Payment of Rent for Commercial Premises: the Lockdown Conundrum

S. M. Algaus, Counsel

Shrey Fatterpekar, Counsel

With a view to contain the outbreak of the COVID-19 pandemic in the country, India went under a strict lockdown from 25th March 2020. The lockdown resulted in all businesses (apart from essential services) ceasing physical operations, causing varying degrees of economic hardship to people and businesses. Reduction in business resulted in decreased cashflow for businesses. With the extension of the lockdown, a large number of businesses struggled to meet their financial obligations. One such financial obligation which concerns a large of number of people is payment of rent for commercial premises during the lockdown period. 

The question of suspension or waiver of payment of rent by tenants of commercial premises during the lockdown period came up for consideration before the Hon’ble Delhi High Court in the matter of Ramanand & Ors. v. Dr. Girish Soni & Ors.[1] This article examines the view taken by the Hon’ble Delhi High Court and its effect.  

Facts of the case

In 1975, the Respondent landlord tenanted a shop in Khan Market, Delhi to the Applicant tenants under a lease deed at the rent of INR 300/- per month. In 2008, the Respondent landlord initiated eviction proceedings against the Applicant tenants and succeeded in obtaining a decree for eviction. In the revision proceedings challenging the said decree for eviction, the Hon’ble Delhi High Court passed an order staying eviction, conditional inter alia on the tenants paying rent of INR 3.5 lakhs per month. The order provided that in the event of default, the stay on the decree for eviction would be vacated. In light of the imposed lockdown, the tenants applied to the Court for suspension of rent or postponement or part-payment thereof during the lockdown period inter alia claiming the lockdown to be a ‘force majeure’ event which caused complete disruption of their business activities.

Findings of the High Court

While considering the rival contentions of the parties, the Hon’ble Delhi High Court observed that a landlord-tenant relationship could take many forms. It could be governed by contract or by law. If contractual, the terms thereof would determine the rights and obligations of the parties. Few examples of contractual tenancies are oral tenancies, short term tenancy agreements, long term leases, lease agreements (with revenue sharing arrangement or as percentage of sales turnover) etc.

Often these agreements contain a clause providing for ‘force majeure’ or like situations. The judgment referred to the Black’s Law Dictionary’s definition of Force Majeure, i.e. “an event or effect that can be neither anticipated or controlled. The term includes both acts of nature (e.g. floods and hurricanes) and acts of people (e.g. riots, strikes and wars)”. Relying on the view taken by the Hon’ble Supreme Court in Energy Watchdog v. CERC & Ors.[2], the Hon’ble Court held that such a clause would have to be examined in light of Section 32 of the Indian Contract Act, 1872.

Considering the same, the Hon’ble Court held that if the contract has an express or implied force majeure or any other similar clause for waiver or suspension of rent, then such clause would govern the prescribed situations. The Hon’ble Court further held that in cases without waiver or suspension of rent provisions, the force majeure clause in the contract may allow the tenant to claim that the contract had become void and surrender the premises. However, if the tenant wished to retain the premises, then the rent would be payable for the lockdown period and thereafter.

The Hon’ble Court then considered situations where there is no contract between the parties or no specific force majeure clause within the contract. The first possibility considered by the Hon’ble Court was where the tenant attempts to invoke the ‘doctrine of frustration of contract’ embodied in Section 56 of the Indian Contract Act, 1872. The Hon’ble Court relied on a decision of the Hon’ble Supreme Court in Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr.[3] where it was held that the provisions of Section 56 would not apply to lease agreements, which are concluded contracts. The Hon’ble Supreme Court drew a distinction between ‘concluded contracts’ and ‘executory contracts’. Executory contracts alone are capable of being frustrated under Section 56. The Hon’ble Supreme Court’s view in Raja Dhruv (supra) has been reiterated in T. Lakshmipathi and Ors. v. P. Nithyananda Reddy and Ors.[4]  and Energy Watchdog (supra). The same was followed by a Division Bench of the Hon’ble Delhi High Court in Hotel Leela Venture Ltd. v. Airports Authority of India[5]. Thus, the Hon’ble Court concluded that the doctrine of frustration would not apply to lease agreements and the Applicant tenants could not avail any benefits thereunder.

The second possibility considered by the Hon’ble Court was the applicability of the provisions pertaining to ‘force majeure’ contained in the Transfer of Property Act, 1882. Section 108 of the Transfer of Property Act, 1882 provides for the rights and liabilities of lessors and lessees. Section 108(B)(l) imposes an obligation on the lessee to pay rent. However, Section 108(B)(e) specifically stipulates that the lease would be void (at the option of the lessee) if a force majeure event rendered any material part of the property “wholly destroyed” or “substantially and permanently unfit” for the purpose provided in the lease. The Hon’ble Court observed that the Hon’ble Supreme Court in Raja Dhruv(supra) had held that temporary non-use of premises due to any factors would not render the premises “substantially and permanently unfit” for use. The Hon’ble Court noted that the Hon’ble Supreme Court in T. Lakshmipathi(supra) and subsequently in Shaha Ratansi Khimji & Sons v. Kumbhar Sons Hotel Pvt. Ltd. & Ors.[6] had held that even destruction of tenanted premises’ structure would not determine the tenancy. In view of the same, the Hon’ble Court held that for a tenant to successfully invoke Section 108(B)(e), there must be complete destruction of the property which is permanent in nature due to the force majeure event. Accordingly, the Hon’ble Court held that Section 108(B)(e) of the Transfer of Property Act, 1882 has no applicability in the event of temporary non-use of premises during the lockdown period.

Accordingly, in view of the aforesaid position in law, the Hon’ble Court in the facts of this case held that the Applicant tenants were not entitled to any relief.

However, the Hon’ble Court thereafter held that in the absence of a contract or contractual provision permitting waiver or suspension of rent, a tenant may generally seek suspension of rent by invoking the equitable jurisdiction of the court. The Hon’ble Court observed that no standard rule could be laid down to determine such an application and accordingly, provided some broad parameters to be considered by courts whilst deciding such applications:

  1. a) Nature of the property – location and demand for the property;
  2. b) Financial and social status of the parties – nexus in their competing necessities;
  3. c) Amount of rent – taking judicial notice of the prevalent comparative market rent;
  4. d) Other factors – whether the tenants are “unauthorised occupants”; regularity of rent payment; tenant’s intention to vacate; the balance of convenience, etc.
  5. e) Existence of any contractual conditions;
  6. f)  Protection under any executive orders – During the lockdown executive orders were passed by the Ministry of Home Affairs and State Governments.

It is pertinent that the Hon’ble Court, without examining the legality of such executive orders, held that the three orders, viz. one passed by the Ministry of Home Affairs[7] and two passed by the Delhi Disaster Management Authority[8] did not apply to commercial premises. Considering these factors, the Hon’ble Court did not suspend payment of rent but permitted the Applicant tenants to pay the rent in a deferred manner.

Conclusion

 Tenants whose agreements contain appropriate clauses allowing them to either forego or suspend payment of rent during the lockdown period can avail the benefit of this judgment. However, for those whose agreements do not contain any such clause, the obligation to pay rent remains. The hardships faced by people during the lockdown period are undeniable. The losses suffered by businesses are also increasing. In light of the same, it is extremely important that businesses are protected by allowing them some relaxation in payment of rent for the premises they operate from. In view of the judgment passed by the Hon’ble Delhi High Court, it is imperative that an appropriate legislation in this regard be enacted in India, in line with similar legislations passed by various other countries, which afford protection to both the tenants and the landlords.


S. M. Algaus (LLM, Queen Mary University of London) is a Counsel, practising in Mumbai. He can be reached at algaus.sm@gmail.com and at 9167166337.

Shrey Fatterpekar (BLS LLB, University of Mumbai and a Solicitor) is a Counsel, practising in Mumbai. I can be reached at this email address, i.e. shreyf26@gmail.com and at 9967140991.


Photo Credits:

Notes:

[1] RC. Rev. 447/2017, order dated 21st May 2020

[2] (2017) 14 SCC 80

[3] AIR 1968 SC 1024

[4] (2003) 5 SCC 150

[5] 2016 (160) DRJ 186

[6] (2014) 14 SCC 1

[7] Order No. 40-3/2020-DM-I(A) dated 29th March 2020

[8] Order No. F/02/07/2020/S.I/PT. File/81 dated 22nd April 2020; Order No. 122-1A F/02/07/2020/S.I/9 29th March 2020

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s