Impact of COVID-19 on License and Leasing arrangements

Introduction

This article specifically seeks to analyse the impact of the COVID-19 pandemic on leave and license / leasing arrangements in India and whether COVID-19 pandemic could be considered as an event of force majeure under the contracts for such arrangements.

Meaning and object of force majeure provisions

The term ‘force majeure’ (French for a ‘superior force’) means an event or effect that can neither be anticipated nor controlled and includes both acts of nature (i.e. natural calamity e.g., floods and hurricanes) and acts of people (e.g. riots, strikes and wars). The rationale behind inserting force majeure clauses in the contracts is that there will always be events that cannot be anticipated and addressed, in which case, it is equitable and reasonable to either suspend performance and extend contract timelines or altogether excuse the performance of the affected party.

Force Majeure – Indian Contract Act, 1872 (“ICA”)

In the absence of a specific provision covering an event of force majeure, contracting parties may seek relief under Sections 32 and 56 of the ICA.

Section 32 provides for a contract which, expressly provides that performance is contingent on the occurrence of an uncertain future event, to be void if such event becomes impossible to perform. Under a lease / license agreement, typically, the obligation to pay monthly rent, and other outgoings is an obligation which is not contingent upon performance of any event and lessee / licensee is bound to make the payment irrespective of temporary suspension of the business operation or loss of revenues, which rent is consideration in lieu of lessor / licensor providing the property as agreed under the agreement, which lessor / licensor continues to do so.

Section 56 of the ICA deals with frustration of contracts and states that a contract to do an act which, after the contract is made, becomes impossible or unlawful is void to that extent. Considering the nature of  lease / license arrangements, Section 56 may not be triggered in such a case since inability for lessee / licensee to operate its business cannot amount to frustration of the contract in its entirety.

Recent Delhi High Court judgment

Recently, the High Court of Delhi has, by its order dated May 21, 2020[1], Section 56 of the Indian Contract Act, 1872 cannot be applied to leases which are executed contracts. Further, a contract is not discharged merely because it turns out to be difficult or onerous for one party to perform. Therefore, in the absence of a contract or a contractual stipulation, the tenant may generally seek suspension of rent by invoking the equitable jurisdiction of the Court due to temporary non-use of the premises. However, the same would depend on the facts and circumstances of each case.

Do Force Majeure clauses cover the Covid-19 situation?

Coming to the key issue whether force majeure clauses cover a pandemic or epidemic like the present COVID-19 situation, if specifically covered under contracts as a force majeure event, will entitle the affected party to invoke the force majeure clause. This would be subject to the affected party proving that it has been adversely affected by COVID-19 which has resulted in ‘prevention of fulfillment of its obligations’. Typically force majeure clauses which cover acts of people such as riots, strikes, etc. or acts which damage the premises or render the premises unfit for use completely rule out the possibility of invoking force majeure clause in COVID-19 like situation.

However, the ambiguity arises in cases where a force majeure clause uses the phrase ‘Act of God’, ‘emergency’, ‘calamity’, ‘act of government’. In such instances, lessees / licensees are arguing that the COVID-19 pandemic / Government lock-down could constitute an event of force majeure thereby preventing payment of rent on account of lessee / license from carrying out its business, thereby, affecting revenues and consequently, the licensee’s ability to pay rent to the licensor.

It is interesting to note that the Government of India has stated that disruption of supply chains due to the spread of COVID-19 will constitute a ‘natural calamity’ and accordingly, a force majeure event.[2] This guidance has been issued for the purposes of interpreting contracts with the Government of India, which are based on common procurement guidelines, and may not necessarily have universal applicability and certainly not for license and leasing of the premises in India.

A valid argument that can be taken up by lessor / licensor is that the pandemic or the Government lock-down hasn’t prevented the licensee from paying rent and there are no Government directives in place that prohibit or restrict the payment of monies including in the nature of rent payments. The State of Maharashtra has by its circular dated April 17, 2020 directed the landlords to permit deferral of rent for a period of 3 months to their tenants for residential premises. Certain other States have also issued similar directions for certain classes of tenants. However, these circulars/ directions do not apply to commercial premises.

Conclusion

Whilst the position under law deters the lessees/ licensees from invoking the present COVID -19 pandemic and government lockdown as force majeure events (unless specifically provided under the contract), considering the Government directives passed by some of the States in favour of tenants, for deferral of rent, etc., and considering the gravity of the present situation and the effect on the economy, the Courts may adopt a more balanced approach in deciding disputes in this regard which shall be solely on the interpretation and judgment of the Court.

Having stated the above, its best for parties to decide the right approach in this regard and reassess their requirements, factor in their business relationships, whilst landlords should examine the need of continued business once the lockdown is lifted, lessees/licensees to also be mindful of financial obligations of landlords and their interdependency on rent, etc., parties to examine the demand supply situation.

Authors:

Nohid Nooreyezdan, Senior Partner
Monika Bhonsale, Partner
Sohni Kherada, Senior Associate

Footnotes:

[1] Ramanand and Others vs. Dr. Girish Soni & another
[2] Office Memorandum No. F 18/4/2020-PPD, dated February 19, 2020 of the Government of India, Ministry of Finance, Department of Expenditure, Procurement Policy Division

Date: September 11, 2020