Can tenants stop paying lease rent due to COVID-19?

[ecis2016.org] Is a tenant entitled to stop paying rent, because of his inability to use the premises during the COVID-19 lockdown? We examine a judgment by the Delhi High Court, to answer this question

The current COVID-19-induced nationwide lockdown has been in continuance for 60 days and counting. This is certainly an unprecedented situation that we all have seen, till date. The economic impact of the Coronavirus pandemic, has forced all business houses, big or small, to look at ways to save costs. Rent occupies a fair share of the business cost. It pinches even more, when one is required to pay rent for space which is not being physically used. It, therefore, needs to be understood if, as a matter of right, tenants can suspend rent for the period when the premises remain inaccessible.

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Although there are several Supreme Court and High Court judgments, which lay down the position of law on contingent contracts under Section 32 of the Indian Contract Act, 1872, (ICA) and frustration of contracts / impossibility of performance, as summarised under Section 56 of the ICA and Section 108 of the Transfer of Property Act, 1882 (TOPA), most still find it difficult to understand the scope and correlation of these provisions of law.

Delhi High Court judgment on payment of rent during COVID-19

In the case of Ramanand and Ors (RC. REV. 447/2017 Ramanand and Ors v. Dr Girish Soni and Anr), the order passed by the Delhi High Court on May 21, 2020 (Order), pools in jurisprudence of the past and brings about clarity on the question of whether the present lockdown would entitle tenants to claim waiver, or seek exemption from payment of rent. The position that the current situation cannot be viewed under a common lens, has been fortified by the Order.

The force majeure clause in rental or lease agreements

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The Order predominantly deals with two situations. One, where the lease agreements contain a force majeure clause and the other, where lease agreements do not contain a force majeure clause.

The Order states that whether a lessee can seek suspension of rent due to inability to run its business, would depend on whether such situations and consequences are explicitly provided for in the lease agreements. If the force majeure clause does not envisage such a situation and does not provide for a waiver or suspension of rent, then, it would not be possible for the lessee to avoid payment of lease rent.

A very important aspect that the court has clarified, is that there are many contracts which have a force majeure clause but provide a right to the lessee only to terminate the contract and do not envisage a situation, where the lessee can suspend payment of rent. In such cases, it would not be open to the lessee to contractually demand suspension of rent. The lessees can, however, only opt to terminate the lease.

What if the tenancy agreement does not have a force majeure clause?

In case of lease agreements and other similar contracts (which are in the nature of executed contracts), which do not contain a force majeure clause, the Delhi High Court has reiterated the well-established position that the provisions of Section 108 of the TOPA shall apply and not Section 56 of the ICA.

Further, the court has stated that the threshold for applicability of Section 108 of the TOPA is extremely high and it deals only with situations where the property is rendered permanently unfit or is completely destroyed. The Order further clarifies that temporary inability to use the property would not fit within the threshold of Section 108 and therefore, if lease agreements do not contain a force majeure clause, lessees / tenants would not be in a position to take any statutory recourse and seek suspension or waiver of rent, in the present lockdown situation.

Suspension of rent due to Corona, on a case-to-case basis

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The Delhi High Court has inter alia held that mere temporary inability to access and use the premises, cannot allow a tenant / lessee to suspend payment obligations, unless the contract provides for the same. The court also clarified that if a lessee seeks remission or suspension of rent on the grounds of equity, then, the facts and circumstances in each case will have to be assessed, while determining whether a tenant is entitled to any such relief.

Payment of rent, in case of revenue share agreements

The court has also envisaged a scenario of revenue share agreements. It has stated that if the payment of rent is linked to profits under rental agreements, then, the tenant may be entitled to seek a waiver of payment of rent, if the tenant has not made any profits due to the lockdown.

Although the court did not deal with the aspect of minimum guaranteed rent, which generally forms a part of such revenue sharing rental agreements, considering the ratio laid down by the Delhi High Court, if there is a minimum guaranteed rent in such contracts and if suspension of rent is not envisaged, then, such minimum guaranteed rent would be payable by the lessee.

The Order passed by the Delhi High Court will dispel doubts of many and bring much required sanctity to the chaos in the minds of the tenants.

(Devendra Deshmukh and Harsh Parikh are partners and Abhiraj Gandhi is a principal associate at Khaitan & Co)

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