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Ergo Update

22-May-2020

The Delhi High Court has vide its order dated 21 May 2020 in the case of Ramanand and ors v. Dr Girish Soni and anr (Rent Control Revision Petition No. 447/2017) clarified the legal position on whether the present Covid-19 pandemic and resultant lockdown would entitle tenants to claim suspension of rent or waiver from payment of rent.

Brief Facts

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The Petitioners were tenants of a commercial premises in Khan Market, New Delhi.

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The Respondent being the landlord had filed for evection of the Petitioners from the premises and had succeeded in obtaining a decree for eviction from the lower court.

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After being unsuccessful in the lower court, the Petitioners filed the aforesaid Revision Petition before the Delhi High Court challenging the eviction order.

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The Delhi High Court stayed the eviction order subject to certain terms and conditions which inter alia required the Petitioners to pay a sum of INR 3.5 lakh per month in advance for each month as rent.

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On account of the nationwide lockdown, the Petitioners moved an urgent application in the aforesaid Revision Petition seeking suspension of rent during the lockdown period in order to not fall foul of the eviction order which required it to pay INR 3.5 lakh per month as rent.

Contentions of the Petitioners

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On account of the nationwide lockdown, there has been a complete disruption of business activities of the Petitioners and the same is a force majeure event, beyond their control. Therefore, such force majeure event entitles them a waiver from payment of the monthly rent or at least a partial relief in terms of suspension, postponement, or part payment of the amount.

Key takeaways from the judgment

Contract reigns supreme:

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Whether the COVID-19 induced lockdown can entitle a tenant to seek waiver or non-payment of rent would depend on the terms of the contract. The fundamental principle is that such relief would be available only if such government orders or pandemic are conceived as force majeure events and consequently if the contract provides for waiver or suspension of rent.

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Further, even if the contract covers the present lock down as a force majeure, it is important to ascertain the consequences provided for. Many contracts only provide for termination on occurrence of a force majeure event. Therefore, even upon occurrence of the force majeure event, the lessee cannot seek suspension or waiver of rent but can only terminate the contract.

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The Delhi High Court has ruled that in the absence of a contractual provisions allowing suspension, if a tenant invokes equitable jurisdiction of the Court on account of temporary inability to use the premises, facts and circumstance in each case will have to be looked at in determining whether a tenant is entitled to any relief by way of suspension of rent.

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In respect of contracts which are not classic tenancy or lease arrangements (mandating payment of pre-determined monthly amounts towards rent), the nature of the contract would be important to assess if the tenant deserves any rent concessions. In ‘revenue / profit sharing’ contracts, the entitlement of the tenant would be governed, not by the overriding force majeure event but by the consequences of such event, such as failure to generate any revenue or profits on account of the lockdown.

Applicability of Section 32 of Indian Contract Act, 1872 (“ICA”):

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Courts can consider applicability of Section 32 of the ICA only in circumstances where force majeure provisions are included in contracts.

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In the absence of any contractual provision providing respite from payment of rent / monthly charges, the same would be payable, should the tenant wish to retain the premises. One cannot resile from a contract only because it has become onerous for a party to perform the same (Hotel Leela Venture Ltd. v. Airports Authority of India 2016 (160) DRJ 186).

Applicability of Section 108 of Transfer of Property Act, 1882 (“TPA”) as opposed to Section 56 of ICA:

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The Delhi High Court has reiterated the well-established position on the non-applicability of Section 56 of ICA to arrangements of lease and other similarly situated contracts (which are in the nature of executed contracts) as opposed to executory contracts. It is well settled that Section 56 of ICA does not apply to cases in which there is a completed transfer (Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr AIR 1968 SC 1024).

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The Delhi High Court has also clarified that Section 108 of TPA (which embodies the Doctrine of Frustration) will govern tenancies and leases in the absence of force majeure clauses in lease deeds  (T. Lakshmipathi and Ors. v. P. Nithyananda Reddy and Ors. (2003) 5 SCC 150). The remedy in Section 108 of TPA is for treating the lease as void at the option of the lessee if events contemplated therein occur. Under no circumstances can one take recourse to Section 108 of TPA to make a case for suspension of rent.

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Relying on several Supreme Court rulings, the Delhi High Court held that Section 108 of TPA would apply only in the absence of a contractual stipulation on force majeure, that too when there is complete destruction of the premises or when premises are rendered substantially and permanently unfit for the purpose for which it was let.

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Temporary inability to use the premises by a tenant due to lock down would not entitle the tenant to avoid the lease under Section 108 of TPA or for that matter, even suspend payment of rent.

Comment

The judgment of the Delhi High Court pools in jurisprudence of the past under one order and brings about a lot of clarity on the question as to whether the present lockdown would entitle tenants to claim waiver or exemption from payment of rent or suspension of rent. The view that the current situation cannot be viewed under a common lens, has been fortified by the Delhi High Court.

The Court has inter-alia held that mere temporary inability to access and use the premises cannot allow a tenant / lessee to suspend payment obligations, unless the contract provides for the same.

If the payment of rent is linked to profits under rental agreements, the tenant may be entitled to seek a waiver of payment of rent if the tenant has not made any profits due to the lock down. Though the Delhi High Court did not deal with aspect of minimum guaranteed rent which generally forms part of most commercial rental agreements, considering the ratio laid down by the Delhi High Court, if there is a minimum guaranteed rent in the contracts, and if suspension of rent is not envisaged, then such minimum guaranteed rent would be payable by the lessee.

Further, in case if lease agreements do not contain a force majeure clause, it would not be open for lessees to seek refuge under provisions of Section 108 of TPA for seeking a waiver or suspension of rent.

-          Devendra Deshmukh (Partner), Harsh Parikh (Partner), Abhiraj Gandhi (Principal Associate)

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