligations to perform the conditions under the contract. The clause is generally drafted in such a manner that in the event of a situation that can be viewed as a force majeure, the parties’ obligation stands suspended. The typical force majeure scenarios include fire, flood, terrorist attack, government order, etc. which are beyond the parties’ control.

With the outbreak of the COVID-19 pandemic, the lockdown imposed by the government worldwide has had a significant impact on the economy and the daily functioning of commercial players. This paper attempts to explain the application of force majeure clauses in the light of the COVID-19 outbreak in a commercial lease or rental agreement in India.

Application: Force Majeure and Lease Deeds

It is a settled position of law that the Doctrine of frustration, which is enshrined under section 56 of the Indian Contract Act, 1872 [hereinafter, ICA], is not applicable to lease deeds. Such agreements are covered under section 108(B)(e) of the Transfer of Property Act, 1882 [hereinafter, TPA]. This section is special legislation that governs the transfer of property by sale, lease, mortgage, etc. and prevails over the general clause of frustration under ICA[1]. However, where an agreement to lease is executed, which is neither registered nor acted upon, Doctrine of frustration may apply[2].

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The seminal case of Raja Dhruv Dev Chand v. Harmohinder Singh & Anr[3]observed that the Doctrine of frustration is not applicable to lease deeds and does not affect the parties’ rights and obligations under the agreement. It was further clarified that parties may instead resort to section 108 of the TPA. The Supreme Court later in Sushila Devi v. Hari Singh[4], reaffirmed this position of law and stressed the difference between a lease deed and an ‘executory contract’. It observed that the law of frustration only applies to an agreement to lease and not lease deeds.

Though the principle of force majeure under section 56 of the ICA, 1872 is inapplicable to lease deeds, this does not prevent the parties to agree to certain protections enshrined under the TPA against force majeure events. TPA under section 108(B)(e) recognizes that in the event of a fire, flood, violence of an army or a mob or other irresistible force, any material part of the property is destroyed or rendered unfit for the purpose for which it was let, the lease shall be void, at the option of the lessee.

Section 108(B)(e) of the Transfer of Property Act, 1882 lays down the following criteria that must be satisfied: (i) existence of an ‘irresistible force’; (ii) the property becomes substantially and permanently unfit for which it was let and (iii) the lessor must be informed of lessee’s decision to render the lease deed void. These conditions are a sine qua non to enforce section 108(B)(e) of the TPA. In this context, whether COVID-19 and the lockdown can be argued as an ‘irresistible force’ or not, becomes an important consideration as neither the TPA provides for its definition nor have the courts previously dealt with this issue.

Interpretation of COVID-19 As A Force Majeure Event

COVID-19 has been recognized to halt or interfere with the operations of various industries. One of the widely popular responses to combat the pandemic globally has been the call for lockdown. With the countrywide lockdown imposed by the Government of India on 24th March 2020, businesses lost access to their premises undertaken via lease deeds. This predicament brought discussions of force majeure clauses and their applicability to the fore. Considering the extraordinary circumstances created due to the pandemic and the responses to it, it is most likely to be construed as a force majeure event.

In the presence of a force majeure clause in the lease agreements, the invocation of such a clause would depend on the words used to describe or define a force majeure event. A force majeure clause is generally worded as follows[5]:

“In the event, either party is unable to perform its obligations under the terms of this agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes”.

These clauses are interpreted in their literal sense and thus the wording of such clauses becomes all the more important. If the parties have specifically included the word epidemic/pandemic in their clause, then the application of such a clause becomes easier. Typically, these clauses include act of God and natural calamities but may not provide for epidemic/pandemics. In such a situation, the words have to be carefully analysed as to whether such a clause can be invoked or not.

There remains another moot point, as to whether words like ‘causes reasonably beyond the party’s control’ would include the situation as we are facing now. It could be argued that on account of a lockdown, a party can’t honour the terms of the contract. Whether such contractual obligations can be avoided on the grounds of force majeure is a factual determination based on specific terms laid down in the contract. The courts would examine the question of whether the impact of the Covid-19 pandemic prevented the party from performing their contractual obligations on a case-to-case basis.

This means that unless the clause is unambiguous and clear in its wording, the lease agreement would continue to exist. If there is any specific clause in the agreement which says that the rights and obligations of the parties shall remain suspended in the case of a force majeure event, which includes epidemic or pandemic, the lessee may invoke that clause to relieve itself of its obligations.

Cases where such a clause is either absent or inadequate in its ambit to cover this scenario, section 108(B)(e) of the TPA comes into play if criteria provided in the section are fulfilled. The first and foremost criterion is that there must be an irresistible force, which renders the property substantially or permanently unfit for the purpose for which it was let. Though the term irresistible force has not been defined, it can generally be understood as an event in which neither party had a role to play. In the event COVID-19 is considered as an ‘irresistible force’, we have to look at the fact that whether it has rendered the property substantially or permanently unfit for the purpose for which it was let.

The observations made in the case of Raja Dhruv Dev Chand v. Harmohinder Singh & Anr.[6]comes to aid again as it held that where the property leased is not destroyed or substantially or permanently unfit, the lessee cannot avoid the lease as he cannot use the land for the purposes for which it was let. Merely because the tenanted structure has been destroyed, the lease cannot be said to have come to an end and the relationship of the lessor and the lessee continues to exist[7]. Financial difficulty to pay the rent is also not within the meaning of a force majeure.

If the lessee wishes to render the lease deed void, he must inform the lessor to give effect to section 108(B)(e) of the TPA. If the lessee fails to give notice under this section, then the lease is deemed to be unaffected despite having met the first two conditions. This was one of the observations made in the case of Hind Rubber Industries (P) Ltd. v. Tayebhai Mohammedbhai Bagasawalla[8]. However, the lessee can avail the benefit of section 108(B)(e) only if the lease is duly registered under the Registration Act, 1908.

Another obstacle in the invocation of such a section would be the rule of interpretation, ejusdem generis. The pandemic has not made the property substantially or permanently unfit for the purpose for which it was let or has destroyed the property but has restricted the access to the property. On the application of ejusdem generis, it becomes difficult to bring COVID-19 under the purview of section 108(B)(e) as neither it has destroyed the property nor made the property substantially or permanently unfit for the purpose for which it was leased.

Impact of Covid-19 On Future Agreements

Though there have been numerous pandemics that have struck the world causing millions of deaths, COVID-19 is a unique one since it led to an imposition of a worldwide lockdown. Countries around the world have imposed travel bans, lockdowns and extremely restricted human movement. Domestic and International trade has come to a standstill and the supply chains for domestic markets suffered the crippling effect.

Since the evolution of the law on transfer of property, there have been very few instances where an epidemic or a pandemic have rendered the properties unfit for commercial use and in a capitalistic society, such situations lead to increase in litigation. To avoid a legal battle, the parties must ensure that the line of communication is always open.

Communication between the lessee and the lessor becomes of paramount importance in such scenarios. In such difficult times, parties must come to a mutual understanding and negotiate their rights and obligations under the deed. A unilateral decision on either side of the deed would cause trouble for both the parties. While the lessees must in their communication show to the lessor the effects of the pandemic, the lessor should be mindful when considering such a request and analyse the situation practically, to avoid any dispute. Lessees may request rent waivers for the period of a lockdown or a change in the rental amount for the financial year. This has been observed as a standard practice taken by businesses across the country.

While it is evident that COVID-19 has been a major blow for the markets worldwide, it stresses on the need to revamp the agreements between the parties. Future contracts and lease deeds are likely to include a force majeure clause where the term pandemic/epidemic is expressly included while being cautious of any other situation that may be outside the scope of the terms already included in the agreement.

References

[1]Airports Authority of India v. Hotel Leelaventure Ltd., 2016 SCC OnLine Del 3882 : (2016) 231 DLT 457 : (2016) 159 DRJ 544

[2]Sushila Devi v. Hari Singh, AIR 1971 SC 1756

[3]AIR 1968 1024, 1968 SCR (3) 339

[4] AIR 1971 SC 1756

[5] Lawinsider.com, Force Majeure Sample Clauses. [Accessed 30 April 2020]

[6]AIR 1968 1024, 1968 SCR (3) 339

[7]Shankar Prasad and Ors. v. State of M.P. and Ors., ILR[2013] MP 2146; Amalgamated Bean Coffee Trading Company v. Surjit Singh Jolly, 2017 SCC OnLine Del 8032; Chamber of Colours and Chemicals Pvt. Ltd. v. Trilok Chand, (1973) DLT 510

[8]AIR 1996 Bom.


Author Details: Rupam Das and Shrey Aggarwal are students at Jindal Global Law School.

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