Whether rent payment can be suspended owing to the COVID 19 lockdown?

On 24th March 2020, the Government of India imposed a nationwide lockdown and shut down all non-essential services in an attempt to control the spread of the pandemic. However, this lockdown created a lot of havoc especially for landlords and tenants as tenants were not able to use their commercial premises and started requesting the landlords for suspension/ waiver of rent. This issue of whether suspension/ waiver of rent due to non-use of commercial premises would be allowed under the law was a contentious issue, till very recently. 

On 21st May 2020, the Delhi High Court in the case of Ramanand & Ors. (‘Appellant/Tenant’) v. Dr. Girish Soni & Anr. (‘Respondent/ Landord’), RC. Rev. 447/2017, dealt with this issue and decided that suspension of rent was not permissible as per the facts of that case though parties could negotiate upon deferment of payment of rent owing to the lockdown. Thus, in this article, we analyze if this Delhi High Court decision will be applicable to all cases and the remedies that would be available to both the landlord and tenant.

Facts of the case

The Respondent/Landlord leased the property bearing number Shop No. 30-A in Khan Market, New Delhi to the Appellant/Tenant for commercial purpose through a lease deed executed on 1st February 1975 at Rs.300/- per month. In 2008, the Respondents filed an eviction petition under Section 14(1)(e) of the Delhi Rent Control Act, 1958. The decree of eviction was passed on 18th March 2017. The Tenants filed an appeal against the eviction order and the Delhi High Court stayed the eviction order on 25th September 2017 the condition that the Tenant shall pay a sum of Rs. 3.5 lakhs per month for the premise, and if there is any default in the payment, the stay of the execution of the eviction order shall stand vacated. Following the outbreak of COVID-19, the Tenant moved an application for the suspension of the rent during the period of the lockdown on the ground that there has been a complete disruption of his business. The Tenant pleaded that the circumstances are force majeure and beyond his control and claimed that he is entitled to waiver of the monthly payment, or at least some partial relief in terms of suspension, postponement or part-payment of the said amount.

Findings of Court

Terms of the Contract

Firstly, the court laid down the general principle that relationship between a landlord and tenant are primarily governed by the terms and conditions of the contract between them. Further, there are different kinds of tenancy and lease contracts and the question of suspension/ waiver of rent payment will be answered differently in case depending on the terms of the contract. Thus, one will have to look at the force majeure clause and other contractual terms to decide this issue. However, where is no relief under the contract, one would have look at the relevant laws.

Section 32 and Section 56 of the Indian Contract Act, 1872 (ICA)

‘Force Majeure’ can be understood as an extraordinary event or effect that can be neither anticipated nor controlled by either party and prevents them from fulfilling their contractual obligations. It includes both acts of nature (e.g. floods and hurricanes) and acts of people (e.g. riots, strikes and wars). Sections 32 and 56 of the ICA govern this concept.

In the case of Energy Watchdog v. CERC & Ors., the Apex Court held that in case the contract itself contains an express or implied term relating to a force majeure condition, Section 32 of the ICA shall govern the same; and Section 56 of the ICA would apply in cases where a force majeure event occurs outside the contract. Section 32 of the ICA deals with contingent contracts in which the contractual obligation is contingent on the happening of an event in the future. Thus, such a contingent contract cannot be enforced unless the future event happens and in such future event becomes impossible then the contract becomes void. Hence, in case a contract has a force majeure clause, then it can be considered as a contingency under Section 32 of ICA, and allow the tenant to claim that the contract has become void and surrender the premises. However, if the tenant wishes to retain the premises then it cannot request for non-payment of tent under the aforesaid Section 32. In the present case, as there was no rent agreement or lease deed between the parties, the provisions of Section 32 of the ICA did not apply. Further, the Tenant wanted to retain the premises.

Section 56 of the ICA deals with the ‘impossibility of performance’, which frustrates the contractual obligations of the parties. However, the Supreme Court in the case of Raja 

Dhruv Dev Chand v. Raja Harmohinder Singh & Anr. held that only executory contracts alone are capable of being frustrated and not executed contracts. An executory contract is a contract where the performance of the parties are not fully performed immediately, where both the sides still have important obligations remaining whereas an executed contract is where the promises are made and completed immediately. In that case the tenant had rented agricultural lands in Punjab, which could not be utilized due to the 1947 Partition, and sought refund of the rent. However, the Court held that a lease is a completed conveyance and an executed contract where under the lessee obtains possession (interest in the immovable property) from the lessor immediately, even though the rent (consideration) has to be paid periodically during the duration of the lease. Thus, it is clear that Section 56 of the ICA would not apply to a lease agreement because it is an executed contract and not an executory contract. The Court also held that a lease contract cannot be discharged merely because it turns out to be difficult or onerous for one party to perform and none can resile from a contract for said reason.

Provisions of the Transfer of Property Act, 1882 (TOPA)

In the absence of contractual terms, one would have to look at the doctrine of force majeure under Section 108(B)(e) under the Transfer of Property Act, 1882 (TOPA). Section 108(B)(e) of TOPA provides that “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”. However, when interpreting the words ‘substantially and permanently unfit’ it has been held that temporary non-use by the tenant would not entitle him to invoke the aforesaid Section 108(B)(e). It was further held that for a lessee to seek protection under Section 108(B)(e), there has to be complete destruction of the property, which is permanent in nature due to the force majeure event. The subject matter of the lease has to be destroyed in entirety. In a case where the subject matter of a lease is the land and building, mere destruction of a building on land is not total destruction of the subject matter of the lease. The Court further clarified that when a building is leased out, it cannot be interpreted to mean that only the building or the structure is leased out exclusively, but it needs to be interpreted to include both the building/ structure and the site. The Court also relied upon the case of Sangeeta Batra v. M/s VND Foods & Ors., (2015) 3 DLT (Cri) 422, where it was held that even though the leased premises (which was intended to be run as a restaurant) was sealed on two occasions, the leased premises were not rendered substantially and permanently unfit as the tenants did not choose to avoid the lease. In view of the above settled legal position, it was finally held that temporary non-use of premises due to the lockdown could not render the lease void under Section 108(B)(e) of the TOPA.

Equitable Jurisdiction

The Court also considered whether the tenant could seek suspension of rent by invoking the equitable jurisdiction of the Court due to temporary non-usage of the premises. In order to answer this question, the Court relied on a few Supreme Court cases to hold that the tenant might be directed to pay a proportionate part of the rent in case the tenant is given possession of only part of the property; or not pay the rent if the tenant has been dispossessed of the premises. However, mere non- usage of the premise may not always entitle the tenant for suspension of rent. The Court also relied upon the Delhi High Court case of Aranya Hospitality Management Services Pvt. Ltd. v. K. M. Dhoundiyal & Ors., where the force majeure clause of the contract was considered 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. It was further held that under circumstances wherein the tenant cannot use the property for the purpose for which it was leased but the fact that the tenant is not dispossessed and is still continuing the possession, he cannot seek suspension of the rent.

The other equitable factors that Court considered were as follows: the nature of property; financial and social status of parties; amount of rent; other factors like the fact the tenants are ‘unauthorized occupants’ of the tenanted premises and a decree of eviction has already been passed; any contractual conditions; and protection under any executive orders of the central or state governments. In the present case, the tenanted premises was located in a prime commercial area of Delhi, the Landlord was a dentist who wished to make bonafide use of the premises and the Tenants operated a footwear shop. It was also noted that the Tenants did not wish to vacate the premises due to the lockdown but wanted continue having possession. The rent that they were paying was much lower as compared to the prevalent market rent in the area. It was also considered that the Tenants were ‘unauthorised occupants’ and thus it was important to reasonably compensate the Landlord for delay in the execution of the eviction order. Further, there were no executive orders that would give relief to the Tenants. It was these factors that titled in favour of the Landlord.

The Delhi High Court finally decided in favour of the Landlord and refused suspension of rent as per the facts of the present case. However, it granted postponement or relaxation in the schedule of payment of rent owing to the lockdown.

Analysis

Firstly it is important to note that this case did not lay down the standard rule that would be applicable in all cases but just laid down the broad parameters that would have to be kept in mind when deciding such cases. Thus, the decision may vary depending on the facts of each case. Secondly, the relationship of a landlord and tenant is a contractual one and thus one will have to first look at the contractual terms to understand the remedies that are available both to the tenant and the landlord.

Even though Sections 32 and 56 of the ICA and Section 108(B)(e) of TOPA may not apply to cases where the tenant cannot simply use the premises due to the lockdown and still wants to continue the possession; however, the Court may consider other factors to decide on equitable grounds. In the present case the factors titled in favour of the Landlord; however, there can be a case where the equitable factors tilt in favour of the Tenant and the Court decides otherwise.

The Court also made an interesting observation that its decision may not apply to a not classic tenancy or lease agreements, where there is profit-sharing arrangement or any arrangement for a monthly payment on the basis of sales turnover. Such cases would be governed by the terms of the contract and the tenant could claim for suspension of rent on the ground that there were no sales or no profits owing to the lockdown.

It is also important to look at executive orders of the Central or State Government before jumping to any conclusion. The Ministry of Home Affairs issued an order on 29th March 2020 directing landlords to not demand rent from workers, especially migrant workers, and not force such workers to vacate the premises. Similarly, the State Housing Department of the Maharashtra Government also issued a circular on 17th April 2020 directing the landlords to postpone rental payment for at least three months and to not evict the tenants in case of non-payment of rent due to economic hardships during the lockdown period. These circulars have been passed not to absolve the tenants from paying the rents but to provide some breather for the tenants during the pandemic.

Even though it may seem that the judgment may allow landlords to ask for rent even during the lockdown, each case would have to be reviewed independently. Renegotiation contracts and restructuring the payment of rent would be the viable options in these cases, before seeking equitable remedies from the Courts. In order to ensure that this issue does not come up again, the executive can also issue an order suspending rental payments during the COVID-19 lockdown for a certain category of cases and take the financial burden upon itself. Other countries are undertaking this step. For example, the Spain cabinet has suspended rental payments and banned evictions during the COVID-19 outbreak. Similarly, Portugal’s government has suspended the rents for the vulnerable households until a month after the state of the emergency ends.