The Frustration of Lease and its Contours during COVID-19

Prashant Daga, Wadia Ghandy & Co.

The COVID-19 has created an unprecedented situation wherein most of the organised sector is working from home and offices are mostly shut or are working, if any, with less than their optimum capacity; a large number of people are migrating to their hometowns etc. Irrespective of the situation one presently is embroiled in due to COVID-19, one’s lease rentals are accruing. Therefore, the question arises whether a lessee can avoid its obligation to pay lease rental/consideration amount on account of  COVID-19?

A lease is a mode of conveyance/transfer whereby lessor vests his right to enjoy a property with lessee against the payment of consideration amount. According to the negotiations between lessor and lessee, terms and conditions of the lease are incorporated in a formal document i.e. a Lease Deed.  Although leases are governed by the Transfer of Property Act, 1882 [TPA]  however the provisions of the TPA, relating to lease, are subject to contract to the contrary meaning thereby parties are free to incorporate provisions such as Lock-in period (the minimum period during which neither party can terminate the lease), Force Majeure (which provides for temporary suspension of performance due to certain specified event and termination if that event continues for more than the specified period) or other specified events on happening of which the lease can be determined, suspended etc. in their lease deed. The validity and interpretation of those conditions/clauses are governed by the Indian Contract Act, 1872 [ICA].

Section 108(B)(e) of the TPA provides that if on account of fire, tempest, flood or violence of an army or a mob or other irresistible force any material part of the property is wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let the lease can be declared void at the instance of the lessee. Therefore, unless the lessee positively declare lease as void, the lessee is liable to make payment of lease rentals.[1]  Accordingly, to declare lease void to avoid payments under a lease deed. However, the said provision may not be applicable in all cases e.g. where the lease is for residential purpose, the lessee cannot avoid the payment by relying upon COVID-19 or citing commercial hardship on account of COVID-19 since COVID-19 has not resulted in the complete destruction of property or rendered it substantial and permanently unfit for residential purposes. Au contraire, wherein parties have entered into a lease agreement for running a hotel [purpose for which premises is being let] on leased premises and presently, due to government orders [irresistible force i.e. by operation of law], such hotels cannot be operated.  Therefore, a lessee (i.e. a hotel operator) can rely on Section 108(B)(e), TPA citing that due to COVID-19 and consequential government orders, leased premises have been rendered substantially unfit for the purpose it was let and therefore, it can declare the lease void and avoid payments under the lease deed.  Thus, the applicability of Section 108(b)(e) will have to be determined on a case to case basis.

Furthermore, Section 108(B)(e), TPA excludes the applicability of the concept of frustration as understood under contract law/ICA.[2] The frustration under ICA is when either party is entitled to put an end to the contract on account of a supervening event which renders their performance impossible and a fortiori, neither parties are liable for breach of contract and damages thereof, however only the advantages received under that void contract by either party are to be restored to the party from whom such advantages were received.[3]   In the case of Hotel Leelaventure Ltd v. Airport Authority of India,[4] the Hon’ble Delhi High Court while assailing the validity of an arbitral award was posed with the issue whether the Minimum Guaranteed Amount (MGA) is no longer payable by the lessee on account frustration of the lease due to economic recession of 2008? While negating the applicability of contractual frustration, relying upon the dictum of Supreme Court in Raja Dhruv Dev Chand case, the Hon’ble Delhi High Court held that:

“35. A contract for lease whereunder the lessee obtains possession from the lessor is an executed contract and during the duration of the lease, since it is a term of the agreement that consideration shall be rendered periodically, the agreed consideration has to be paid and it hardly matters that rents have fallen in the meanwhile…”

Further, it is a trite law that the party cannot resile from the performance of their part solely on the account that their performance under the contract/ agreement has become onerous in nature or commercial impossible.[5] The obligation to pay the consideration [whether lease rent (monthly or annual) / benefits out of the property / or both] is tied with the interest that has been transferred vide a lease in the favour of the lessee, therefore, the payment of rent cannot be avoided unless the lease is determined in accordance with the provisions of the TPA.

As noted above, the provisions of TPA are subject to the contract, therefore, whether a lessee can avoid its obligation to pay lease rents under lease or determine the lease would also depend upon the construction of the covenants under the lease deed. Further, whether a party can take advantage of a “force majeure” clause in a lease deed/contract, in these COVID-19 times or lockdown period, would depend upon the nature of the industry to which that party/ lessee is associated with i.e. whether such industry has been declared as a provider of essential service or allowed to be operated during the lockdown period.[6]

Be that as it may, the lessor should consider present circumstances and on the humanitarian ground should not force lessee into paying high rents /existing agreed consideration or any other payments rather explore the option of renegotiating the terms of lease deed or temporarily suspending the payment of rent. In the event, if any such dispute between lessor and lessee reaches courts, the courts while adjudicating such claims/dispute, which may well be contractual in nature, can consider equities / humanitarian grounds[7] arising thereof viz. genuine hardship of lessee, the effect of lockdown, conduct of lessee, nature of property etc. while passing any order or granting any relief in such cases.  The possibility of considering such equities by the courts while deciding lease-related disputes, in such COVID times, has been recently affirmed by the Delhi High Court in its decision of  Ramanand & Ors v. Dr Girish Soni & Anr.[8]


Prashant Daga is an Associate at Wadia Ghandy & Co. (Delhi). He can be reached here.

Views are personal.


Notes:

[1] T. Lakshmipathi v. P. Nithyananda Reddy, AIR 2003 SC 2427.

[2] Raja Dhruv Chand v. Raja Harmohinder Singh and Anr., AIR 1968 SC 1024.

[3] Section 65, ICA.

[4] FAO(OS)(Comm) 64/2016 decided on 07th November, 2016. The SLP against the said order was dismissed by the Hon’ble Supreme Court on 05th February,2018 (SLP (C) 21674 of 2017)

[5] Alopi Prashad v. UOI AIR 1960 SC 588; Panna Lal v. State of Rajasthan AIR 1975 SC 2008.

[6] See, Standard Retail Pvt. Ltd vs M/s G. S. Global Corp & Ors, Commercial Arbitration Petition (L) No. 404 of 2020, Bombay High Court dated 08th April, 2020 whereby Hon’ble Bombay High Court refused to extend the benefit of a force majeure clause to a steel operator as steel has been classified as essential industry and is not affected by lockdown.

[7] Shalimar Gas v. Indian Oil Corp. Ltd., (2010) 13 SCC 760.

[8] RC. Rev. 447/2017, Delhi High Court decided on 21st May 2020.

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