Covid-19 Update: Delhi High Court Clarifies the Conundrum Surrounding Force Majeure in Rental Agreements

The pandemic caused due to COVID-19 and the lockdown imposed by the Central Government has almost stalled all the businesses courtywide. This has inturn caused a lot of hardships to the business establishments (not being essential service providers), especially in paying salaries to the employees/workers and the rent of the premises. Recently, the Delhi High Court in its judgement, passed in the matter of Ramanand & Ors. Vs. Dr. Girish Soni & Anr.[1], on 21st May 2020 has provided clarity on the issue whether lockdown would entitle tenants for suspension of the monthly rent.

The Delhi High Court noted that whether the lockdown would entitle tenants to claim waiver or exemption from the payment of rent or suspension of rent, is bound to arise in thousands of cases across the country. Even though the facts of the case didn’t require it to, the court highlighted various commercial lease/leave and license agreements in which such disputes can arise.

Key Takeaways

  • In absence of any contract between the parties, one can always choose to invoke equitable jurisdiction of the court for suspension of rent due, however, whether the same will be suspended or no, will depend on the facts and circumstances of the cases.
  • The nature of the contract between the parties would play a major role to determine the manner in which pandemics, such as COVID-19, can play out.
  • Section 32 of Indian Contract Act, 1872 (“ICA”) can be applied in cases where there is a force majeure clause in a contract.
  • In absence of any contractual arrangement between the parties, Section 108 of Transfer of Property Act, 1882 (“TPA”) can be invoked, only in cases where the property has completely been destroyed or have been rendered unfit for use. Thought, one cannot seek suspension of rent under this section.
  • Rental contracts involving profit sharing agreement or monthly payment basis sales/turnover, would strictly be as per the terms of the agreement, in case a party wants to seek suspension of rent. Such contracts would not be governed by the overriding force majeure event but the consequence of there being no sales or profit, will suffice for seeking suspension of monthly payments.

Brief Facts

  • The Appellants were tenants of a shop in Khan Market, New Delhi. An eviction suit was filed against the Appellants by the Landlord and a decree of eviction was passed against the Appellants. An appeal was filed against the decree which was dismissed by the Ld. Rent Control Tribunal.
  • The Appellants thereafter filed a petition in Delhi High Court challenging the eviction order. In the interim, the Delhi High Court stayed the eviction order subject the Appellants paying the Landlord a rent of INR 3,50,000/- per month. The court in the order further recorded that in case of any default in rent, the stay of execution of eviction order shall stand vacated.
  • Thereafter, following the outbreak of COVID-19, the Appellants filed an application for suspension of rent during the lockdown period, as the Appellants business activities had completely been disrupted. The Appellants claimed that such a situation is force majeure and they are entitled to waiver of monthly rent, directed to be paid vide the previous order passed by the court.

Contractual situations dealt by the Delhi High Court

The court mainly clarified the situation with respect to four types of contractual agreements:

  • Contracts with no force majeure clause.
  • Tenancy where there is no written contract between the parties.
  • Contracts with force majeure clause that could lead to a relief on payment of rent.
  • Contracts that are profit – sharing.

Crucial Observations

Situations governed under Section 32 of ICA

The court clarified that the contracts with Force Majeure clauses or any other condition that could permit waiver or suspension of the monthly agreed payment, would be governed by the contractual terms under Section 32 of the ICA, which deals with enforcement of contracts contingent on an event happening. Therefore, for the contracts having a force majeure clause, the court will have to examine such a contract in light of Section 32 of the ICA. This position has been clearly explained by the Hon’ble Supreme Court in the matter of Energy Watchdog vs. CERC & Ors.[2].

The court further clarified that where the contract has any particular clause which provides for some sort of waiver or suspension of rent, only then the tenant could claim under the same.  However, there are certain contracts which would only provide for termination on occurrence of a force majeure event. In such cases, even upon occurrence of a force majeure event, the lessee cannot seek suspension or waiver of rent but can only terminate.

Can one invoke Section 56 of the ICA where there is no contract?

Generally, in situation of force majeure, in absence of a contractual term, one may attempt to invoke the doctrine of frustration under Section 56 of ICA. However, it is a settled position in law that Section 56 of ICA would not apply to lease agreements. The Supreme Court in the matter of Raja Dhruv Dev Chand vs. Raja Harmohinder Singh & Anr.[3]held that Section 56 of ICA does not apply to cases in which there is a completed transfer. The Supreme Court held that a lease is a completed conveyance though it involves monthly payment and hence, Section 56 cannot be invoked to claim waiver, suspension or exemption from payment of rent.

This view was again reiterated by the Supreme Court in the matter of T. Lakshmipathi and Ors. Vs. P. Nithyananda Reddy and Ors.[4], and also in Energy Watchdog (supra). Therefore, Section 56 of the ICA would not apply to lease agreement and other similar contracts which are “executed contracts” and not “executory contracts”.

Application of Section 108 of TPA in place of Section 56 of ICA

The Delhi High Court clarified that, in absence of any agreement governing the relationship between the parties, the same will be governed under Section 108 of the TPA. Section 108(B) of the TPA covers a force majeure situation, wherein the lessee, at its option, may treat the lease as void, where the property is wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let, for the reasons as mentioned therein. One cannot seek suspension of rent under Section 108 of TPA.

Though, as stated above, the “doctrine of frustration” under Section 56 would not be applicable in case of leases, the Supreme Court in the matter Raja Dhruv (Supra), has stated that the broad principles of frustration of contract will apply to leases. The Delhi High Court has in depth discussed about what constitutes permanent destruction of property. Relying upon several Supreme Court judgements, the court has clarified that Section 108 of the TPA shall apply only in situations where  there is an absence of a “force majeure” clause and only where the property has completely been destroyed or has been rendered unfit for use for the purpose for which it was let. Therefore, court held that one cannot invoke or seek shelter under Section 108 of TPA due the temporary non-use of premises due the lockdown (COVID-19).

What the court held in light of the facts of the present case

In the case at hand, as there was no agreement between the parties, section 32 of the ICA could not have been invoked, and it was also not the case of the parties that the tenancy is void under Section 108(B)(e) of the TPA. Therefore, the plea of the Appellant for suspension of rent was rejected. However, owing to the lockdown situation, the court did allow postponement or relaxation in the schedule of payment.

Observation of Delhi High Court in other such Writ Petitions

Recently, in the matter of Gaurav Jain vs, Union of India & Anr.[5], the Delhi High Court dealt with a Writ Petition filed under Article 226 of Constitution of India whereby the petitioner had sought a blanket waiver of rent for all the tenants in Delhi and had even prayed for setting up of a “Rent Resolution Commission” by the Government to solve the grievances of the tenants and provide a lump sum compensation to the landlords. The Delhi High Court dismissed the Writ Petition imposing a cost of INR 10,000/- on the petitioner, thereby observing that the court cannot do charity at the cost of others and charity beyond law is an injustice to others. The court even observed that the payment of rent is basis the contractual arrangement between the parties and the power/discretion to waive such rent vests first with the landlord , who are contractually entitled to do the same and courts have to take a very slow approach in interfering with the contractual terms of an agreement entered into between the two parties. Where a landlord is entitled to receive rent in accordance with law as per the contractual arrangement entered into between the parties, then the court cannot by a general order of nature waive such an amount.

Conclusion

The Delhi High Court in the judgement of Ramanand (Supra) has taken into consideration the complete jurisprudence laid down by the Apex Court and the various other high courts in India, bringing about clarity on under what circumstances can one seek suspension of rent.

The applicability of force majeure in these unprecedented times cannot be construed as an extraordinary situation, allowing suspension of rent to all, as also observed by the Delhi High court in the matter of Gaurav Jain (Supra). The facts, circumstances and the nature of contract will play a key role and a deciding factor whether one can seek suspension of rent. If due to imposition of lockdown, because of which one is not able to carry on their operations in the said premises or is unable to use the premises for a particular period, will not render the premises unfit for use and seeking frustration of contract will not be possible.

In the judgement of Ramanand (Supra), the court has mainly considered lease agreements. It may be possible that the leave and license agreement may be viewed differently. As against a lease, where an interest is created in the property in favour of the lessee, a leave and license agreement is merely use of a property for specific purpose in consideration of payment of a licensee fee. Therefore, if because of the imposition of lockdown, if something prevents from use of the premises, it can be argued that the contract stands frustrated and Section 56 of ICA can be invoked. However, this again will be subject to the nature, circumstances and the agreement, governing the contractual relationship between the parties.

Thus, while doing any lease/leave and license agreement, it is advisable to get the same vetted to ensure that all such situations are covered. One also needs to note, that before sending out any notices for suspension or termination of the rental agreements, the clauses of the agreement should be carefully examined.

-Archana Balasubramanian (Partner) with Lalit Munshi (Associate)

[1] 2020 SCC Online Del 635

[2]  (2017) 14 SCC 80.

[3]  AIR 1968 SC 1024

[4]  (2003) 5 SCC 150.

[5] 2020 SCC Online 652

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