Dikshita Damodaran1
With the unprecedented COVID-19 pandemic the businesses all over the world have faced severe disruptions. The nationwide lockdown which began from March 24, 2020 till May 31, 2020 led to the stoppage of all the commercial activities in the country. Every industry faced the consequences of this pandemic and is trying to come up with coping mechanisms for the future.
The nationwide lockdown, the rising number of coronavirus cases in India, the abysmal revenue collection by businesses and, the social distancing norms has caused a severe blow to the commercial establishments and retail outlets. The pandemic has also raised questions on the sanctity of the terms of the commercial leases and license agreements.
The nationwide lockdown made the leased/ licensed premises inaccessible for three months for most of the businesses. Furthermore, even in the unlocking phase, the non-resumption of several public means of transport, social distancing norms, and the general fear amongst the public are acting as factors for the closure and curtailed operations in the leased premises.
The article aims to discuss the new discussions that are emerging in the present circumstances between the lessors and lessee concerning the existing lease/ license agreements. The article further aims to analyze the future of the commercial lease agreements and the possible financial arrangements that may emerge in the wake of the COVID-19 pandemic.
General provision with respect to the lease rent in the Lease/ License Agreement
A commercial lease deed or license agreement generally contains the provision relating to the payment of lease rent in the manner similar to the following clause:
“Lease Rent: The Lessee shall, on and from the Commencement Date i.e. …………., to till the end of the term shall pay a gross monthly rent of Rs. ………………. /- (Rupees ……………………) to the Lessor per month. (“Monthly Lease Rent”)
It is agreed between the Parties that the Lessee shall pay to the Lessor Monthly Lease Rent or revenue share by way of ……..% of the net sales whichever is higher.”
The abovementioned arrangement encompasses in its ambit two models of payments:
- The payment of a minimum amount as a monthly lease rent; or
- The payment of a certain percentage of revenue obtained from the premises whichever is higher.
This arrangement operates on a premise and assumption that a retail store or outlet will make a profitable business in a given month. However, in these unparalleled times even after the reopening of the outlets since the month of June, the retailers and businesses are struggling to exist and are on the verge of collapsing due to their mounting payment obligations and abysmal revenue generation.
Hence, depending on the terms of the lease and license agreements, the doctrine of ‘force majeure' is being cited to either suspend the onerous obligations under the agreement or to ultimately terminate the agreements all together. These circumstances have led to the renegotiation of the previously executed lease agreements and also reinventing the wheel in order to make existing arrangements of payment obligations in a manner beneficial to the lessor/ licensor as well as the lessee/ licensee under the agreements.
Judicial precedent in this regard
The Delhi High Court in the matter of Ramanand and Others v. Dr. Girish Soni and Others2, the Hon'ble Delhi High Court stated that the question as to whether the lockdown would entitle tenants to claim waiver or exemption from payment of rent or suspension of rent, is bound to arise in thousands of cases across the country, therefore certain broad parameters can be kept under consideration, to determine the manner in which the issues that arise can be resolved.
The Hon'ble Court has held that a temporary non-use of premises during the lockdown due to the COVID-19 outbreak cannot be construed as rendering the lease void excusing the tenant from the payment of rentals. The Hon'ble Court has made the following observations:
“29. In contracts where there is a profit-sharing arrangement or an arrangement for monthly payment on the basis of sales turnover, the tenant/lessee may be entitled to seek waiver/suspension, strictly in terms of the clause. Such cases would purely be governed by the terms of the contract itself, and the tenant's claim could be that there were no sales and no profits and thus the monthly payment is not liable to be made. Thus, the entitlement of the client in such a situation is not governed by any overriding force majeure event but by the consequence of the said event, being that there were no sales or profits.”
The observations of the Hon'ble High Court gave a much needed clarification that the obligations with respect to payments of lease rentals in the wake of the COVID-19 pandemic and the nationwide lockdown will only flow from the terms of the agreement. The Hon'ble High Court has held that Section 56 of the Indian Contract Act dealing with frustration of contract does not apply to tenancies. Thus, if the agreement contains a provision with respect to force majeure permitting non-payment of rentals the liability of the same shall not arise. However, in the absence of such a provision, the payment of rent will continue. The Hon'ble Court has further observed that relaxations can be granted to the tenants on equitable considerations.
Way forward
In light of the present circumstances, the rising number of coronavirus cases in India, the social distancing norms and the decline in the footfalls of customers' in the outlets, the retailers are in the process of negotiating the idea of changing the existing model of ascertaining the amount of rentals. The retailers all over the country are attempting to arrive at a decision wherein the agreements are being renegotiated with only the presence of a revenue sharing arrangement as a payment model. The change in strategy comes owing to the fact that the provision relating to the minimum monthly lease rent has caused severe revenue losses to the lessees'.
The current sequence of events, the closure of business activities for a continued period together with the orders of the government has compromised the financial health of various retailers. Therefore, to bring normalcy in the economic activities and upholding the sanctity of the contractual relationships, depending on the power of leverage and negotiation strategy of the parties, the adoption of the revenue sharing model as a mechanism for payment of commercial leases has a potential of being accepted as a way forward.
Footnotes
1 The Author is an Associate at Upscale Legal
2 Ramanand and Others vs. Dr. Girish Soni and Others RC. REV. 447/2017
Originally published 09 July, 2020
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.
