Commercial Lease : To Execute or Not to Execute – A Case for A Re – Look?
Of late, the issue of whether a lessee can seek exemption from payment of rent in a commercial tenancy in the wake of COVID-19 pandemic has gained some steam. Multiple litigations have been filed by lessees in various High Courts across the country in this regard. However, all Courts have denied this exemption to the lessees majorly on 2 grounds - (a) the lease deed is silent on the issue...
Of late, the issue of whether a lessee can seek exemption from payment of rent in a commercial tenancy in the wake of COVID-19 pandemic has gained some steam. Multiple litigations have been filed by lessees in various High Courts across the country in this regard. However, all Courts have denied this exemption to the lessees majorly on 2 grounds - (a) the lease deed is silent on the issue of exemption in the event of occurrence of any pandemic and hence Section 32 of the Contract Act 1872 is inapplicable (b) and even the benefit of Section 56 can't inure in lessees' favour , as Section 56 is applicable only in cases of "executory contract", whereas lease deeds are "executed contract".
Without exception, almost all the orders pertaining to this dispute, relying upon a long standing line of Apex Court's judgments, emphasize upon two legal principles, and the authors truly believe in the soundness of these principles, namely,– (1) that Section 56 is applicable only in cases where there is no contract (lease deed) or where the contract is bereft of any force majeure clause; in case there is a force majeure clause, then that clause itself under the aegis of Section 32 will govern the dispute (2) that if the conditions stipulated are met, Section 56 can only discharge the parties from carrying out their obligations which are yet to performed and can't undo the obligations already carried out and executed and hence, Section 56 is only applicable in cases of "executory contract"
However, the authors most respectfully believe that in the burgeoning clamour with respect to this topic of exemption from payment of commercial rent, two very fundamental issues have not received the kind of attention they deserve, both by the court and the academia.
The 1st issue concerns with the labelling of all lease deeds as "executed contracts" by the Supreme Court, long back in the year 1968 in its decision in Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr. AIR 1968 SC 1024. This labeling by the Apex Court in the judgment has been done without much ratiocination. Since then this position has been re-iterated in various judgments of different courts and very recently by Delhi High Court in Ramanand & Ors. v. Dr. Girish Soni & Anr RC. REV. 447/2017 while rejecting a plea of exemption from payment of commercial rent made on the basis of Section 56.
The authors believe that labelling all kinds of lease agreements as executed contracts and rendering them ineligible for the provision's benefit may not be right. Broadly, there can be two types of lease agreements – (a) one, in which the entire consideration of rental payments is paid by the lessee at the start of the agreement for the entire span of the lease (b) other, in which, the consideration of rental payment is monthly or periodic. It is proposed by the authors that while it may be safe to declare the first kind of lease agreements as "executed contracts", the same can't be said with the equal conviction about the second kind of lease agreements.
To appreciate the difference between "executed contract" and "executory contract", reference has to be made to the underlying rights and liabilities of these contracts, at a jurisprudential plane. An "executed contract" is one in which all obligations have been performed and therefore the rights and liabilities inter-se stand discharged and extinguished. In this regard, one can imagine a "sale deed" or the first kind of lease deed as mentioned above because in both, consideration has been paid by one party and possession of the property has been handed over by the other, leaving no obligation to be performed and concluding the contract.
In stark contrast to this, the second kind of lease deed is as an arrangement under which, at regular intervals, arises, the lessee's obligation to pay the periodic rental charge and lessor's obligation to not violate the lessee's right of peaceful possession. To appreciate the point better, it can be easily said that if one party fails to perform his periodic obligation, then other party's right gets affected/prejudiced, for the simple reason the rights and liabilities inter-se herein are outstanding and yet not discharged or extinguished.
Furthermore, the Apex Court in its decision in Union of India v. Chaman Lal Loona & Co., 1957 SCR 1039 has defined "executory contract" to mean a contract wherein rights and duties are outstanding, and are yet to be performed fully for concluding the contract. It may also be mentioned that the Apex Court in another set of decisions, for example in State of Orissa v. Titaghur Paper Mills Co. Ltd., 1985 Supp SCC 280, has held that an "executory contract" is one which is does not create rights and duties in the demised property and cites "agreement to sell" to mean "executory contract" & "agreement of sale" to mean "executed contract". One can very well argue that there is an inherent contradiction in these 2 sets of judgments simply for the reason that if "executory contracts" are incapable of creating rights and duties then how can any of these rights and duties be outstanding and yet to be performed as rights and duties can wait for their execution only if they exist and are created in the first place.
Be that as it may, a legal liberalist would think that keeping this dichotomy aside, and simply going by the phraseology of Section 56, it can be argued if Section 56 applies when an obligatory act or promise is yet to performed, then the second kind of lease agreement can very well fit in it and the benefit of the same can be given to the lessees provided other requirements are met. Also, it would not matter then whether second kind of lease deed is "executory" or "executed" as long as it fits within the verbiage of Section 56.
Therefore, irrespective of the fact that whether one views the proposition from the point of view of a liberal lawyer or a conservative lawyer, the conclusion irresistibly inures in favour of applying Section 56 to the advantage of lessees of second kind of lease deeds. Thus, the long standing view of the Supreme Court that Section 56 will have no application in cases of Lease Agreements, clearly cannot be used a Straight Jacket or a uniform ormula for the reasons stated above.
The Second Issue, which the authors wish to highlight, is with the respect to the scope and ambit of Section 32 and Section 56 of the Indian Contract Act. Although, the same is well settled in light of the numerous judgments passed by the Supreme Court. However, it appears, there is still room for some specific observations to be made by the Apex Court.
The Supreme Court, in its decision in Satyabrata Ghose v Mugneeram Bangur & co (1954) S.C.R 310 and others has held that if there is a Force Majeure Clause in the contract, providing for discharge from obligations, then it would be governed by Section 32 and on the other hand if the contract does not have a Force Majeure Clause, then it would be governed by Section 56 of the Contract Act.
However a perusal of these judgments, makes it clear that the law as it stands today is unable to answer this question – in a case where the event/contingency on the occurrence of which exemption from obligation is being sought, is not provided for in the force majeure clause, then can it be said because there is a force majeure clause, Section 56 will not be applicable and because the force majeure clause itself does not mention the event/contingency at hand, Section 32 will also not inure in a tenant's favour? In other words, whether for refuting Section 56's application and the consequent benefit of exemption, existence of a general force majeure clause is sufficient or a specific force majeure clause in relation to the event/contingency at hand is necessary.
It can't be overemphasized that if existence of a general force majeure clause is deemed sufficient for rejection of Section 56's benefit of exemption, then that would surely vanquish the cause of justice as nobody should be made to suffer for not thinking or contemplating about a contingency/event at the time of contract formation for which there were no reasons or any occasion to imagine about and the example of contingency of COVID -19 pandemic is most apt in this regard.
To conclude, it would also be appropriate to remind ourselves of a basic principle governing Section 56, i.e. the word "impossible" used in the Section does not mean physical or literal impossibility alone. If the performance of the Act has become useless from the point of view of the object and purpose which the parties had in mind at the time of entering into the Contract, even then Section 56 can be invoked. More importantly, while the obligation of payment of rent itself has not become unlawful in terms of Section 56 so as to brook any exemption, but the very economic activity of sale and purchase which capacitates a commercial tenant (running a shop) to pay the rent, has been curbed by the sanction of the Government in declaration of the lockdown. Therefore, if not directly, then indirectly a case for application of Section 56 can be made out in favour of the tenants.
However, it must be pointed that a direct consequence of successful invocation of Section 56 would be status quo ante and that would mean the lessee will have to let go of the possession of the property, if he is not able to pay the rent. It is submitted that because the lessor himself would not be able to make use of his property anyway, such a harsh measure of evicting the lessee in these troubled times should be avoided by Courts in the interest of equity and substantive justice, keeping in mind the temporary nature of the Lockdown.
In the humble opinion of the authors, the issues highlighted above deserve some consideration and perhaps require modification of the law settled long ago by the Apex court and cemented by a catena of judgments thereafter. The authors sincerely believe that if not for the plight of commercial tenants in the wake of COVID-19 pandemic, then solely for the purpose of ensconcing the province of law, a rethink is most necessary