WHY COVID-19 Situation Has NO Implication On The Commercial Leases?

Being hit by the Lockdown Order several commercial establishments including individual retailers, retail chain-outlets, etc., operating from leased premises are approaching their respective Lessors claiming no liability to pay lease consideration/rental under their respective lease arrangements/deeds on the ground of the mandatory lockdown orders/directions issued by the governmental authorities being a 'Force Majeure' event. In view of above, the common question that lawyers are dealing with is whether such lessees are legally entitled to the benefit of Lock down Order and consequently claim no liability to pay lease consideration/rental under their respective leases till the operation of the Lock down Order?

Lock down Order a Force Majeure event for the Lessee?

Generally, all Commercial Leases and other Commercial Contracts contain events or circumstances "beyond the reasonable control of the parties" as part of a Force Majeure clause besides having an inclusive definition of Force Majeure events. The phrase "beyond the reasonable control of the parties" is quite wide in nature and ordinarily should cover the Lock down Order as a Force Majeure event. However, whether the Lock down Order will be a Force Majeure event or not in relation to a commercial contract, is a question of interpretation and is fact-specific/clause-specific. In view of the authors, due to the unprecedented nature of the COVID-19 outbreak, the consequent Lock down Order is very much likely to constitute a force majeure event with regard to several kinds of contracts including executory contracts of supply of goods and services, construction contracts, etc.,

The relevant question which triggers for analysis in this paper/article is whether the Lock down Order (i.e. a force majeure event of general nature) which has resulted in temporary closure of virtually all kinds of business/commercial operations will qualify to be a 'Force Majeure' event, enabling the Lessees of purely commercial leases to claim exemption from paying the agreed rental till the continuation of a Lockdown Order on the pretext of non-use or non-occupation of the leased premises during the said Lockdown?

Commercial Lease and Force Majeure

The above said framed question can arise in two cases namely,

• commercial leases containing force majeure clauses;
• commercial leases not containing force majeure clauses.

Adverting to the first case, it is noted that ordinarily commercial leases stipulate force majeure clauses essentially in the following terms:

"If due to any Force Majeure event like act of God, tempest, flood, earthquake, etc., including event beyond reasonable control of the parties the leased premises cannot be used and/or occupied by the lessee or if the leased premises is sealed or is rendered unfit for use or occupation then the lessee shall not be liable to pay any lease rental or any other amount.

It is worth noting that the lessees of commercial leases containing above indicated clause or a clause of similar nature cannot rely on the Lockdown Order as a Force Majeure event to claim exemption from their liability to pay the agreed lease rental till continuation of the Lock down Order on account of the following:

• indisputably, the lessees continue to use and/or occupy the leased premises even during the Lockdown Order in as much as office furniture, equipment, fittings, etc., of the lessees continue to be in the leased premises;

• undeniably, leased premises in no manner have been affected by the Lock down Order and the lessees will be able to use the leased premises immediately after the Lock down Order is lifted;

• the Lock down Order has resulted in temporary closure of the operation of the commercial establishments (emphasis laid) and in no manner has restricted the use or occupation of the leased premises;

• inability to operate a commercial establishment from the leased premised cannot be equated to inability to use or occupy the leased premises;

• payment of the lease rental, as recognized under the commercial leases, is absolute subject to the terms thereof. Thus, when the leases contain a specific clause relating to suspension/exemption of payment of lease rental on occurrence of Force Majeure event, the liability to pay the lease rent is not suspended till the occurrence of the said events. This principle stems from Section 108(l)^[2] read with Section 108 (e)^[3] of the Transfer of the Property Act,1882.

• payment of lease rental is not contingent upon the health of the business operating from the leased premises but is purely for the exclusive use of the leased premises. Thus, it cannot be contended that since the lessee is not able to operate its business from the leased premises thereby not generating revenue therefore, it is not liable to pay the lease rental. Such a contention would not stand the scrutiny of law inasmuch as it is a settled law that commercial hardship/onerous condition is no ground not to perform the obligations under any contract^[4].

Besides the above, the lessees of commercial leases containing above said indicated clauses will be hit by the following law laid down by the Apex Court in Satyabrata Ghose vs Mugneeram Bangur & Co.^[5]:

"16…..In cases, therefore, where the court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of section 56 altogether."

With regard to the second scenario where there are no force majeure clauses in the leases, the question of resorting to any clause in the said leases does not arise and accordingly, the lessees will not be in their right to claim that they are not liable to pay the agreed lease rental till continuation of the Lock down Order.

Now, therefore, the next logical question which arises for consideration is that whether the lessees of commercial leases can resort to the law of frustration/ supervening impossibility or illegality as embodied in Section 56 of the Indian Contract Act,1872 ("Contract Act") for claiming benefit of the Lock down Order and that they are not liable to pay the agreed lease rental till continuation of the Lock down Order. The Answer to the said question is NO for the following reasons:

• The lessees of the commercial leases containing force majeure clauses including the ones indicated above will be governed by the said clauses and the same will be beyond the purview of Section 56 of the Contract Act as held by the Apex Court in the Satyabrata Ghose vs Mugneeram Bangur & Co (Supra).

• The obligation of the Lessees under their respective leases is to pay the rent which has neither become impossible nor illegal to perform on account of the Lock down Order. Moreover, the said commercial leases have not been frustrated in any manner on account of the Lock down Order. Thus, clearly Section 56 of the Contract Act is not attracted.

• Inability to earn revenue on account of closure of the commercial establishment for the temporary period cannot be stretched to be equated to supervening impossibility to pay the lease rental.

• It is a settled law that Section 56 of the Contract Act does not apply to leases. In the view of the above, the most important judicial precedents are referred as under: -

In Raja Dhruv Dev Chand v. Raja Harmohinder Singh^[6], the Hon'ble Apex Court held that:

• though by way of Section 4 of the Transfer of Property Act, provisions of the Contract Act shall apply, however, said Section 4 cannot be construed to mean that all provisions of the Contract Act are enacted in the Transfer of Property Act and be read as the provisions of the Transfer of Property Act.

• the completed transfers are outside the scope of Section 56 of the Contract Act. There is a clear distinction between a completed conveyance and an executory contract, and events which discharge a contract, do not invalidate a concluded transfer. By its express terms, Section 56 of the Contract Act does not apply to cases in which there is a completed transfer as in the case of concluded lease.

• Following the law laid down in Raja Dhruv Dev Chand v. Raja Harmohinder Singh (Supra) that has been followed by the Hon'ble Apex Court in Sushila Devi and Ors. vs. Hari Singh and Ors.^[7], wherein it was held:-

"8. The conclusion of the Division Bench of the Jammu and Kashmir High Court that Section 56 of the Contract Act applies to leases as well cannot be accepted as correct. Section 56 applies only to a contract. Once a valid lease comes into existence the agreement to lease disappears and its place is taken by the lease. It becomes a completed conveyance under which the lessee gets an interest in the property. There is a clear distinction between a completed conveyance and an executory contract. Events which discharge a contract do not invalidate a concluded transfer-see Raja Dhruv Dev Chand v. Harmohinder Singh and Anr.: [1968]3SCR339. In view of that decision the view taken by some of the High Courts that Section 56 of the Contract Act applies to leases cannot be accepted as correct. Further the English decisions bearing on the point can have no further relevance."

• In T. Lakshmipathi v. P. Nithyananda Reddy^[8], the Hon'ble Apex Court referred to law laid down in Raja Dhruv Dev Chand (supra) and held that doctrine of frustration belongs to the realm of law of contracts and it does not apply to a transaction where not only a privity of contract but a privity of estate has also been created inasmuch as a lease is the transfer of an interest in immovable property within the meaning of Section 5 read with Section 105 of the Transfer of Property Act.

• It is pertinent to note that Section 108 (e) Transfer of Property Act stipulates the doctrine of frustration of leases in case of destruction or rendering the leased premises unfit for use by fire, tempest, flood, violence or other irresistible force. In such cases, Section 108(e) gives the option to the lessee to treat the lease as void. However, if the lessee does not exercise the option, the lease continues, and the lessee remains liable to pay the rent to the Lessor^[9]. Section 108(e) of the Transfer of Property Act is a special law on the doctrine of frustration of lease and it excludes the general law contained in Section 56 of the Contract Act as held by the Hon'ble Supreme Court in Kedar Lall v. Hari Lall^[10].

From the above discussion, following clear principles emerge: -

• In absence of any contract to the contrary, the liability of the lessees to pay the lease rental is absolute in terms of their respective leases and they would be governed by Section 108 (e) of the Transfer of Property Act, 1882; and

• In case of a contract to contrary i.e. in case of specific contract, parties to the lease deed can deviate from the applicability of Section 108 (e) of the Transfer of Property Act, 1882 and liability to pay lease rental will be governed by the said specific clauses/contracts in the lease deed; and

• The general force majeure clause (indicated above) in commercial leases is in slight deviation from Section 108 (e) of the Transfer of Property Act, 1882 and no liability to pay lease rental arises in specific cases of the inability of lessees to actually use and/or occupy the leased premises arising on account of force majeure events which in essence include physical damage, actual inaccessibility of the leased premises, actual ingress and egress issues due to force majeure events .

Upholding the liability of the lessee to pay the rent/premium as absolute the Hon'ble Madras High Court in Gopalakrishna Mudaliar v. Rajan Kattalai^[11] negated the contention of the tenant who contested the claim for rent on the ground that there had been a cyclone. The Madras High Court rejected the contention holding that the rent stipulated in the lease is an unconditional rent and not subject to act of God.

Relief for the Lessees under the Epidemic Act & the Disaster Management Act-MISCONCEPTION!!

Relying on Section 4 of the Epidemic Act^[12] and Section 73 of the Disaster Management Act some of the lessees have sought to justify that they are not liable to pay the lease rental. The reliance on the said provisions is totally misconceived, wholly inapposite to the lessees' case and is not likely to pass muster of law for following reasons:

• On a plain reading of the expressions 'any person' 'for anything done' and 'to be under this Act' used in Section 4 read with Section 2 & 2A of the Epidemic Act it clearly emerges that the relief of protection from the suit or legal proceedings is available to:

• persons who owe the positive duty under the act as well as regulations framed under the Epidemic Act to implement the provisions of the act as well as said regulations framed which, would, inter alia, include the State or Central Government and their officials.; and

• not to the persons who do not have do any positive act under the Epidemic Act and who are merely beneficiaries of the orders and regulations passed under the Act, by compliance of the same.

This interpretation is fortified in view of the judgment of the Hon'ble Apex Court in the State of Gujarat vs. Kansara Manilal Bhikhalal^[13] wherein, while interpreting almost identical provision i.e., Section 117 of the Factories Act, 1948, it was, inter alia, held that

• though the expression 'any person' is wide enough to include any person or officer but the critical words are "anything * * * done or intended to be done" under the Act;

• the relief of no suit or proceedings can only be claimed by a person who can plead that he was required to do or omit to do something under the Act or that he intended to comply with any of its provisions while doing any act under the said Act.

• On a bare reading of Section 73^[14] of the Disaster Management Act, it is clear that the relief from suit or prosecution is available to the named authorities in the said provisions which illustratively includes authorities like Central and State Government, the National and State Authority, etc.

• The lessees of the leased premises have no positive duty to implement provisions of the above named two statutes and they are only the beneficiaries of the Lock down Order.

CONCLUSION

Thus, what is significant is that the loss of revenue arising due to events like Lock down Order is primarily in the nature of a business risk undertaken by the lessees while leasing out the premises for operating their commercial establishments and operations. This business risk has to be borne by the lessees and they can neither wriggle out of their obligations to pay the lease rental under their respective leases nor resort to the current legal framework to get out of their said obligation to pay the lease rental to their lessors.

Since the lessees cannot take resort to Lock down Order to get rid of their liability during the operation of Lockdown Order therefore, the said Lock down Order cannot be put to service for any reduction or waiver of payable lease rental for future months.

The pragmatic approach for the lessee is to renegotiate the lease terms primarily the lease rental with the lessors till they recuperate from the potential economic hardships caused due to COVID-19.

This article has been written by Mr. Vikas Mishra (Partner) and Mr. Shaleen Srivastava (Associate) of Capex Legal and with invaluable inputs from the Managing Partner of the Firm, Mrs. Malini Sud.". Author's views are personal