IMPACT OF COVID- 19 ON LEASE DEEDS CONTRACTS AND RERA

Author :- By Advocate Surbhi Oswal

Introduction

Due to Corona Virus there has been a nationwide lockdown. India shut its $2.9 trillion economy (approximate), closing and issuing strict stay-at-home orders to more than a 1.3  billion (approximate) people since March 24, 2020. In such a scenario the impact of the same on the Indian economy has been hugely disruptive.

Prime Minister Narendra Modi in his speech stated “From the economy’s point of view, the lockdown undoubtedly looks costly right now, but compared to the lives of Indian citizens, it is nothing.” (translation, original in Hindi) The government has taken certain steps in the real estate sector to reduce the burden of the people. Vide a notification, the rent of the workers have been waived for a period of one month.

In the period of this lockdown due to Covid 19, commercial leases, businesses, construction and the Real Estate Sector as a whole has also been suffering. There are no sales, no businesses but the expenses, salaries, Rentals etc are the same and are to be bourne. Can some of the expenses be reduced without having to terminate the Contract, in the times of this Force Majure? This Article tries to cover some of the implications of the same.

What is Force Majure?

“Force majeure” as translated from French means “superior force.” As defined in Merriam Webster’s Dictionary, it means “an event or effect that cannot be reasonably anticipated or controlled.” In India, the same is statutorily governed by Section 32 of the Indian Contract Act, 1872, which provides, Enforcement of contracts contingent on an event happening.

Can the spread of Corona Virus be called as a Force Majure event?

The Ministry of Finance, through an office Memorandum has recognized the spread of the COVID-19 epidemic as a Force Majure event and a Natural calamity, as under-

“.. A doubt has arisen if the disruption of the supply chains due to the spread of Corona Virus in China or any other Country will be covered in the Force Majure Clause (FMC). In this regard it is clarified that it should be considered as a case of Natural Calamity and Force Majure Clause may be invoked, wherever considered appropriate following the due procedure..”

What is a force Majure Clause?

A Force Majure Clause is a clause by virtue of which an aggrieved party is statutorily and contractually permitted to refrain from performing its obligations under a Contract, without resulting in any “breach thereof” for a limited period of time. However, the reason for non performance, should be a Force Majure event, that is to say the event should be outside the control of the Non performing Party, like War, change of Law etc. The spread of Corona Virus is a Force Majure event.

However, it is not necessary that the court will permit every person to use Force Majure as a defence for his non Performance under the garb of a Force Majure Event. As late as on 8th April, 2020 in Commercial Arbitration Petition Nos. 404, 405, 406, 407 and 408 of 2020 the Bombay High Court refused to grant interim relief to the Petitioner who had terminated its Agreement with the Respondents in respect of supply of Steel Products, on account of frustration, impossibility and impracticability by invoking the Force Majure Clause due to Covid-19, in the Agreement. The Petitioners relied upon Section 56 of the Indian Contract Act, 1872. The Honorable Court reasoned that-

1. The Respondent had complied with its part of the contract, that is the goods were shipped from South Korea. Hence the Petitioner cannot argue that it cannot perform its obligation.

2. The Lockdown Notification includes distribution of steel as an essential service, therefore there are no restrictions on its movement and other related activities.

3. The Petitioner cannot use the Lockdown, which is for a limited period for their benefit so as to absolve them from making the payments to the Respondent.

Thus, the Honorable Courts are also vigilant so that a Party (who is not actually aggrieved,) does not take advantage of the Law and the Force Majure Clause in the Agreement. keeping the same in mind, the Force Majure Clause in Contracts, Leases, Leave and License Agreements, Co Working Spaces Agreements, Joint ventures, etc have to be reviewed and scrutinized.

Force Majure Clauses in a Lease Deed

The basis of the relationship between a landlord and tenant is a contractual one—the lease. When the lease deed contemplates occurrence of “force majeure” and provides for consequences, then the provisions of the Deed would prevail. This principle has been recently laid down by the Supreme Court in Energy Watchdog v CERC & Ors.

By an express clause of Force Majure in the Lease Deed, Lessees may be exempted from the payment of the Lease  Rentals so long as the Lockdown continues. At the cost of repetition, the Force Majure Clause in the Lease Deed has to be read and interpreted properly.

What happens if there is no Force Majure Clause in a Contract ?

The Defense of Frustration of a Contract is available for any Contract, under Section 56 of the Contract Act, if there is no Force Majure Clause in the Contract. Section 56 provides

“Agreement to do impossible act.— An agreement to do an act impossible in itself is void. —An agreement to do an act impossible in itself is void.” Contract to do act afterwards becoming impossible or unlawful.—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”

What happens if there is no Force Majure Clause in a Lease Deed?

A Lease is defined under Section 105 of the Transfer of Property Act, 1882. Section 105 provides- 105. Lease defined.—A lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops,

service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. Lessor, lessee, premium and rent defined.—The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent.

a. Doctrine of Frustration

In a Contract, in the absence of a Force Majure clause, a party can opt for the doctrine of Frustration of Contract under Section 56 of the Contract Act. In the absence of a Force Majure Clause in a Lease Deed, the Courts have generally not allowed the defense of frustration of Contract under Section 56 of the Contract Act for a Lease Deed as it is an executed Contract  and the rights under a Lease are governed by the Transfer of Property Act in India and not under the Indian Contract Act, 1872. The Supreme Court clarified this position in Raja Dhruv v. Raja Harmohinder Singh 1968.

Thus commercial Leases, Co Working Spaces, Malls, Restaurants etc not having any Force Majure Clause in their Lease Deeds cannot avail the benefit of Section 32 or Section 56 of the Indian Contract Act, 1882. The same is the position outisde India too, in relation to Frustration. However, Lord Wright observed, “But the doctrine of frustration is modern and flexible and is not subject to being constricted by an arbitrary formula. I am not, therefore, prepared to state as a universal principle that it can, in no circumstances be applied to a lease.”. 

b. Section 108 (B) (e) of the Transfer Of Property Act, 1882

Section 108 (B) (e) of the Transfer Of Property Act, 1882, relating to the rights of the Lessee (s), provides as under-

(e) if by fire, tempest or flood, or violence of an army or of a mob, or other irresistible force, any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let, the lease shall, at the option of the lessee, be void: Section 108 (e) of the Transfer of Property Act is a specific section which deals with the substance of Sec. 56 of the Indian Contract Act would show that the doctrine of frustration as enacted in Sec. 56 is substantially incorporated in Sec. 108(e) of the Transfer of Property Act The result is that under the Contract Act,

the contract stands discharged as this is a part of positive law; whereas under Transfer of Property Act it depends on the option of the lessee. In the case of Dhruv Dev vs Harmohinder Singh and others, the Hon’ble Supreme Court held that the Doctrine of Frustration under Section 56 of the Indian Contract Act would not apply to leases of land. It, however, held that if the leased property is destroyed by fire, tempest, flood or violence, then the tenant has the option to declare the agreement void or non-performable under Section 108 of the Transfer of Property Act, 1882.

 The High Court of Andhra Pradesh in the case of Gandavalla Muniswamy vs Marugn Muniramaiah clarified the position of Section 108(B)(e) as under:

“under section 108e, T.P. Act a lease is not automatically determined on the destruction by fire or irresistible fore of a substantial portion of the property leased. It is a matter of option with the lessee to get rid of the lease or not. He could treat it as void of he so desired. But the law does not compel him to do so. This aspect of the matter makes it all the more necessary that an unambiguous declaration of the lessees intention to treat the lease as void must be communicated to the lessor.

The lessor would not otherwise be able to take appropriate steps on the footing that the lease has to come to an end and he is therefore after liberty to deal with the property as he chooses. What is even more important is that a mere declaration of intention to treat the lease as void is not sufficient. The lessee must also yield up possession of the property to the lessor as required by the provisions of Section 108(q) of the Transfer of Property Act. He cannot continue in possession and yet declare that he has treated the lease as void. That sould obviously be an inconsistent and impermissible position to adopt. So long as a lessee has not surrendered to his lessor the possession which he obtained from the latter at the time of the lease, he cannot rid himself of his obligations under the lease.”

The Lessee can have his contract determined/ terminated under the said Section. However, as we all know that the Lockdown is itself Temporary in nature and not Permanent. Besides, after the upliftment of the Lockdown, the Lessee would want to continue from the said premises.  Besides, there needs a clarification if Covid 19 is an irresistible Force. The same is a grey area. Otherwise, even though the Lease Deed would be terminated by the Lessee, he/she would be liable to pay the Lease Rentals, if Covid 19 does not fall under the ambit of irresistible force. The Termination would not be valid.

The options that may be available are-

1. continue paying the Lease Rental in the agreed time period
2. Discuss with the Lessor and renegotiate the Terms (After the upliftment of the Lockdown do not forget to execute and register a Correction deed for the Renegotiated Terms for the remaining period)
3. Send a letter/Notice invoking the Force Majure clause in the Agreements/ Contracts or Letter/ Notice under Section 108 of the Transfer of Property Act, 1882 or a Letter/ notice for Termination, Determination or treating the Deed to be Void. Sending the same after the upliftment of the lockdown may appear to be an afterthought. In any case, the provisions of Termination of Lease under the Transfer of Property Act have to be followed.

Apart from the Force Majure Clause in the Lease Deed there seems no ground or statutory Notification under which the Lease Rentals can be legally withheld in the period of the lockdown. If not settled mutually between the Lessor and the Lessee, every matter may see its way in the Court. If lease rental is unpaid, the same may lead to breach of the Lease Deeds. The matter can be discussed and mutually resolved. If not, perform the contract or face the consequences for breach of contract.

Commercial Impossibility

Can a Commercial Impossibility/ financial crunch be taken as a defense under Force Majure or Frustration is also to be addressed.  It is a settled that the theory of frustration or impossibility of performance of a contract cannot be applied to cases of commercial transactions. In other words, the impossibility referred to in S. 56 is not commercial impossibility. In his treatise on “Impossibility of performance”, 1941 Edn. Roy Grenville Mc Elory states at p. 194 under the heading “Commercial Impossibility is not frustration” : So far as existing authorities go, no change in economic conditions, however serious, and however deeply it may affect the contract, can by itself amount to impossibility such as to avoid it. There is no implied condition as to ‘commercial’ impossibility. It is false and misleading, therefor, to use the term ‘frustration’ to describe such a situation.

The Real Estate (Regulation and Development) Act, 2016- a sigh of relief for the Promoters/ Builders

Due to the aforesaid lockdowns, the supply chains for obtaining construction material have been disrupted and Labour work force may have migrated back to their home states. Due to these circumstances, Real estate projects across Maharashtra will take some time to restart work. The RBI has also allowed banks to provide a three month moratorium on fixed term loans and EMI payments.

Hence, in furtherance of the relentless efforts of the Government, MAHARERA vide its circular dated 2 April 2020 for  Revision of Project Registration Validity and Extended Timeline for Statutory Compliances, in view of Covid 19 Pandemic extended the registration of all real estate projects by a period of three months, in cases where registration is expiring on or  after 15 March 2020. Further, Maharashtra RERA Authority, have also extended the timelines for compliance of the RERA Act which were due in March / April / May are to 30th June 2020. Naturally, the demand Notices also may not be reaching the allottee(s).

TIPS!

It is impossible to imagine the time frame of the Lockdown. A few Safeguards/Tips that could be followed-

1. Review your Lease Deeds/ Agreements
2. Take the guidance of an Advocate for the Force Majure Clause
3. Comply with the Statutory Notice formalities at the earliest
4. Keep the records of all the expenses incurred
5. Mutually have a word with the other Party and try and settle the matter
6. Take note of all the Notifications and Circulars
7. Ensure that all Contracts henceforth have a Force Majure Clause.

Stay Home and Stay Safe!