COVID-19: In the recent months, the world is struggling with the novel ‘Corona Virus Disease’ (“COVID-19“) which has severely affected the global markets and businesses, leading to disruption in supply chains, stalling of manufacturing operations, stoppage of operations of offices and imposition of travel restrictions.
Lockdowns: While the Government of India (“GOI“) is trying to tackle this unforeseen and unprecedented situation, businesses have started to feel the impact of this disastrous outbreak. A significant step was taken by the GOI when the Hon’ble Prime Minister of India on March 24, 2020, announced a 21-day nation-wide lockdown with effect from March 25, 2020. Following this announcement, the Ministry of Home Affairs (“MHA“) and various state governments issued orders/ notifications which provided for a complete lockdown in the entire country including shutting down of all offices, businesses, buildings, factories, malls, cinema theatres, etc., along with a slew of other measures such as prohibition on assembly of four or more people in any area, suspension of the flights, etc. Any non-compliance with the aforesaid orders was also made a punishable offence under the Indian laws.
Essentials etc. : The GOI and the state governments have ensured that the essentials (like groceries, dairy, ATMs, pharmacies and medical services) remain unaffected due to this lockdown and remain available to the general public and have also attempted to promote and ensure work from home and continuation of businesses to the extent feasible with telecommunication, internet services, IT and IT enabled services (for essential services), facility management services and security services being included in the exceptions to the general prohibition.
Loan & interest moratoriums : The GOI and the Reserve Bank of India (“RBI“) have tried to protect the interests of businesses by introducing various incentives such as loan and interest moratoriums; however, the businesses are still feeling the heat with some of these measures left to the discretion of the banks. The lockdown of the establishments, offices, shopping malls, etc. did not particularly help the real estate sector as these were implemented around the time when most of the real estate developers were facing reduced demand, severe liquidity crunch and increasing litigations (including under insolvency laws).
Tenants seeking rent suspensions/ waiver : As the notification had an impact across sectors, the tenants have started approaching the owners of the offices, shopping malls, commercial complexes etc. seeking suspension/ waiver of the lease rentals till the time the lockdown subsists. Some are invoking the ‘force majeure’ clauses under the lease agreements/ lease deeds/ license agreements while the others are pleading the benefit of the “doctrine of frustration” of contract enshrined under Indian law.
Whether a force majeure : This has led to deliberation amongst all the stake holders (viz. the real estate developers, malls/ office complexes owners, tenants etc.) as to whether the outbreak of Covid 19 can be categorised as a ‘force majeure’ event.
The tenancy agreements where the words like ‘epidemic’, ‘government order’ and ‘any other situation making conduct of business impossible’ are used in the force majeure, the spread of Covid 19 may be argued to be categorised as a ‘force majeure event’. The ambiguity arises either when the agreements contain narrowed definition of ‘force majeure’, like limiting it to physical damage to the business premises or change in law or policy, OR when there is no definition of ‘force majeure’ at-all in an agreement.
Whether frustration of contract doctrine : In cases where there is a narrowed definition of ‘force majeure’ or no definition at all, the parties may have to look beyond the terms of the agreement. In such a situation, one available option is the doctrine of frustration of contract which provides for the scenario where the performance of the contract becomes impossible. In such cases, it will need to be proved that the event i.e. Covid 19, has changed the circumstances totally, to upset the very foundation of the agreement, thereby rendering the agreement ‘impossible’ to perform. Mere economic difficulty or loss may not be “sufficient” basis to trigger the doctrine of frustration of contract.
Having said that, in some cases the courts have taken contrary views and held that it is not necessary for the contract to be ‘impossible’ and the doctrine may be invoked even when it has become impracticable for parties to perform the contract. Additionally, in most cases where doctrine of frustration is involved, the jurisprudence suggests that the contract cannot be performed and hence is sought to be terminated, which may not be the case with most tenants, who would only want a temporary abeyance of rent payment as against to losing the premises altogether. Similarly, even property owners would not want to go for termination of rent generating properties in such times and thereby making it a compassionate decision rather than a purely legal one.
Retail Malls : Retail malls will face the most severe impact of the lockdowns, since, at the first instance of the outbreak of Covid19 in India, the cinema halls and malls were ordered to be shut down in various states. As the tenants have sent notices for no rents, the situation for mall owners becomes precarious as they are bound to pay interest on their loans and are also prevented from lowering the costs such as wage reduction, or labour retrenchments etc. While the GOI and the RBI have tried to ease the pressure by announcing the moratorium on the loans, nonetheless the interest keeps accruing on such loans. The situation will worsen if the mall owners do not get covered under their business interruption insurance policies, and most may not.
Office/ Commercial Spaces : The impact of the lockdown on the commercial/ office spaces may not be same as the retail malls. Some of the commercial office building owners (whose tenants may be engaged in manufacturing or provisioning of essential services (such as telecom or media agencies)), are approaching the relevant government authorities to obtain permits/ approvals/ curfew passes to be able to operate their buildings/ premises/ complexes so that tenants can operate consequently from such buildings. Also, in some instances the tenants are still operating their skeleton infrastructure from the office buildings. The owners are also under pressure to ensure compliance with the lockdown guidelines and conditions imposed by the GOI and the state governments. Financial burden of keeping the premises open, maintaining the requisite infrastructure and ensuring that all facilities (such as HVACs, lifts, gensets etc.) available within the premises are properly maintained and are operational, is hampering the business of the owners, since they are also struggling to claim the cost of maintenance from most of the tenants who are anyway under the financial burden. These are all, in addition to the huge manpower and workmen related costs which the owners bear to maintain the office buildings.
Ongoing Battle : Considering the unprecedented situation that the commercial real estate core asset market is going through, while it is certain that tenancy disputes will rise, nonetheless it is worthwhile to wait and watch the jurisprudence and the government and how they come to the rescue to help end, or minimize, the crises.
Watch this space for more…
Hardeep Sachdeva, Senior Partner
Ravi Bhasin, Partner