I. Introduction
In the current scenario, the question as to whether the lockdown would entitle tenants to claim waiver/exemption/suspension of rent is a pressing one. Whilst there remains no one size fits all answer to this question, the Hon’ble Delhi High Court on 21st May 2020 in the case of Ramanand Ors. v. Dr. Girish Soni and Anr. (CM APPL. 10848/2020) dealt with this issue and inter alia laid down broad parameters pertaining to the law in relation to lease agreements and the applicability of Force Majeure. In doing so, the Hon’ble Court examined relevant provisions of the law namely Section 108 (rights and liabilities of lessor and lessee) of the Transfer of Property Act, 1882 (“TP Act”), Section 32 (contingent contracts) and Section 56 (frustration of contracts) of the Indian Contract Act, 1870 (“Contract Act”) and provisions of the Delhi Rent Control Act, 1958 (“the DRC Act”).
II. Facts of the Case
i. Vide a lease deed executed on 1st February 1975 at Rs.300/- per month the Respondent No. 1/ Landlord gave the premises being Shop No. 30-A, Khan Market, New Delhi (“tenanted premises”) to the Appellants/ Tenants (“Appellant”) for commercial purposes, i.e. to run a shoe store.
ii. Thereafter, the Respondents filed an eviction petition under Section 14(1)(e) of the DRC Act and a decree of eviction was passed vide order dated 18th March 2017. The Appellants filed an appeal against the order of eviction which came to be dismissed by the Ld. Rent Control Tribunal on 18th September 2017.
iii. A revision petition was filed by the Appellants/Tenants challenging order dated 18th March 2017. In the revision petition vide order dated 25th September 2017 the Ld. Single Judge stayed the order subject to the Appellants making an advance monthly payment of Rs.3,50,000/- (Rupees Three Lakhs Fifty Thousand only) to the Respondents. The Order also stated that default in making the payment would automatically vacate the stay and the Respondents would be entitled to execute the order of eviction.
iv. Following the outbreak of COVID-19, an application for suspension of rent was moved urgently by the Appellants.
III. Important observations made by the Court
A. Section 32 and Section 56 of the Contract Act.
i. The Court stated that though the relationship between lessor and lessee and landlord and tenant could be found in different forms, they are primarily governed by the law of contracts and the terms of the contract would determine the parties’ rights and obligations.
ii. The Court observed that contracts which contain a force majeure clause would be governed by Section 32 of the Contract Act. In such contracts, the tenants/lessees seeking exemption/waiver of rent would have to resort to the provisions of their contracts and examine the force majeure clauses to make out their case. In this regard the Hon’ble High Court relied upon the Hon’ble Supreme Court of India’s (“Apex Court”) judgment in the case of Energy Watchdog v. CERC & Ors. ((2017) 14 SCC 80). Further the Court observed that the fundamental principle would be that if the contract contains a clause (in terms of Section 32 of the Contract Act) providing for some sort of waiver/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.
iii. In the absence of a force majeure clause in the contract, the tenant may invoke Section 56 of the Contract Act, i.e. frustration of contract. However, the Court held that the same is inapplicable in the present case. In the facts of the given case, the Court relied upon the judgment of the Apex Court in the case of Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr. (AIR 1968 SC 1024) wherein the difference between ‘completed conveyance’ and an ‘executory contract’ was elaborated. The Apex Court in this judgment unequivocally held that 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. This position was also reiterated by the Delhi High Court in the case of Hotel Leela Venture Ltd. v. Airports Authority of India (2016 (160) DRJ 186) where it was held that the Doctrine of Frustration and its broad principles are inapplicable in the case of lease agreements.
B. Section 108 of TP Act.
i. The Court placed reliance on Section 108(B)(e) of the TP Act. The said sub section provides for situations which would render the property substantially and permanently unfit for the purpose for which it was leased and its consequences. It also provides that at the option of the Lessee, such lease would be void. The Court observed that the terms ‘substantially and permanently unfit’ could not be constituted by temporary non-use by the tenant due to any factors and would not entitle the tenant to invoke this section. The threshold to invoke Section 108(B)(e) would be the concept of ‘permanent destruction’ of a property. The Court observed that this threshold would exclude even the destruction of a building on land which is the subject matter of the lease. Therefore, it was observed that in the absence of complete destruction of the property which is permanent in nature caused by a force majeure event, the lessee could not seek protection under the provisions of TP Act. In this regard the Court placed reliance on the Apex Court’s judgment in the case of T. Lakshmipathi & Ors. v. P. Nithyananda Reddy & Ors. (2003 (5) SCC 150).
ii. The Hon’ble Court also placed reliance on the judgment passed by the Delhi High Court in the case of Sangeeta Batra v. M/s. VND Foods & Ors., ((2015) (3 DLT (Cri) 422) wherein it has been held that the fact that the leased premises, intended to be run as a restaurant, was sealed on two occasions is of no relevance as the tenants did not choose to avoid the lease. In the present case, in view of the settled legal position the Court held that temporary non-use due to the lockdowns could not be used as a defence under Section 108B(e) by the Appellant to avoid the lease or subvert its obligations to pay rent under Section 108(B)(1) of the TP Act.
C. Suspension of Rent and Equitable Jurisdiction
In cases where tenants seek suspension/waiver of rent due to temporary non-use due to the lockdown, they may, in the absence of a contract or contractual stipulation, resort to invoking the equitable jurisdiction of the Court. Whether the same can be granted would ultimately depend on the facts and circumstances of each case. In this regard, the Court relied on the following judgments:
i. Surendra Nath Bibran v. Stephen Court (AIR 1966 SC 1361)
In the said case, the Apex Court directed payment of proportionate part of the rent as the tenant was not given possession of a part of the property.
ii. Raichurmatham Prabhakar and Ors. v. Rawatmal Dugar ((2004) 4 SCC 766)
The Apex Court held that suspension of rent may be claimed by the tenant if the lessee has been dispossessed.
iii. Aranya Hospitality Management Services Pvt. Ltd. v. K. M. Dhoundiyal & Ors. (Arb. A. (Comm.) 6/2017)
The Delhi High Court in this case considered the force majeure clause of the contract to hold that the mere non-approval by the concerned authority for running a restaurant would not entitle the tenant to seek suspension of rent. The Court held that under circumstances wherein the tenant cannot use the property for the purpose for which it was leased, the tenant would have no right to continue enjoying the property and seek suspension of rent at the same time.
D. Revenue Share Agreements
With regard to contracts where a monthly pre-determined amount is paid purely as ‘rent’ or ’lease amount’, the Court observed that the manner in which pandemics, such as COVID-19 will play out would depend on the nature of the contract.
With respect to profit sharing agreements or an arrangement for monthly payment based on sales turnover, the Court observed that the party occupying such premises may seek waiver/suspension of rent strictly in terms of the contractual clause. The party occupying the premises could support their claim for suspension on the ground that there were no sales and no profits and therefore the monthly payment is not liable to be made. The Court observed that “the entitlement of the client in such a situation is not governed by any overriding force majeure event but by the consequence of that event, being that there were no sales or profits.” However, in such cases, the Courts would give due consideration and weightage to the terms of the contract between parties.
IV. Analysis
In this judgment, the Delhi High Court has upheld the rulings of the Apex Court in respect of the non-application of Section 56 of the Contract Act to Lease Agreements. The Court has also elaborated the option available to tenants seeking waiver/ exemption/ suspension of payment of rent and in doing so has stated that the threshold to seek exemption from payment of rent is very high. Unless the force majeure clause in the lease agreement provides for a contingency which allows for the waiver/ suspension/ exemption of rent, the requirement under Section 108 of the TP Act to avoid a lease deed is strictly construed. Whilst the Court did state that tenants may approach the Court under its equitable jurisdiction, whether such relief is to be granted would ultimately depend on each individual case.
In the present case, the Court also considered several factors such as the socio-economic status of the tenant, the location of the tenanted premises the rent amount and applicability of protection under Executive orders to hold that the tenants in this case could not be exempted from making due payments.
V. Conclusion
In this case, the Court examined not only the existing precedents of the Apex Court and the Delhi High Court but also based its decision on factors unique to the case at hand.
However, the legal principles with respect to the applicability of force majeure to lease agreements remain unchanged.
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