WHERE IS MY RENT? IMPACT OF COVID-19 ON LEASE AND LICENCE AGREEMENTS
Author: Vishwajeet Deshmukh[1]
ISSN: 2582-3655
ABSTRACT
COVID-19 has impacted multiple arenas including “Lease Agreements” and “Lease and Licence Agreements” for multiple corporations. Corporations have not been able to generate revenues on the pretext of the 21-day lockdown and multiple other notices by State Governments. Corporations (lessee) rent their office space (licensing premises) for the purpose of business. Since corporations do not have the revenues to provide the rent, rent waivers shall be sought in the situation. Due to the same, “Force Majeure” has been invoked under Section 56 of the Indian Contracts Act, 1872. However, when the lease and license agreements are taken into consideration, the examination of such agreements from the perspective of the legislations Indian Easement Act, 1882 and Transfer of Property Act, 1872 is critical. “License” has been defined in the Indian Easement Act, 1882 and “Lease” has been defined in the Transfer of Property Act, 1872. The difference between the two agreements provides distinct options. Upon consideration of the same, the lessee has the option of revoking or terminating the license under the coronavirus pandemic regime. Even though legal options for the same exist, consideration must be placed on the period of the lockdown so as to avoid any litigation.
- IMPACT OF COVID-19 ON INDUSTRY
The World Health Organization (“WHO”) declared “COVID-19” as a global ‘pandemic’ on 11th March 2020.[2] The Prime Minister of India invoked Section 144 of the Code of Criminal Procedure, 1973 and starting 25th March 2020 declared a 21-day lock-down across all Indian states, except for the industries which are involved in the production of goods under the Essential Commodities Act, 1955.[3] The far-reaching impact of the pandemic has cost multiple nations human loss, economic loss and financial loss. According to the “Coronavirus COVID 19: Facts and Insights (Updated: March 9, 2020) – Global Health + Crisis Response”[4] by McKinsey & Company, identified global economic slowdown as an impact of the COVID-19, the outbreak may result in a significant fall in the global Gross Domestic Product (“GDP”) and all sectors of the industry may be impacted. Major disruption has been recorded in the supply chain on the pretext of COVID-19 pandemic due to which multiple contractual obligations are at a pedestal of being delayed, interrupted or canceled. This forms a chain of non-performance in the market, the suppliers will not be able to perform their contractual obligations due to the measures undertaken by the Centre and State to curb the spread of COVID-19. Subsequently, companies will not be able to perform their specific customer agreements due to the suppliers’ non-performance and ultimately delay or even cancel their obligations. Additional consequences of the same may result in renegotiations and mitigations of the contract clauses generated due to the shift in supply and demand. This article shall examine that, in the wake of the COVID-19 outbreak, does the non-performance of contractual obligations in contract/agreement amount to “force majeure” or “frustration of a contract” under the Indian Contract Act, 1872 (“ICA”).
- EFFECT ON LEAVE AND LICENCE AGREEMENTS
India’s largest restaurant chains, retailers and multiplexes including McDonald’s, Jubilant FoodWorks-operated Domino’s Pizza, Speciality Restaurants, Reliance Retail, Future Group, Spencer’s Retail, and PVR have written individually to mall owners invoking the force majeure clause and have sought a waiver of rentals up till May amid the lockdown.[5] They have cited zero revenues in the 2020 first term and a major drop in revenues for several months to come. The restaurant industry, which employs over seven million people, is staring at store closures, job losses, and significant erosion of profits and revenue because of the lockdown and social distancing norms.[6] All of the major corporations have their spaces rented through the means of “Lease Agreements” or “Leave and Licence Agreement”. This article shall focus on the impact of COVID-19 on the performance of lease agreements and leave and license agreements and subsequently the party obligations and rights.
- DIFFERENCE BETWEEN : LEASE and LICENCE AND LEASE AGREEMENT
To understand the difference between the two agreements definition of “Lease” and “Licence” have to be scrutinized. The definition of “Licence” has been explicitly mentioned in Section 52 of the Indian Easement Act, 1882:
“Where one person grants to another, or to a definite number of other persons, a right to do or continue to do, in or upon immovable property of the grantor, something which would, in the absence of such rights, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a license.”[7]
Section 105 of the Transfer of Property Act, 1872 defines a Lease as under:
“A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specific occasions to the transferor by the transferee, who accepts the transfer on such terms.”[8]
hIn order to determine The main test for deciding whether a person is a licensee of a property or a lessee is that of exclusive possession. If the right granted conveys an exclusive right of legal possession, though subject to certain reservations, it shall be a lease as opposed to licensing. However, where the right granted is only for use of the property in a certain way and on certain terms while the property remains in the legal possession and control of the owner, the right granted shall be a license.
- IMPOSSIBILITY TO PERFORM AN ACT
In the situation of a pandemic like COVID-19 makes the performance of obligations impossible or difficult. Commercial hardships are faced by some industries whereas some are rendered completely incapable in their performance obligations. Impossibility of performance after the execution of a contract is provided for under Section 56 of the Indian Contract Act, 1872. Section 56 occurs in Chapter IV of the ICA which relates to the performance of contracts and purports to deal with one category of circumstances under which performance of a contract is excused or dispensed with. The section states:
“Section 56. Agreement to do impossible act —An agreement to do an act impossible in itself is void. Contract to do act afterward becoming impossible or unlawful—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Compensation for loss through non-performance of an act known to be impossible or unlawful—Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.”
According to the Memorandum by Ministry of Finance, Government Of India dated 19th February 2020,[9] COVID-19 has been constructed under the meaning of Force Majeure as constituted under the meaning of Section 56 of the ICA.
It has been established as a general rule of law that force majeure under Section 56 of the Indian Contract Act,1872 is not applicable to deeds meant for lease or license. In the recent case of Airports Authority of India Vs Hotel Leela Venture Ltd [10] the High Court of Delhi has placed reliance on the Supreme Court Case of Raja Dhruv Dev Chand Vs. Raja Harmohinder[11] and Sushila Devi Vs. Hari Singh[12] affirmed the fact that Section 56 of the Indian Contract Act, 1872 is not the applicable law when the rights and obligations arising out of the lease deed under transfer of property is in question. Delhi High Court has also placed consideration on the case of T. Lakshmipathi Vs. P. Nithyananda Reddy[13] wherein the Supreme Court had held that the privity of estate and privity of the contract is distinct and the doctrine of frustration belongs to the contract law and its applicability is sealed when the transaction of privity of contract is in question along with estate inasmuch as a lease is the transfer of an interest in immovable property within the meaning of Section 5 read with Section 105 of the Transfer of Property Act, 1872.
“20. The tenancy cannot be said to have been determined by attracting applicability of the doctrine of frustration consequent upon demolishing of the tenancy premises. The doctrine of frustration belongs to the realm of the law of contract; it does not apply to a transaction where not only a privity of contract but a privity of estate has also been created inasmuch as lease is the transfer of an interest in immovable property within the meaning of Section 5 of the Transfer of Property Act (wherein the phrase “the transfer of property” has been defined), read with Section 105, which defines a lease of immovable property as a transfer of a right to enjoy such property.”[14]
Section 108(e) of the Transfer of Property Act, 1872 incorporates the doctrine of frustration. Section 108(e) provides an option on the lessee to treat the lease as void and thereby avoid the liability of paying the rent in the future.
“if by fire, tempest or flood, or violence of any 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: Provided that, if the injury be occasioned by the wrongful act or default of the lessee, he shall not be entitled to avail himself of the benefit of this provision.”
Bombay High Court in Hind Rubber Industries Pvt. Ltd. Vs. T.M. Bagasarwalla[15], provided for an elaborate explanation of Section 108 of the Transfer of Property Act, 1872 which deals with the rights and liabilities of lessor and lessee and further elaborating the explanation of clause (e) of Section 108 stating that if the property leased in wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was leased by fire, tempest or flood or violence of an army or of a mob or other irresistible force, such lease may be rendered void at the option of the lessee provided of course that such injury to the leased property has not been occasioned by the wrongful act or default of the lessee. The reason behind such a principle is that the option of termination is the duty of the lessee and the duty to report its termination if the lessee fails to do so the rent will have to be paid to the lessor.
In the present pandemic outbreak, the lessee has to establish that COVID-19 is an “irresistible force” which has rendered the property substantially and permanently unfit for the purpose for which it was leased out and inform the lessor of its decision to void the deed, in order to gain benefit out of Section 108(e).
- APPLICATION OF INDIAN EASEMENT ACT,1882
The provisions of the Indian Easement Act,1882 are responsible for the licenses and their functioning by the licensors. In addition to the same, the terms of the license are responsible for its functioning, this gives the licensors powers to revoke the license subject to the terms of this agreement. Section 62 (d) and Section 62 (f) of the Easement Act provide for deemed revocation of a license as under:
“(d) where the property affected by the license is destroyed or by superior force so permanently altered that the licensee can no longer exercise his right;
(f) where the license is granted for a specified purpose and the purpose is attained, or abandoned, or becomes impracticable;”
Section 62 provides for the conditions under which the revocation of the license shall be deemed valid:
(1) The property in consideration has suffered destruction by a superior force in a permanent manner so as that the property cannot be used i.e. the licensee is incapable of exercising their right or
(2) where the license is granted for a specified purpose and such purpose either abandoned or becomes impracticable.
These sections are applicable to the commercial contracts involved in lease and license. The condition for the application in the commercial contracts would involve proving that the pandemic is a superior force that has changed the position of the licensed property and has made it obsolete for use and exercising the rights would be a challenge in the situation. The nature of the lockdown is of a temporary nature, it does not alter the right to use the property on a permanent basis. The usage of the premises does not get hampered for the future. However, the situation of COVID-19 can be a valid ground in order to terminate the license. The application of the same is not compatible with the residential premises.
- CONCLUSION AND RECOMMENDATIONS
The lockdown period of 21-days has witnessed stopped multiple economic activities and even forced multiple corporations to enter into Work From Home policies. Prior to the 21-day period lockdown, multiple State Governments had ordered to shut down malls and gyms. Wherein these businesses have not incurred any revenue. There exists no legal responsibility to waive the rent for the time period of the lockdown however, considering the same is beneficial for both the parties to declare the lockdown period as a rent-free period. Placing consideration on the Force Majeure Clause and Indian Easement Act along with the Transfer of Property Act,1872 it is clear that the lesse has the power to terminate the lease. However, the same is not beneficial in a long-term view.
[1] B.L.S, LL.B 2022 Government Law College, Mumbai. The author can be contacted at [email protected].
[2] Extract from the Opening Remarks by the Director General, WHO, at the Media Briefing on March 11, 2020, as uploaded on the official website of WHO. Available at: https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-atthe-media-briefing-on-covid-19—11-march-2020 [Accessed on 10th April 2020].
[3]Mha.gov.in. 2020. [online] Available at: <https://mha.gov.in/sites/default/files/Guidelines.pdf> [Accessed 11 April 2020].
[4] “Coronavirus COVID 19: Facts and Insights (Updated: March 9, 2020) – Global Health + Crisis Response” by McKinsey & Company
[5]Bhushan, R., Mukherjee, W. and Mukherjee, S., 2020. Lockdown Effect: Restaurants, Cinemas & Retailers At Malls Seek Zero Rentals Till May. [online] The Economic Times. Available at: <https://economictimes.indiatimes.com/industry/services/retail/lockdown-effect-restaurants-cinemas-retailers-at-malls-seek-zero-rentals-till-may/articleshow/74956239.cms?from=mdr> [Accessed 11 April 2020].
[6] Id.
[7] Section 52 of Indian Easement Act, 1882
[8] Section 105 of the Transfer of Property Act, 1872
[9]Doe.gov.in. 2020. [online] Available at: <https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf> [Accessed 11 April 2020].
[10] (2016) 231 DLT 457
[11] AIR 1968 SC 1024
[12] (1971) 2 SCC 288
[13] (2003) 5 SCC 150
[14] Id.
[15] AIR 1996 Bombay 389