Ruckus of the Rent – Delhi High Court may have an answer

Case Update: Delhi High Court decision on whether the lockdown would entitle tenants to claim waiver or exemption from payment of rent or suspension of rent.

One of the burgeoning issues of the current Covid-19 pandemic has been the contractual relationship between a tenant and landlord. With the economy plunging south and liquidity diluted on account of the regulatory restrictions in trade, business, the plight of tenants and landlords continues to echo.

In this opaque environment, the Delhi High Court (“the Court”), on 21 May 2020, rendered its decision in Ramanand & Ors. vs. Dr. Girish Soni & Anr, RC Rev 447, 2017 where the Court discussed the impact of the lockdown due to Covid-19 on contractual relationships between a tenant and a landlord.

In this judgment, the Court while analyzing Sections 32 and 56 of the Indian Contract Act, 1872 (“ICA”) and Section 108 (B) of the Transfer of Property Act, 1882 (“TPA”) held that the lockdown would not entitle the tenants to claim waiver or exemption from payment of rent. The Court, however, allowed the tenant a relaxation in the schedule of payment “owing to the lockdown”.

The facts

An urgent application was filed by the tenants raising issues relating to and for seeking suspension of payment of rent owing to Covid-19 lockdown crisis in a pending revision petition (“Urgent Application”) being RC Rev. 447/2017 (“Revision Petition”) which had challenged an order passed by the Senior Civil Judge-cum-Rent Controller granting a decree of eviction in respect of a shop in Khan Market, New Delhi (“Premises”).

The Revision Petition was first heard on 25 September 2017 and an order was passed fixing a monthly rent of INR 3.5 lakhs as a condition for grant of stay for continued use and occupation of the Premises (“Order”). However, in view of the lockdown, the Urgent Application was filed by the tenants stating that due to the complete disruption of business activities, the “circumstances are force majeure and beyond the control of the Tenants”.

In the Urgent Application, the tenants prayed for (a) waiver of the monthly rent fixed in terms of the Order; or (b) a partial relief in terms of suspension, postponement or part-payment of the rent. In reply, the respondent, argued that a mere disruption of the business cannot exempt the tenants from making the monthly payments as the landlord also depends on the income from the Premises.

Analysis and Findings of the Delhi High Court

The Court rejected the Urgent Application.

Amongst other things, the Court held that a relationship between a tenant and a landlord is primarily governed either by contract or by law and therefore, the rights and obligations, in relation to Force Majeure can only be determined by the terms and conditions, whether express or implied, under the contract.

The Court relied on Energy Watchdog v. CERC & Ors., (2017) 14 SCC 80 and other judgments on Section 32 of the ICA and held that “[t]he fundamental principle would be that if the contract contains a clause providing for some sort of waiver or suspension of rent, only then the tenant could claim the same. The force majeure clause in the contract could also be a contingency under Section 32 which may allow the tenant to claim that the contract has become void and surrender the premises. However, if the tenant wishes to retain the premises and there is no clause giving any respite to the tenant, the rent or the monthly charges would be payable.”

Therefore, it was concluded that without an express or implied term or agreement (between the parties) which provides respite to the tenant, the rent or monthly charges would be payable.

In relation to Section 56 of the ICA, the Court held that “[i]n the absence of a contract or a contractual term which is a force majeure clause or a remission clause, the tenant may attempt to invoke the Doctrine of Frustration of contract or `impossibility of performance’, which however would not be applicable in view of the settled legal position…..”

The Court also referred to the decision in Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr., AIR 1968 SC 1024 where the Supreme Court had examined Section 56 of the ICA in the context of the obligations of tenants. In Raja Dhruv Dev Chand, the tenant had rented agricultural lands in Punjab which he could not use because of the partition in 1947. Consequently, the tenant demanded refund of the rent for the Kharif season in 1947 and Rabi season of 1948. The Supreme Court held that in the Indian context, Section 56 of the ICA“lays down a positive rule relating to frustration of contracts and the Courts cannot travel outside the terms of that section”. Importantly, it was also held that Section 56 does not apply to lease agreements. The Court drew a distinction between a “completed conveyance” and an “executory contract”.

Given the law on this subject, the Court concluded that “a lease is a completed conveyance though it involves monthly payment and hence, Section 56 cannot be invoked to claim waiver, suspension or exemption from payment of rent” and therefore, a lease has to be understood as “executed contracts” and not “executory contracts”.

Thereafter, in the absence of any express/implied contract between the tenant and landlord, the Court explored the applicability of Section 108(B)(e) of the TPA which recognises the doctrine of force majeure.

The Court observed that Section 108 (B)(e) of the TPA would only be applicable in the absence of any contractual stipulation between the parties and that the lease would be void if, due to fire, tempest or flood, or violence of an army or of a mob, or other irresistible force, “any material part of the property [of the property] be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let”. (emphasis supplied).

Significantly, the Court went on to hold that the temporary non-use of the property would not render it substantially and permanently unfit.

However, the Court concluded by holding that for a lessee to seek protection under Section 108(B)(e), there has to be complete destruction of property of a permanent nature destruction due to the force majeure event.

Having examined the TPA, the Court held that “[i]n view of the above settled legal position, temporary non-use of premises due to the lockdown which was announced due to the COVID-19 outbreak cannot be construed as rendering the lease void under Section 108(B)(e) of the TPA.” And further that the tenant cannot avoid payment of rent

Finally, the Court held that with regard to suspension of the rent, a tenant may approach the Court by invoking the equitable jurisdiction of the Court. The Court rightly held that such a question would depend on the facts and circumstances of each case.

In the present case, the Court looked at various circumstances. For instance, (a) the nature of property – in this case being located in Khan Market in New Delhi made it a sought-after location for business purposes; (b) the financial and social status of the parties; (c) the amount of rent (INR 3.5 lakhs per month in this case) and whether that rent is commensurate to the prevalent rate; (d) other factors specific to the case; (e) any contractual provisions in the contract (the Court did not find any); (f) protections under any executive order.

The Court ultimately rejected the Urgent Application but allowed a postponement of rent in view of the lockdown.

Conclusion

This decision of the Court marks a significant development on the applicability of Sections 32 and Section 56 of the ICA and eventually, Section 108(B)(e) of the TPA, in the context of a landlord and a tenant relationship during the Covid-19 pandemic.

It is interesting to note that the Court discussed several alternative arguments. The tenants would have to look into the contractual provisions before taking a decision on the payment of their rents. The judgment also makes it clear, that it is not an inherent right of the tenant to ask for a deferral of rent from the landlord. Such a direction can only be given by a Court after looking into the facts and circumstances of each case.

Moreover, this judgment may serve as a yardstick for many ongoing and understandably contentious relationships between the parties. The impact of the lockdown due to Covid-19 on contracts, and in particular, rent agreements is here to stay, and it is certainly possible that this judgment may not be the last word on this point. The authors eagerly wait to see the legal development of this issue.

Omar Ahmad is a Partner with Cyril Amarchand Mangaldas. Abhinav Bhushan is the Director, South Asia, ICC Arbitration & ADR. This case update reflects the views of the authors only and not of the firm or institution they are associated with.