Tenancy in the regime of COVID-19

24th March onwards, people were asked to stay at home and not to be outside. After the announcement of the first nationwide lockdown, people have not been able to go outside for their work or any other reason as they used to, people lost their jobs, salaries have been cut off, companies have gone bankrupt. This is certainly not a good time for the economy. As the tenant's ability to pay rent has been adversely affected, the financial state of the landlords has also been disturbed. A prominent question has been aroused is whether tenants across the country would be exempt from paying rent for the duration.

Let's take a look at the Indian laws governing the concept of the lease to get a clearer picture.

First of all, What are a lease and a tenancy?

A `lease' is defined in Section 105 of Transfer of Property Act, 1882 (in short T.P. Act), thus:-"105.

Lease defined - A lease of immovable 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 things to be so rendered is called the rent." And a tenancy is created as a result of an agreement between the landlord and a tenant. Since the premises owned by the landlord are leased out to the tenant by virtue of the agreement between the parties, the agreement is normally called a `lease deed'.

Now let's move to the Act governing Lease.

When a lease is executed, though it is a contract under the Indian Contract Act, 1872, there is a transfer of property. Hence, the lease is governed under the Transfer of Property Act, 1881.

The lessee is put in possession and it is the duty of the landlord to allow the tenant to continue in possession without interruption under Section 108(c) of the Transfer of Property Act, 1881. Further, the lessee is bound at the proper time and place to pay the rent to the lessor as provided under Section 108 of the Act.

Under the normal scenario, tenancy, as a general rule, is terminated based on the following:

  • by action/Inaction of the Tenant in violation of the rental/lease agreements;

  • by action/Inaction of the landlord/owner in violation of the rental/lease agreements;

  • by mutual agreement;

  • by any order/decree from the jurisdictional Court or Tribunal;

  • (FMC) or Doctrine of Suspension of rent.

Tenants are hoping to invoke the doctrine of force majeure as legal protection against the non-fulfilment of their contractual obligations. Even large corporations like PVR and Reliance Retail have been forced to invoke this maxim. Statutory bodies like the RERA in many states have had to take note of the pandemic as a force majeure.

An FM or force majeure event can be understood as an extraordinary event or a circumstance beyond human control, which frees both the parties from contractual obligations, when prevented by such an event, from fulfilling their obligations under the contract. Force Majeure Clause (FMC) is one such standard clause which is invariably incorporated in each and every Agreement and incorporates such FM instances or events as decided by the parties. It also entitles legally to suspend and or to not to perform an undertaking by a party (without the same amounting to an express breach of an undertaking by the said party- here we are concerned with the rent only) for the duration of the FM event. Unfortunately, most of the FMCs in already concluded Agreements do not have a pandemic event like the present COVID-19 incorporated in it. What is a most important thing to be noted is that existence of an FM event in no any manner excuses complete non-performance by a party or absolves entirely such non-performance by a party in all times to come. An event in order to be stated to be an FM event inter alia must (a) directly or by implication be an event which is beyond the reasonable control of any of the parties & (b) must affect the ability to perform by any of the parties.

In the case of ''Court of Wards Dada Siba Estate v. Raja Dharan Dev Chand,, it was held that,

“...where a contract creates an estate in land, the rule of frustration is inapplicable to put an end to such an estate which has already been created in favour of one of the parties and that the doctrine of frustration is applicable only to purely contractual obligations”.

An argument that the question of the frustration of a lease by the destruction of the property is to be decided under the Transfer of Property Act, but other cases of the lease becoming impossible such lockdown is to be adjudged under the Contract Act, seems rather difficult, as propounded in Mahadeo Prosad Shaw v. Calcutta Dyeing and Cleaning Co.

An argument that the question of the frustration of a lease by the destruction of the property is to be decided under the Transfer of Property Act, but other cases of the lease becoming impossible such lockdown is to be adjudged under the Contract Act, seems rather difficult, as propounded in Mahadeo Prosad Shaw v. Calcutta Dyeing and Cleaning Co.

"It is an established principle that where there is a general law and a special law dealing with a particular matter, the special excludes the general."

In that view, Section 56 of the Contract Act has no application to leases and instead of that, Section108 (e) will apply so far as frustration relating to leases is concerned.

However, for the present crisis, even the provisions of Section108 (e) of the Transfer of Property Act are also inapplicable, because the land was neither destroyed nor became permanently unfit for the purposes of occupation.

To sum up, a contract of lease may be avoided at the option of the lessee on the happening of an event as contemplated under Section 108 (B) (e) of the Transfer of Property Act. In such a case, the lessee cannot continue to hold on to the premises or say that the lease continues but he will not pay the rent.

The rights of the lessee in the demised property continues notwithstanding the fact that for a certain period, the lessee was prevented from deriving substantial benefits out of the lease due to the circumstances beyond the control of anybody.

Thus, It is, therefore, advisable for the parties to themselves come forward and negotiate and agree to a reduced rental, apart from amicably and out of court resolution of the issue of payment of the rental for the period of operation of the FM period and sometime thereafter, say till December 2020 to begin with, and to again take stock at the end of 2020 and thereafter either shift to the original rental (as per the Agreement) or take a call whether to continue with this temporary arrangement and or to further negotiate to reduce the rentals. If the lessee/ tenant has gone bankrupt or has refused to continue his/her business from leased premises because of the various financial reasons beyond its control and has shown its inability to pay the entire rental for the lock-in period, the parties must also resolve this issue with a human touch as Court intervention may not give the lessor/landlord an immediate relief, that too when the tenant/ lessor is a legal entity with limited liability clause in its Article of Association.

Official Writer - Sneha Kumari

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