COVID-19 and frustration of lease deeds: A viewpoint- By Shubham Garg

COVID-19 and frustration of lease deeds: A viewpoint

We are facing an unprecedented global health crisis, as a result to which a nation-wide lockdown was imposed by Indian Government under the Disaster Management Act, 2005 as a preventive measure to limit the community spread of COVID-19. Undoubtedly, all have been affected in one way or another with the order of directing the commercial establishments to halt their operations for an uncertain period. This uncertainty has led to a hardship for ongoing business concerns and their contractual relationships specifically with respect to the lease deeds .

How does this COVID-19 impacts the contracts specifically from the perspective of invoking force majeure clause in the executed contracts or the resort to the statutory remedy in cases where no such express clause has been embodied under the contracts?

What does the term “force majeure” mean? A frustrated contract in general term means that a contract without fault of either party, is incapable of being performed due to an unforeseen event (or events), resulting in the obligations under the contract being radically different from those contemplated by the parties to the contract.  In the event there is no force majeure clause specified in a contract, then the parties normally resort to the doctrine of frustration which is embodied in Section 56 of the Contract Act to see whether it can be applied to argue that the contract has become impossible to perform.

Section 56 is based on the maxim “ les non cogit ad impossibilia” which means that the law will not compel a man to do what he cannot possibly perform. Under Section 56 of the Indian Contract Act, 1872,

“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”.

The rule under the aforesaid section explains the situation of subsequent impossibility of the contracts. It deals with cases where the contract was possible to perform when it was entered but because of some event, the performance has become impossible or unlawful and therefore it discharges the party from performing it. But the question arises, whether a resort can be taken to the said rule in the case of executed lease deeds?

The Supreme Court in the case of Raja Dhruv Dev Chand v. Raja Harmohinder Singh, outlined a clear distinction between a completed conveyance and an executory contract and observed;

“Under a lease of law there is a transfer of right to enjoy that land. If any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purpose for which it was let out, because of fire, tempest, flood, violence of an army or a mob, or other irresistible force, the lease may, at the option of the lessee, be avoided. This rule is incorporated in Section 108(e) of the Transfer of Property Act and applies to leases of land, to which the Transfer of Property Act applies, and the principle thereof to agricultural leases and to leases in areas where, the Transfer of Property Act is not extended. Where the property leased is not destroyed or substantially and permanently unfit, the lessee cannot avoid the lease because he does not or is unable to use the land for purposes for which it is let to him.”

The said position was reaffirmed by the Apex Court after a decade in the case of Sushila Devi v. Hari Singh, where following observation was made;

“The conclusion of the Division Bench of the Jammu and Kashmir High Court that Section 56 of the Contract Act applies to leases as well cannot be accepted as correct. Section 56 applies only to a contract. Once a valid lease comes into existence the agreement to lease disappears and its place is taken by the lease. It becomes a completed conveyance under which the lessee gets an interest in the property. There is a clear distinction between a completed conveyance and an executory contract”.

Transfer of Property Act and Doctrine of frustration

A lease of an immovable property is defined under section 105 of the Transfer of Property Act and govern by the rules embodied in it. In general understanding, a lease is an agreement between a transferor and a transferee for a transfer of an interest in the property in exchange of a valid consideration. In the event of reaching out to an agreement, if a force majeure clause is documented in the lease deed, then the said clause can be invoked subject to the scope and ambit of the agreed terms therein. If the force majeure clause has specifically included epidemic/pandemic/in the course of government’s adversary action, then invocation of such clause would be easier during the prevalent situation and in the cases otherwise, it should be diligently analysed. 

The Transfer of Property Act under section 108 (B)(e) recognises certain situations under which unforeseen circumstances may give rise to a justified ground to treat the lease as terminated. It provides;

“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”

This leaves the lessee with an opportunity to determine an event which has permanently affected his ability to use the property. Additionally, in case of  an impairment to the lessee’s ability to use the property, the law imposes a statutory duty to serve a notice under Section 108(B)(e) of the TPA to the lessor. If the lessee fails to give notice under Section 108(B)(e) of the TPA, the lease is deemed to remain unaffected regardless of a force majeure event.

The Apex Court in its precedents has explained the situation, when a lessee is all in his right to avoid a lease deed? In case of Raja Dhruv Chand, it was observed;

“…………..where the property leased is not destroyed or substantially and permanently unfit, the lessee cannot avoid the lease because he does not or is unable to use the land for purposes for which it is let to him”.

This shows that three criteria must be satisfied before a benefit of force majeure can be derived:

1. there shall be an existence of an ‘irresistible force’;
2. subsequent to such irresistible force, the property becomes substantially and permanently unfit for use for which it was let; and
3. the lessor must be informed of the lessee’s decision to render the lease deed void. A valid notice with an express intention of a lessee to avoid the executed lease deed shall be mandatorily served. In the case otherwise, lessee is bound to fulfill and not discharged from his his obligations under the lease dead.

What circumstances can be termed as “irresistible force” would depend on case to case basis. The order of the Ministry of Home Affairs, Government of India, bearing Number 40-3/202-DM-1(A) dated March 24, 2020, declaring a nationwide lockdown as a preventive measure to deal with the situation of COVID-19 resulting in disruption of business is being argued as a force majeure event/Act of God, thereby seeking termination of their obligation under the lease deed, waiver of the rent for the period of the lockdown, reduction of rent for a portion or remainder term of the lease deed, deferment of the agreed rent under the lease deed. However, in author’s opinion it is very unlikely that the prevalent circumstances can be termed as “irresistible force” or a force majeure/Act of God as the lease property cannot be identified as destroyed or permanently unfit for the purposes it was let.

However, given the large number of interpretations to the words “…….. substantially and permanently unfit for the purposes for which it was let” under section 108 (B)(e) and how the situation is being presented before the court, arguing and defending ‘substantially unfit premises’ will be an interesting observation in the near future.

References:

1. Raja Dhruv Dev Chand vs Harmohinder Singh & Anr 1968 AIR 1024, 1968 SCR (3) 339
2. Sushila Devi v. Hari Singh & Ors 1971 AIR 1756, 1971 SCR 671
3. Order of the Ministry of Home Affairs, Government of India, bearing Number 40-3/202-DM-1(A) dated March 24, 2020 available at https://www.mha.gov.in/sites/default/files/MHAorder%20copy.pdf
4. Section 56 of Indian Contract Act, 1872
5. Section 105 and 108(B)(e) of Transfer of Property Act, 1882

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