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As the impact of the pandemic Covid-19 builds by the day, the consequences of the lockdown imposed by the Government is bringing into focus the implications on the contractual obligations, especially that of lessors and lessees. Would a force majeure clause excuse parties from performing their obligations or from doing so on time during this crisis, is the query of the hour.

STANCE TAKEN BY COURTS ACROSS THE GLOBE IN SUCH SITUATIONS AFTER SIMILAR OUTBREAK OF PANDEMICS:

The SARS epidemic outbreak in 2003 was highly similar to the Covid-19 pandemic which is currently threatening the world right now during which period also many nations had imposed lockdowns, isolations, quarantine etcetera. With respect to the SARS epidemic in 2003, Hong Kong courts did not permit tenants to wriggle out of their obligations of payment in lease agreements, even when the tenant was not permitted to enter the leased premises due to temporary isolation orders.

The Hong Kong court in Li Ching Wing v Xuan Yi Xiong [2004] 1 HKLRD 754 held that a 10-day isolation period was insignificant in relation to the two-year lease. And that while SARS was unforeseeable, it did not ‘significantly change the nature of the outstanding contractual rights or obligations’ of the parties in the case.

LANDLORDS AND TENANTS – RESIDENTIAL V. COMMERCIAL PURPOSES:

However, it is to be noted that the scenario would be different for normal tenancy & lease agreements given for residential purposes, basic commercial purposes and the more complex corporate leave and license agreements. For instance mall leases have ceased to be in the nature of a tenancy agreement. The clauses are no longer limited to availability of the premises, rent, lock-in period, repairs, and exit. The mall owners sometimes get into our fee sharing arrangement based on sale targets with the retailers and such agreements would need closer scrutiny vis-à-vis the plain rental agreements. . Rent consists of both a percentage of the revenue earned by the retailer as well as a fixed monthly payment, which would have to be looked into under a different lens, given the circumstances.

So a lockdown, as the one currently in place as a result of the pandemic Covid-19 would have a more financially crippling effect on the lessees in a rigid leave and licence agreement than plain vanilla tenancy agreements and thus in such cases, depending upon the phraseology of the force majeure clause in the said agreements, the protection could be provided to the party committing a breach of the contract.

There are precedents of both the Supreme Court and various High Courts which allow for an avoidance of the lease at the option of the lessee. However, it preconditions the same with the property being rendered “permanently unfit”, which certainly is not the situation today with the COVID-19 lockdown.

SOME PRACTICAL/COMMON ISSUES SEEN AMIDST COVID-19:

Given the outbreak of the pandemic Covid-19, it appears as though all tenants are invoking the force majeure clause with respect to lease rentals in their communications to their respective landlords, especially in the case of commercial leases. The lessees also seek for waiver of not only the lease rentals but also, common area maintenance charges, utility bills, etc. Here again, if the language of the “force majeure” clause in the agreement is wide enough to cover all these under “amounts payable” encapsulating the above, it would be a difficult case for the lessor whereas if the clause only limits the same to lease rent alone it would be in favour of the lessor.

However this is under the presumption that there is a force majeure clause in the agreement which is mostly the scenario. However, in the absence of the same, the provisions of the Indian Contract Act and the doctrine of frustration come to the rescue of the party seeking refuge due to a force majeure event.

Another practical difficulty is the mismatch of expectations between parties whereas at times either a tenant demands something which prima facie appears a bit unreasonable such as waiver of rent and other charges for not just the period of the lockdown but also for a further period of 6-12 months well beyond the lockdown period. On the other hand, at times, landlords are unwilling to waive the lease amount payable during the lockdown period based on interpretation of the clause etc which could also come across as harsh given the slump in the economy which is aggravated by this pandemic. Both, the lessees and the lessors should ensure that their transactions at such a predicament are steeped in the principles of equity and fairness and do not look to extract undue benefits from the other party.

We have constantly maintained that in the present global scenario and more specifically in the context of financial strain in India; parties shouldn’t be landing themselves in disputes and litigation on this issue and try to find mutually acceptable solutions to the same. It is difficult but certainly achievable.

CONCLUSION: