As India enters its second week of government mandated lockdown, various economic relationships are being strained. One important relationship that deserves closer study in these uncertain times is that of lessor and lessee (see here). On account of the ensuing lockdown, businesses that have been deemed to be non-essential have been forced cease operations and cannot access their leased office premises. These circumstances provide an opportune moment to examine how the doctrine of frustration interacts with and applies itself to leases.
A. Force Majeure, Frustration and Lease Deed
At the very outset, it is important to clarify that the general rule of force majeure under Section 56 of the Indian Contract Act, 1872 (ICA) does not apply to lease deeds. The Supreme Court clarified this position early on in Raja Dhruv v. Raja Harmohinder Singh (1968). Here, agricultural lands were leased in erstwhile undivided Punjab for cultivation. Such cultivation subsequently became impossible on account of the partition of India. The Plaintiff (the initial lessee) commenced an action for refund of the previously paid rents. The Supreme Court dismissed the claim of force majeure under Section 56 on two broad grounds. First, it held that rights under a lease are not simply contractual rights but are instead governed under the provisions of the Transfer of Property Act, 1872 (TPA). Second, the Court reasoned that Section 56 of the ICA does not apply to a concluded contract where no further performance was required. The Supreme Court re-affirmed this position in Sushila Devi v. Hari Singh (1971) which also involved a claim for refund of rent and deposit in relation to lands that now formed part of Pakistan.
It is important to bear in mind that although the general law of force majeure is inapplicable to lease deeds, this does not prevent parties by way of contract to agree to certain protections in the event a force majeure event does arise. This issue is discussed below.
B. Transfer of Property Act and unforeseen circumstances
Section 105 of the TPA defines a “lease”. The Transfer of Property Act recognizes certain situations under which unforeseen circumstances may give rise to a justified ground to treat the lease as terminated. Section 108(B)(e) of the TPA provides “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 ...” (emphasis supplied). Similarly, Section 111(b) of the TPA allows parties to consent to the determination of the lease upon the happening of an agreed event (such as a force majeure event).
The Supreme Court precedent on Section 108(B)(e) of the TPA does not address the scope of “other irresistible force” and instead clarifies what happens to a lease/tenancy when the building is destroyed. In Vannattankandy Ibrayi v. Kunhabdulla Hajee (2001), the Court held that upon the destruction of a building due to fire, the lessee has the option to treat the lease as having become void and avoid further obligation to make rent. However, in the event that such option is not exercised by the lessee, he is not entitled to squat on the land. In Saha Ratansi Khimji v. Kumbhar Sons Hotel Pvt. Ltd. (2014) the Court overruled Vannattankandy Ibray and held that merely because the leased premises are destroyed, does not mean that the tenancy stands automatically terminated. Both of these decisions deal with situations where the leased premises were physically destroyed and not where tenants were prevented from accessing such premises due to supervening events. Accordingly, both Vannattankandy Ibray and Saha Ratansi Khimji are of little assistance in dealing with COVID-19 issues.
Section 108(B)(e) shows three criteria must be satisfied before any benefit can be derived: (i) the existence of an ‘irresistible force’; (ii) property becomes substantially and permanently unfit for use for which it was let; and (iii) the lessor must be informed of the lessee’s decision to render the lease deed void. Therefore, under Section 108(B)(e), it is as important to establish that COVID-19 rendered the property permanently unfit for the purpose for which it was leased out, as it is to establish that COVID-19 is in itself an instance of an ‘irresistible force’.
In this context, it becomes important to examine whether COVID-19 and the lockdown can be termed as an ‘irresistible force’ for the purposes of Section 108(B)(e). Black’s Law Dictionary defines force majeure, inter alia, as a “superior or irresistible force” (4th ed. 1972). While the authors have not come across a judicial precedent where the definition of ‘irresistible force’ has been specifically settled, obiter indicates that the Courts have not made a distinction between ‘irresistible force’ and force majeure.
Whether COVID-19 itself would qualify as a force majeure event is a question of fact and is most likely to be settled on a case to case basis. The National Disaster Management Authority Order dated 24 March 2020 could be used to argue possibly be argued as an ‘irresistible force’ preventing the lessee from using the property for the purpose for which the property was leased. However, it is unlikely that COVID-19 can be shown to render the property permanently unfit. It remains to be seen if this translates as being an ‘irresistible force’ for the purposes of Section 108(B)(e) of the TPA.
A discussion on Section 108(B)(e) of the TPA would remain incomplete without reference the lessee’s obligation to give notice to the lessor when an event of ‘irresistible force’ takes place. The law provides the lessee the opportunity to determine if an event within the ambit of Section 108(B)(e) of the TPA has permanently affected his ability to use the property. However, if there is an impairment to the lessee’s ability to use the property, the law imposes a strict obligation to give a notice under Section 108(B)(e) of the TPA to the lessor. If the lessee fails to give notice under Section 108(B)(e) of the TPA, the lease is deemed to remain unaffected regardless of a force majeure event. It is important to note that once this notice is sent, the lease agreement between the parties stands terminated.
C. Payment obligations and unforeseen circumstances
An obvious and major concern is whether the payment obligations under the lease remain active despite the lessee not having access to the property. The question as to COVID-19 and not having access to the property is a question of fact for the courts to determine on a case to case basis. But Courts have deemed that the lessee is in possession of the property and has access to is unless a notice under Section 108(B)(e) of the TPA is sent to the lessor.
In Shankar Prasad and Ors. v. State of M.P. and Ors. (ILR [2013] MP 2146) the High Court of Madhya Pradesh held that the obligation to pay rent by the lessee did not cease, even though the godown leased out was completely destroyed by a fire, as the lessee had not sent a notice under Section 108(B)(e) of the TPA to the lessor. This position of law has also been followed by the High Court of Bombay in Amalgamated Bean Coffee Trading Company v. Surjit Singh Jolly (2017) and the Delhi High Court in Chamber of Colours and Chemicals Pvt. Ltd. v. Trilok Chand (1973) and Airport Authority of India v. Hotel Leela Venture Ltd (2016). The logic governing these transactions is that unless the lessee satisfactorily surrenders the property by way of a notice, the lessee is deemed to be using the property and is obligated to pay rent. The lessee should be mindful to elaborate, in its notice, reasons as to why COVID-19 is an event of irresistible force under Section 108(B)(e) of the TPA. It is also settled law that a financial inconvenience in making payment does not qualify as a force majeure event.
D. Considerations for a Lessee
The relationship between the lessee and the lessor are primarily governed by the terms of the lease deed. If the lease deed does not have a force majeure clause, resort has to be had to Section 108(B)(e) of the TPA. The lessee will have to first satisfy himself that the event is one of ‘irresistible force’ and has to notify the lessor to avoid future rental payments.
This analysis is complicated by two important considerations. First, a lessee can only seek the benefit of Section 108(B)(e) if the lease in question is duly registered under the Registration Act, 1908. In the absence of registration, a lessee must examine their protection under common law for a month to month tenancy. Second, most lease agreements for commercial establishment contain an arbitration clause as the means for dispute resolution. The arbitrability of disputes under a lease deed is currently pending resolution by the Supreme Court. In Himangni Enterprises v. Kamaljeet Singh Ahluwalia (2017) the Court held that disputes under the TPA were non-arbitrable. The correctness of this view has been doubted in Vidya Drolia vs Durga Trading Corporation (2019) and a reference to three judge bench is currently pending.
Given the large number of open-ended questions, it would be interesting to observe how courts react to the impact COVID-19 has had on various economic relationships.
The authors are lawyers at Keystone Partners.