COVID-19 and the lockdown that followed this pandemic has not just created large-scale implications for businesses across the globe, but has also severely affected contractual relationships. An important question that has arisen during these unprecedented times is whether this lockdown would entitle tenants to claim waiver or suspension of rent.
Recently, the High Court of Delhi (High Court) in Ramanand & Ors. v. Dr. Girish Soni & Anr.1, has set out the parameters to be considered while dealing with requests for waiver or suspension of rent.
The tenants run a shoe store in Khan Market, New Delhi (tenanted premises), which was given on rent for commercial purposes through a lease deed dated 01 February 1975 at the rate of INR 300 (Rupees three hundred) per month.
In 2008, the landlord filed an eviction petition under Section 14(1)(e) of the Delhi Rent Control Act, 1958 (Rent Control Act) whereby, a decree for eviction was passed by the Senior Judge-cum-Rent Controller on 18 March 2017. The tenants challenged the eviction order before the Rent Control Tribunal, which was dismissed by way of the order dated 18 September 2017.
Subsequently, a petition challenging the dismissal order was filed by the tenants before the High Court, wherein the High Court, by way of its order dated 25 September 2017, granted an interim order of stay of the eviction order, subject to the tenants paying a sum of INR 3,50,000 (Rupees three lakhs and fifty thousand) per month.
Pursuant to the outbreak of COVID-19, an application seeking suspension of rent was moved by the tenants during the lockdown period. The tenants claimed that the lockdown had caused a complete disruption of all business activities, including the business activities of the tenants. It was pleaded that the lockdown was a force majeure event, which was beyond the control of the tenants and therefore, the tenants prayed for a waiver of monthly rent, or in the alternative, partial reliefs in terms of suspension, postponement or part-payment of the rent amount.
FINDINGS OF THE HIGH COURT
At the outset, the High Court noted that the contracts of tenancy and leases could be of different kinds, including but not limited to the following: -
- Oral tenancies with a month to month payment of rent;
- Short term tenancy agreements with rent payable on a monthly basis;
- Long terms leases with force majeure clauses;
- Lease agreements which are structured as revenue sharing agreements and;
- Lease agreements which are in the nature of monthly payments as a percentage of the sales turnover.
It was clarified that the question of waiver, suspension or any remission in rental payments would operate differently for each category of agreements. The High Court extensively deliberated on the applicability of Section 32 and Section 56 of the Indian Contract Act, 1872 (Contract Act) and Section 108(B)(e) of the Transfer of Property Act, 1882 (Property Act) to contracts of tenancy.
Section 32 of the Contract Act
It was held that in circumstances such as the outbreak of a pandemic like the current COVID-19 outbreak, the grounds on which the tenants/lessees or other similarly situated parties could seek waiver or non-payment of the monthly amounts, under the contracts which have a force majeure clause would be governed by Section 32 of the Contract Act. Reference was made to the Black's Law Dictionary, whereby force majeure had been defined as "an event or effect that can be neither anticipated nor controlled" and includes "both acts of nature (e.g. floods and hurricanes) and acts of people (e.g. riots, strikes and wars)".
The High Court placed reliance on the decision of the Supreme Court of India (Supreme Court) in Energy Watchdog v. CERC & Ors.2, where it was held that in case the contract itself contains an express or implied term relating to a force majeure condition, the same shall be governed by Section 32 of the Contract Act. The Supreme Court also held that Section 56 of the Contract Act, which deals with the impossibility of performance, would apply in cases where a force majeure event occurs outside the contract.
It was held that in agreements containing a force majeure clause, a court would examine the same in light of Section 32 of the Contract Act. The High Court observed that a force majeure clause could be differently worded in different contracts as there is no standard draft, application or interpretation. It was held that the fundamental principle would be that if the contract contains a clause providing for some kind of waiver or suspension of the rent, only then could the tenant claim the same.
The High Court further observed that the force majeure clause could also be a contingency contract in terms of Section 32 of the Contract Act which may allow the tenant to claim that the contract has become void and surrender the premises. However, the High Court clarified that if the tenant wishes to retain the premises and there was no clause giving respite to the tenant, rent would be payable.
Section 56 of the Contract Act
The High Court held that in the absence of a force majeure clause or a remission clause, a tenant may attempt to invoke the doctrine of frustration of contract or the impossibility of performance, as encapsulated in Section 56 of the Contract Act. The High Court, however, held, that such invocation would not be applicable in view of the settled legal position.
Reliance was placed on the decision of the Supreme Court in Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr.3 , where the tenant who had rented agricultural lands in Punjab, which could not be utilized due to partition in the year 1947, sought refund of the rent paid by him. The Supreme Court, after considering the law on impossibility of performance from various jurisdictions, held that Section 56 of the Contract Act, which lays down a positive rule relating to frustration of contract, will not apply to lease agreements. The Supreme Court had drawn a distinction between a 'completed conveyance' and an 'executory contract'. It was held that Section 56 does not apply to cases in which there is a completed transfer. The Supreme Court laid down the law in this regard by holding that a lease is a completed conveyance and therefore, Section 56 of the Contract Act cannot be invoked to claim waiver, suspension or exemption from payment of rent. This view of the Supreme
Court has been reiterated in T. Lakshmipathi and ors. v. P. Nithyananda Reddy and ors.4 and Alopi Prashad v. Union of India5.
The High Court placed further reliance on the decision in Hotel Leela Venture Ltd. v. Airports Authority of India6 where a division bench of the High Court held that a contract for lease whereunder the lessee obtains possession from the lessor is an executed contract. It was held that since periodical payment of rent is a term of the agreement, the agreed consideration has to be paid and such rent will not be discharged merely because it turns out to be difficult for one party to perform. No one can resile from a contract for the said reason.
In view of the aforementioned precedents, the High Court took the view that Section 56 of the Contract Act would not apply to a lease agreement and other similarly situated contracts, which are executed contracts and not executory contracts.
Section 108(B)(e) of the Property Act
The High court observed that in the absence of contracts or contractual stipulations, the provisions of the Property Act will govern tenancies and leases. It was stated that the doctrine of force majeure and the rights and liabilities of the lessee are enumerated in Section 108(B)(e) and Section 108(B)(l) of the Property Act, respectively. As per the said provisions, on the occurrence of any of the stipulations stated in Section 108(B)(e) such as fire, tempest or flood or violence of an army or of a mob, or other irresistible force, which renders the property substantially and permanently unfit to be used for the purpose for which it was leased, will make such lease void, at the option of the lessee.
Reliance was placed on the decision in Raja Dhruv (supra), where the Supreme Court held that temporary non-use by tenant of the leased premises due to any factors would not entitle the tenant to invoke Section 108 of the Property Act. Reliance was also placed on the decision in Shaha Ratansi Khimji and sons v. Kumbhar Sons Hotel Pvt. Ltd. and ors.7 where the Supreme Court clarified that in cases concerning a lease agreement, Section 108(B)(e) of the Property Act cannot be interpreted by assuming that when a building or structure is leased out, it is only the superstructure that is exclusively leased out and that lease is also a lease of site. Even though the tenanted premises had been demolished and destroyed, the tenancy could not be said to have been determined.
The aforesaid view of the Supreme Court was reaffirmed in Sangeeta Batra v. M/s VND Foods and ors.8 where the High Court held that the fact that the lease premises, intended to be run as a restaurant, was sealed is of no relevance as the tenants did not choose to avoid the lease. It was held that unless the lessee avoids the lease, the obligation contained in Section 108(B)(l) cannot be avoided.
In view of the settled legal position, the High Court held that, for a lessee to seek protection under Section 108(B)(e) of the Property Act, there has to be a complete destruction of the property, which is permanent in nature, due to the force majeure clause. It was held that until there is a complete destruction of the property, Section 108(B)(e) of the Property Act cannot be invoked. The High Court took the view that temporary non-use of a premises due to lockdown which was announced due to the outbreak of COVID-19, cannot be construed as rendering the lease void under Section 108(B)(e) of the Property Act and therefore a tenant cannot avoid payment of rent.
In relation to contracts where there is a profit-sharing arrangement or an arrangement for monthly payment on the basis of sales turnover, the High Court held the tenant/lessee may be entitled to seek waiver/ suspension, strictly in terms of the clause. It was observed that such cases would be purely governed by the terms of the contract itself and tenant could claim that there were no sales and no profits and therefore, the tenant is not liable to make the monthly payment. The High Court took the view that in such cases, the entitlement of the lessor is not governed by any overriding force majeure events but by the consequence of the force majeure event, being that there were no sales or profits.
Findings on the facts of the present case
With regard to the present case, the High Court observed that Section 32 of the Contract Act did not have applicability. It was further held that Section 56 of the Property Act does not apply to tenancies and therefore, the case was to be governed by the provisions of the Property Act.
The High Court took note of the fact that the tenants in the present case did not urge that the tenancy was void under Section 180(B)(e) of the Property Act and that the plea of the tenants was for extension of the doctrine of suspension of rent which are covered by lockdown due to COVID-19. The High Court considered the following factors as necessary for determining the question as to whether the tenants were entitled to any relief of suspension of rent:
- Nature of the property: The High Court observed that the tenanted premises was located in the prime commercial area of Khan Market.
- Financial and social status of the parties: The High Court took note of the fact that the landlord was a dentist who wishes to use the tenanted premises and had sought eviction of the ground of bonafide used under Section 14(1)(e) of the Rent Control Act. It was noted that the tenants run a footwear shop on the tenanted premises, which they were in possession of since 1975 at a monthly rent of merely INR 300 (Rupees three hundred).
- Amount of rent: It was noted that the monthly payment of INR 3,50,000 (Rupees three lakhs and fifty thousand) had been fixed by the High Court itself, as a condition for grant of stay for continued use and occupation, after the decree of eviction had been passed against the tenants. It was also observed that the tenants did not wish to vacate the tenanted premises due to lockdown but wished to continue to occupy the same. The Court also noted that the even though the amount being paid by the tenants was substantial, the said amount was on the lower side as compared to other properties in the locality in which the said tenanted premises was situated, i.e. Khan Market, New Delhi.
- Other factors: The High Court held that the tenants were unauthorized occupants of the tenanted premises as a decree of eviction had already been passed. It was noted that the monthly payment of rent had been fixed by the High Court itself in view of the decision of the Supreme Court in Atma Ram Properties (P) Ltd. v. Federal Motors (P) Ltd.9. The High Court took the view that the use and occupation of the tenanted premises was to be determined in a manner so as to fully compensate the landlord as it the landlord had let out the property to a third party. This would tilt the balance of convenience in favour of the landlord.
- Any other contractual condition(s): It was observed that there were no contractual obligations that permitted the non-payment or suspension of rent.
- Protection under any executive order(s): The High Court observed that the central and state governments have given protection to certain classes of tenants such as migrants, laborers and students. However, without going into the legality of several executive order passed, the High Court observed that the tenants were not covered under such orders and therefore could not claim relief on the basis of such orders.
Based on the aforesaid findings, the High Court rejected the tenant's application for suspension of rent. However, a certain degree of relaxation was allowed by the High Court in the schedule of payment of rent, owning to the lockdown.
The decision of the High Court provides much needed clarity especially in the COVID 19 times on the questions pertaining to obligation of lessee to pay rent. The High Court has thrown light upon the applicability of Sections 32 and 56 of the Contract Act and Section 108(B)(e) of the Property Act in the present scenario. In doing so, the High Court has also provided the factors necessary for determining whether the tenants were entitled to any relief of suspension of rent.
The findings of the High Court are summarized hereinbelow: -
- Section 32 of the Contract Act will only come into play when there exists a clause in the nature of force majeure providing for waiver or suspension of rent;
- Section 56 of the Contract Act is not applicable to lease agreements and other similarly situated contracts, which are executed contracts and not executory contracts;
- In the absence of any contracts or contractual stipulations, the provisions of the Property Act will govern tenancies and leases. Temporary non-use of premises due to lockdown pursuant to COVID-19, cannot be construed as rendering the lease void under Section 108(B)(e) of the Property Act and therefore a tenant cannot avoid payment of rent under the said clause.
This decision of the High Court makes it clear that it is not an inherent right of a tenant to seek waiver or suspension of rent from the landlord. Although this decision is first in line of the many judgments that will possibly be rendered by courts in this regard, it certainly does set the benchmark for consideration of requests for waiver or suspension of rent.
1 RC. Rev. 447 of 2017; Decided on 21 May 2020
2 (2017) 14 SCC 80
3 AIR 1968 SC 1024
4 (2003) 5 SCC 150
5 (1975) 2 SCC 633
6 2016 (160) DRJ 186
7 (2014) 14 SCC 1
8 (2015) 3 DLT (Cri) 422
9 (2005) 1 SCC 705.
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