COVID-19, a pandemic is an unprecedented crisis which has spread across 209 countries and territories around the world. The Indian market has also suffered due to the pandemic and the lockdown enforced by the government to contain the pandemic. Due to lockdown imposed by the Central Government on March 24, 2020, businesses in India have faced huge losses. One of the markets which was also impacted by the pandemic is the real estate market for leasing commercial spaces.
Due to the pandemic the commercial leased spaces were not used by the lessees. The situation created by the pandemic forced the parties to revisit their contracts and understand the agreed position regarding payment of rent or termination of agreement under the ‘force majeure' provisions.
Force Majeure has commonly been understood as a superior force or the circumstances that are beyond the control of either of the contracting parties. Under the Indian legislation force majeure is not specifically dealt with under any statute, however Section 32 and 56 of the Indian Contract Act, 1872 have been referred in terms of the doctrine of force majeure. Various cases have been adjudged by the courts on which the concept of force majeure is dependent.
It has been decided by the apex court of India in the judgement Raja Dhruv Dev Chand v. Raja Harmohinder Singh1 that the provisions of the Transfer of Property Act, 1882 shall be read into the Indian Contract Act, 1872 and not vice-versa. This interpretation meant that the general provisions of the Contract Act will not apply to the lease agreement as the lease agreements are governed by a specific law i.e., Transfer of Property Act, 1882. The apex court held in this case:
“There is a clear distinction between a completed conveyance and an executory contract, and events which discharge a contract do not invalidate a concluded transfer. By its express terms s. 56 of the Contract Act does not apply to cases in which there is a completed transfer.”
In another case adjudged by the Supreme Court of India1 the doctrine of ‘frustration of contract' available under the Indian Contract Act, 1872 was decided to not be available to lease agreements as the transaction of leasing a property where not only a privity of contract but a privity of estate has been created as lease is a transfer of an interest in immovable property within the meaning of Section 5 of the Transfer of Property Act, 1882 read with Section 105 of the Transfer of Property Act, 1882.
Section 108(B)(e) of the Transfer of Property Act, 1882 provides the conditions which may be considered as force majeure event. In can be summarized into three ingredients (i) irresistible force (ii) property is developed permanently and substantially unfit for use; and (iii) lessee must convey its decision to the lessor regarding the agreement is void.
Considering the aforesaid, the force majeure clauses of the lease agreement play an important role. Traditionally, the force majeure is a standard provision in the lease agreement which usually provides what can be a force majeure event, parties to mutually decide whether the damage caused by the force majeure event is curable or not, payment of rent during the force majeure period.
Due to the pandemic of COVID-19, force majeure clause cannot be provided in the lease agreement in a summarized manner. The force majeure clause should be codified in a manner which caters to all the circumstances which may affect the lease. For example, after lifting of the lockdown, the office spaces were allowed to operate at half capacity, therefore, the leased property is used but is not fully used. Force Majeure event may contemplate the mechanism of payment of rent in this case. Similarly, during the subsistence of a force majeure event which may be for an indefinite period, the lessee may not be required to pay the lease rent.
The force majeure clause should define which event may fall under the category of force majeure event. Secondly, a mechanism to send information of a force majeure event to the other party shall also form part of the force majeure clause. Usually, the parties dispute over the date from which the force majeure event begun. Thirdly, contemplating circumstances as a consequence of which the agreement may be terminated, or payment of rent is paused during the subsistence of the force majeure event. Payment of partial rent on partial occupation of the lease space is one of the mechanisms that may be decided between the parties.
Footnotes
1 Civil Appeal No. 407 of 1965, decided on March 01, 1968
2 T T. Lakshmipathi v. P. Nithyananda Reddy
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
