decoding the if and buts of leases
By Divya Malcolm
In the pandemonium about the pandemic, force majeure has ceased to sound Latin.
Instinctively, everyone – suppliers, retailers, tenants, lessees – has sought to take refuge in
force majeure/ vis majeure, and avoid payments. It’s a natural fallout of Covid-19 lock-down
and the consequent drying up of revenues. However, the relationship of a lessor and lessee stands on a different footing. It’s neither ad hoc nor onetime; there is both (a) privity of contract, and (b) privity of estate; the duration is several decades: they are truly tied up in knots. The paragraphs below attempt to untie some of these knots.
A man’s word is his bond- impossibility of performance, the only exit:
Commerce and trade would have been impossible if businessmen were allowed to walk in and out of the promises made by them. The law too casts a firm responsibility on them to perform their contractual obligations. In this spirit, under Section 37 of the Indian Contract Act, 1872, the parties are specifically enjoined upon to perform their promises unless such performance is dispensed with or excused under the provisions of the Contract Act, or of any other law. One such instance is when the performance of an act becomes impossible without any fault of the promisor. Section 56 deals with such instances and embodies the doctrine of frustration of contract. However, the Courts have consistently held that contracts cannot be frustrated on the grounds of commercial difficulty, inconvenience or hardship. Force Majeure is, therefore, construed strictly. And should a contract define force majeure, the manner in which it should be invoked, the consequences (including compensation, suspension of obligations, or termination) that shall follow, they are all implemented to a tee by the Courts.
In case of leases the matter is although the more sticker.
Section 56 of the Contract Act inapplicable to leases:
Leases are dealt with by the Transfer of Property Act, 1882 (popularly called TOPA). Under law, special statutes override general enactments such as the Contract Act. Since TOPA holds sway on leases, Section 56 of the Contract Act is ousted. Further, the two landmark
judgement of the Supreme Court [(a) Raja Dhruv Dev Chand v. Raja Harmohinder (AIR 1968 SC 1024) and (b) Sushila Devi v. Hari Singh (1971) 2 SCC 288] have left no scope for doubts or debate. A joint reading of the two bears out that Section 56 of the Indian Contract Act, 1872 does not apply to leases as it is a completed conveyance different from an executory contract and events which discharge a contract do not invalidate a completed transfer or lease.
It is not that force majeure finds no place in TOPA. Clause (e) of Section 108, reproduced below, is as close as it gets:
“(e) 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.”
Hence, only if the force majeure event is of such a nature that the leased property is substantially, and permanently destroyed it can be voided at the option of the lessee.
The Delhi High Court’s judgement dated July 15, 2016 Airports Authority of India V/s. Hotel Leela Ventures Limited offers a succinct treatise on the subject. Briefly, the lessee sought remission in the lease rent as the project had become commercially onerous on account of recession in the hospitality industry triggered by the terrorist attacks in Mumbai in 2008. The lease under question was for a duration of 30 years, and the lease rent was calculated as a percentage of the revenue. The Hon’ble Delhi High Court held the Petitioner’s claim to be false, frivolous, and an abuse of the process of law. It may be noted that the Special Leave Petition preferred by Hotel Leela Ventures against the Delhi High Court’s order failed.
Leave & Licenses:
Overtime the business of letting out of property has evolved. Today, multinationals operate from co-working spaces. Mall owners, at best, execute a leave and license agreement in favour of the retailers. Restaurateurs operate from premises on Business Conducting Basis.
Hence, the nuances of leases may be of little relevance to them. In such cases, a lot turns around the wordings of the contract.
Under Covid lockdown the relationship between co-working space operators and their users, mall owners and retailers is teetering. Very few contracts provide for suspension of monthly compensation / conducting fee / rent during the subsistence of the force majeure event. Most provide for termination in case the event continues for over 3 months. However, termination is never a solution. With large security deposits, un-depreciated fit-out costs, and goodwill attached to premium sites at stake, parties need to sit across the table with the property owners and brainstorm solutions.
So far as Maharashtra is concerned, there is yet another aspect which has been lying low for sometime, but may now become rather sensitive. If the owners of commercial properties terminate the leave and license agreements, notwithstanding any arbitration clause, for eviction of the licensees, the correct forum is the appropriate civil court and not the arbitral tribunal. A reconciliatory approach in a plummeting market may be good for the owners too.
To quote Nelson Mandela: “May your choices reflect your hopes, not your fears”.
Divya Malcolm is a Partner at Kochhar & Co., Advocates and Legal Consultants. The views
expressed in this article are her own and not that of the firm.