Applicability of Force Majeure in Commercial Lease Agreements Amid Covid-19

[Sumit Kumar Gupta is a 4th year student at the West Bengal National University of Juridical Sciences, Kolkata]

Covid-19 has unleashed an unprecedented economic crisis, and has brought with it a plethora of issues surrounding commercial lease agreements, as tenant associations increasingly seek waivers. The question whether the lockdown would entitle tenants a guarantee of waiver or claim exemption from payment of rent will undoubtedly emerge in a huge number of cases. These problems have been exacerbated further due to the ambiguity in executive orders seeking to give protection to some classes of tenants such as migrants, labourers and students, by suspending payment of rent. This post seeks to analyze the doctrine of force majeure in commercial lease agreements and explore whether such an invocation is permissible in the context of lease agreements.

By way of its judgment dated May 21, 2020, the Delhi High Court held that the doctrine of frustration under section 56 of the Indian Contract Act, 1872 is not applicable to lease agreements. While discussing the nature of lease agreements, the High Court relied heavily on the past jurisprudence surrounding the applicability of force majeure on commercial lease agreements. The Court also noted that such applicability of force majeure would be subject to any provisions to the contrary in the lease agreement executed between the parties. In hindsight, this case has raised the issue of incorporating a comprehensive and well-structured force majeure clause when the parties execute a lease deed. Against this background, author revisits the jurisprudence surrounding the doctrine of force majeure and its relevance in lease agreements.

Force Majeure means “an event or effect that can be neither anticipated nor controlled, is unexpected and which prevents someone from doing or completing something that he or she had agreed or officially planned to do.” [Black’s Law Dictionary (10th ed. 2014)] In simpler terms, force majeure is an extenuating circumstance that renders the performance of the contracts beyond the control of parties. The concept of force majeure finds its genesis under the Contract Act. The relatability to an express or implied clause in a contract is governed by section 32 of the Contract Act, while insofar force majeure event occurs de hors the contract, it is dealt with under section 56 of the Contract Act.

Interplay of Force Majeure and Commercial Lease Agreements

The evolution of the principle of force majeure has been aided by a catena of judgments. Section 56 of the Contract Act enshrines the principle of force majeure. The key elements for a successful invocation of this principle are two-fold: (a) the occurrence of the event that could not be prevented; and (b) the impossibility to perform such obligations arising out of the contract due to the occurrence of that event. Further, it has been held that the impossibility to perform is not limited to physical or literal impossibility, but also includes practical impossibility. However, mere commercial hardship or economic unviability does not frustrate the contract.

The Supreme Court had the occasion to consider the application of this doctrine on lease agreements. It drew a distinction between a ‘completed conveyance and an ‘executory contract’. The Court mentioned the limitation of the wording of section 56 of the Contract Act and stated explicitly that the said section does not apply to cases in which there is a completed transfer. The reason is that only executory contracts are capable of getting frustrated and not executed contracts. In a contract for lease, the lessee obtains possession of a property from the lessor. During the duration of the lease, the lessee only has to pay consideration periodically. A contract for lease is an executed contract. Therefore, it has been a settled position that section 56 of the Contract Act will not apply to lease agreements.

As no contractual stipulations are arising from the Contract Act, the provisions of the Transfer of Property Act, 1882 (TPA) would govern the encapsulated disputes in tenancies and leases. The Supreme Court in T. T. Lakshmipathi v. P. Nithyananda Reddy has settled the conundrum regarding the applicability of section 56 of the Contract Act and categorically held that section 108(B)(e) of the TPA would apply in case of lease agreements. Section 108(B)(e) recognizes the doctrine of force majeure. Three criteria must be satisfied for the invocation of this section, i.e. (a) the existence of irresistible force, (b) such situation should render property ‘substantially and permanently unfit’ for the purpose, and (c) the lessor must be notified by the lessee about lease deed becoming void. Additionally, the Supreme Court also held that a temporary non-use of the property by the tenant due to any factors would not entitle the tenant to invoke this section. This section places the onus on the lessee to establish the irresistible force due to lockdown, and that this lockdown has rendered the property permanently unfit for the purpose for which it was leased out. The Supreme Court has also held that until and unless there is a complete destruction of property, which is permanent in nature, this section cannot be invoked. Thus, the temporary non-use of property by the tenants due to lockdowns enforced by the government cannot be the ground for refusal to pay rents.

The decision of Delhi High Court on May 21, 2020 has cemented the already established legal position surrounding the applicability of force majeure in commercial lease agreements. Thus, even in the accentuating circumstances of coronavirus outbreak, tenants will have to pay the rents as stipulated under the lease agreement. The enforced lockdown has not resulted in meeting the criteria for the invocation of section 108(B)(e). Neither the pandemic nor the lockdown has rendered the property permanently unfit for use. Technically, there is no respite for the tenant in the law. Therefore, in the present circumstances, the parties should mutually negotiate suitable terms in order to avoid any economic hardships and tenants can be discharged from their obligations under the lease agreement.

Way Ahead for Tenants

A further question arises. If the force majeure clause is enforced neither under 56 of the Act nor under the TPA, then under what legal premises such force majeure clauses can be enforced? The author endeavours to explain one scenario wherein force majeure clause can be enforced in a lease agreement. If the terms of the lease agreement encompass such unforeseen circumstances, then it may become a valid ground to claim force majeure. The principle of pacta sunt servanda embodies that a concluded contract must be observed truthfully. This means that the parties have the legal obligation to fulfil the promises and the terms of the contract would be legally binding between the parties. Further, the Supreme Court has observed that “while interpreting provisions of an agreement, courts should not endeavour to imply terms into the language of the contract; rather, read the contract as per its express terms.” The jurisprudence evolved reveals that the judiciary has confined itself within the contours of the terms of the contract. There should be limited judicial intervention unless the wordings of the contract go beyond the purview of public policy, immorality, and the like. Hence, the holistic understanding is that the intent of the parties should be taken within the unambiguous, clear and express terms of the contract.

Therefore, it follows that in instances where the terms of the lease agreement contain a force majeure clause providing a waiver of rent in extreme inevitable circumstances (which goes beyond the control of parties) the terms of the agreement must be enforced. The clause should be read in the strict sense so as to respect the intent of the parties. Furthermore, the incorporation of the force majeure clause will not violate any established law and would not be in contravention of the public policy. For future reference, such incorporation will not only protect an onerous obligation of such economic inviable situations but also avoid unnecessary litigation for both lessee and the lessor.

Sumit Kumar Gupta

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