To pay rent, or not? Tenant-landlord conflict in the time of Coronavirus legally explained

We are witnessing an unprecedented situation, which not only has disrupted all our economic and organisational norms hereto, but also has deeply affected our relationships – both interpersonal and social. In almost all the big cities where there are relatively more concentration of migrant workforce, a simmering unease and discontent is palpable in connection with the issue of non-payment of rent by tenants/lessee and the landlord/ lessor. This article aims at analysing this peculiar situation from the legal point of view and to come up with some probable solutions- out of Court as well as political.

The Legal Framework

We have to first understand that legally speaking any tenant-landlord/ lessee- lessor relationship is pure and simple a contractual relationship based on the free will of the parties (except in a situation where the monthly rental happens to be below a specified amount and such a relationship being governed by the various provisions of the Rent Control/ Regulation Acts enacted by various States). This relationship is governed by the assurances given by the landlord/lessor on one hand and the tenant/ lessee on the other (i.e. to say assurances given by the parties to that contract to each other) which when brought down into writing, forms the Rent Agreement/Lease Deed (Agreement). This Agreement/ Deed is largely governed by the various provisions of the Indian Contract Act, 1872, inter alia and particularly with respect to offer, acceptance, consideration, term, breach and frustration of contract. The parties to such contract are free to include and agree to all the possible present and foreseeable conditions and exceptions into the Agreement, which when arises, gives a legal right to any of the parties to perform or not to perform its undertaking.

Let’s understand as to what is a Force Majeure (FM) event. A FM event can be understood as an extraordinary event or a circumstance beyond human control, which frees both the parties from contractual obligations, when prevented by such an event, from fulfilling their obligations under the contract. Force Majeure Clause (FMC) is one such standard clause which is invariably incorporated in each and every Agreement and incorporates such FM instances or events as decided by the parties. It also entitles legally to suspend and or to not to perform an undertaking by a party (without the same amounting to an express breach of an undertaking by the said party- here we are concerned with the rent only) for the duration of the FM event. Unfortunately most of the FMCs in already concluded Agreements do not have pandemic event like the present COVID-19 incorporated in it. What is most important thing to be noted is that existence of a FM event in no any manner excuses complete non-performance by a party or absolves entirely such non-performance by a party in all times to come. An event in order to be stated to be a FM event inter alia must (a) directly or by implication be an event which is beyond the reasonable control of any of the parties & (b) must affect the ability to perform by any of the parties.

Now, looking from this perspective we all will agree that the first condition is satisfied- this pandemic is beyond control of any of the parties and further the lockdown and various restrictions imposed by the Governments and Authorities are also beyond the control of any of the parties and particularly can be stated with proof, particularly by a lessee of a commercial premises. So let’s analyse the second consideration i.e. whether such a FM event has affected the ability to perform by a party (tenant here)? And here arises conflict and differences, as the answer to the first consideration is a factual state of affairs which no one can deny but the answer to the second consideration is vague, subjective and party specific particularly when we are talking about a residential premises. We must keep in mind here that any FMC or a FM event does not totally and absolutely absolve and frees the tenant/ lessee from his/her/its legal liability to pay the rent, it just suspends. If we peruse some of the more important case laws, on the issue of interplay of force majeure clause and the doctrine of frustration of contact, like Satyabrata Ghose v. Mungneeram Bangur & Co. [1954 SCR 310]; M/s Alopi Parshad & Sons Ltd. v. Union of India [1960 (2) SCR 973]; Naihati Jute Mills Ltd. v. Kyaliram Jagannath [AIR 1954 SC 44 ] and the most recent Energy Watchdog vs. CERC (2017) 14 SCC 80, we will find that the courts have consistently ruled that the concept of frustration of contract can only be called into help when there is no any force majeure clause in the contract. Further it has been a consistent view of the Supreme Court of India (SC) that the contract is not frustrated merely because its performance has become onerous on account of turn of events or that a contract is not frustrated merely because the circumstances in which it is made are altered, the courts having no general power to absolve a party from the performance of his or her part of the contract, merely because its performance has become more onerous on account of an unforeseen turn of events. Very interestingly the SC in the case titled Raja Dhruv Dev Chand v. Raja Harmohinder Singh 1968 3SCR 339, wherein it was dealing with the issue of whether concept of frustration of contract applies to lease deeds, had held that the same is not applicable to the lease deeds.

Further if we try to take lesson or guidance from the case laws and judgment from the Common law nations, during the Great Flu/ Swine flu of 1918, we will find that in majority of cases it has been held that epidemic did not excuse a duty to perform by the parties. The consensus everywhere, it seems, when we sieve through the landmark judgments passed by the highest courts of the various jurisdictions across the world, while interpreting a FMC, is to give it an interpretation which binds the parties to the contract/ to their undertakings than to release a party or parties form its obligations on the ground of interruption by a FM event.

The Present Scenario

The various State Governments and the Government of India, ever since February end and March, 2020 beginning, have been issuing advisories, guidelines and Orders under the provisions of the Epidemic Disease Act 1897 provisions of the Code of Criminal Procedure, 1973 and the National Disaster Management Act, 2005 gradually putting minor to complete restriction on the movement of people and functioning of the industries and establishments across the country, leading to a crippling and stalling effect on business and normal life in the entire country.

Governments- both Central and State- have further directed all the employers (whether an industry of any establishment-shop etc.) to make the payment of the entire wages/salaries to all the employees- irrespective of their status as a workmen or a non permanent or a daily or contractual labour or a white collar employee or a blue collar employee, whether getting a package of a million rupees a month or five thousand rupees a month so on and so forth, there arises a valid expectation in the minds of the landlords/ lessors- particularly of residential premises- that they are entitled to their rental as per the Agreement, as even though there is a pandemic/ FM event, the same has not affected the ability of the tenant/ lessee to pay the rent, as he/ she is entitled and must have got his/her entire wage/salary and therefore, why should he/she let go the rental. Any landlord/ lessor can validly say that since the Banks have also deferred payment of the EMIs there is absolutely no occasion for a tenant to not to pay the rent.

Unfortunately, this is something which does to pass the test on the ground. Almost no employer is adhering to the said fiats, banks have only deferred the recovery of the EMIs in these months, however the Term of the loan (time to payback) has proportionately been extended and the banks are ruthlessly charging the interest for the period of such non payments/ deferment. So the situation of a tenant/lessee is not what the landlord/lessor thinks, is.

Legal Disputes- Limitations

This situation is rife with possibilities of legal disputes cropping up between the landlords/ lessors at one end and the tenants/ lessees on the other since we are clear now that a FM event only suspends the performance of an undertaking, it does not obliterate or removes the requirement to perform even later on by a defaulting party who has defaulted during the operation of the FM event. Further all are coming to terms now that the world economy in general and Indian economy in particular is going into deep recession and the things won’t be normal for a long time to come therefore, the ability of the tenant/ lessee to repay the entire outstanding of rental accrued during the FM duration (suspension period), to be objectively seen, in the future too seems to be severely compromised.

Now, visualize a scenario in which a landlord/ lessor approaches a Court of law for recovery of the rent/ outstanding rent for the period of suspension (during the operation of the FM event). In such a situation it will be very difficult to speculate the outcome of such a Court case. If we presume that the landlord/ lessor has the resources to pay the Court Fee as well as the fees of the lawyer still there will be many questions to think over by the landlord/ lessor like- Can a Court of law direct a landlord/ lessor to give up insisting upon performance of an undertaking by the other party- the tenant/ lessee here- in complete disregard to the contract entered, by the exercise of free will and with mutual consent, between the parties? Can a court of law read something extra into the Agreement which is not at all there, at the first place? Can a Court of law restrain a landlord/ lessor to not to terminate the Agreement despite there being an express breach of undertaking by the tenant/lessee? What will the Courts do if tenants/ lessees are going to breach their commitments for the payment of rent for the entire duration of the “lock in” period particularly in case of lease taken by a commercial entity when it is clear that his/her enterprise is not going to survive or earn in the same manner as it used to do and therefore the lessee of the commercial property wishes to handover the possession of the premises back even during the lock in period? Another very germane question which arises here is that do our Courts have the necessary capacity- in terms of resources both infrastructural and manpower- to handle barrage of such cases, particularly in the light of estimated more than 2 Crore cases pending as on date at the various levels of our judicial set ups and the time it will take for a Court of law to decide/ give an appealable verdict? The very relevant question which again arises here is, what if the tenant/ lessee despite there being a decree against him/her/ enterprise, by a competent Court of law, fails to pay the decretal amount, for some valid reason- the enterprise going bankrupt or loss of job of the tenant?

One can well guess about the time in months it will be required to even serve the Court Summons and not to talk about the time in years to get the final decree- contested or ex-parte, which is always open to challenge before a superior Court of law, till the SC. And the most frustrating nightmare for any landlord/ lessor would be, if the lessee happens to be a legal entity with limited liability provision, say a liability of rupees one lakh only, incorporated in its Articles of Association. Even otherwise, the Commercial Courts Act, 2015 bars direct institution of any commercial suit, like what we are discussing-recovery of money/ lease amount etc.

As per section 12A. Pre-Institution Mediation and Settlement-(this section has been inserted by Act 28 of 2018, s. 10 with effect from 03-05-2018)-no suit which does not contemplate any urgent interim relief, shall be instituted unless the plaintiff exhausts the remedy of pre-institution mediation. Various Legal Services Authorities constituted under the Legal Services Authorities Act, 1987 (39 of 1987) have been authorised to conduct the pre-institution mediation, where the aim of such mediation is to resolve the dispute during the mediation itself, without the intervention of a Court of law. It is only when a Certificate, certifying that the pre-institution mediation has failed, is issued by the concerned Legal Service Authority, the plaintiff can file such commercial suit in a Court of law.

The Probable Solutions

Looking at the above peculiar factual situation and the settled legal position, the solution to these issues seems to lie with the parties themselves and with the executive and fairly not with the judiciary. The need of the hour for the parties (landlords/lessors & the tenants/ lessees) is to become realistic and to look at the present and emerging future scenario practically. Since the economy is going into recession with little or no chance of recovery in the next 1-2 years, the earning and the general paying capacity- including rental, of a residential premises and especially of the commercial premises, is going to be drastically cut down. Further Work From Home (WFH) is going to be the new normal, which directly is going to hit the requirement for commercial space by organisations across the sectors- so there is almost no or at the maximum a very bleak possibility, for the lessors/ landlords, of getting a new tenant/ lessee at the same monthly rental/ yearly lease amount or even at a lesser amount which their present lessee/tenants are paying, for a long time to come. The parties, particularly the landlords/ lessors, must not forget that in the times to come, to get a new tenant/ lessee that too at the rates at which the Agreements have already been executed with their present tenants/ lessee, is a pure and simple day dream. If a tenant/lessee is going to vacate and handover the possession to the landlord/ lessor, the possibility of the premises lying vacant for a long period of time in want of a tenant/ lessee even at a throwaway rental, is real.

It is therefore, advisable for the parties to themselves come forward and negotiate and agree to a reduced rental, apart from amicably and out of court resolution of the issue of payment of the rental for the period of operation of the FM period and some time thereafter, say till December, 2020 to begin with, and to again take stock at the end of 2020 and thereafter either shift to the original rental (as per the Agreement) or take a call whether to continue with this temporary arrangement and or to further negotiate to reduce the rentals. If the lessee/ tenant has gone bankrupt or has refused to continue his/her business from a leased premises because of the various financial reasons beyond its control and has shown its inability to pay the entire rental for the lock in period, the parties must also resolve this issue with a human touch as Court intervention may not give the lessor/landlord an immediate relief, that too when the tenant/ lessor is a legal entity with limited liability clause in its Article of Association.

The parties may execute an Addendum with the help of a legal person or try to negotiate and put it in writing and execute. The strict requirement of compulsory Registration of such pandemic time Addendums or novation of contracts, during these hard times, must be dispensed with by the governments so that there is no unnecessary hassle – both financial burden as well as requirement to physically travel to the concerned Sub Registrar’s office- to the willing parties. Services of trained Mediators and Conciliators and Organisations may be used by the parties, if agreement seems difficult to arrive at by and between the parties.

This unprecedented situation also requires an unprecedented political solution which could be anything from direct transfer of the rent directly into the accounts of landlords/lessors to dissuade them to take any coercive step against the tenant/ lessee. A new Application (App) can be developed or some provision can be incorporated in the very relevant “Aarogya Setu” App for the tenants to make a request by uploading relevant (registered or unregistered) Agreements on the basis of self- declaration and there being in place, the provisions and application of the Indian Penal Code, 1860 with respect to anyone in criminal conspiracy uploading and using as genuine any wrong, false or forged document/ Agreement, to discourage fraudulent claims. Government is just not there to levy and collect and appropriate taxes only, it must loosen its coffers to help its citizens, from whom it collects the taxes, and share their burden. No one can stop the governments to impose a new Cess (for a definite period of time) to exclusively cater to this requirement of money, if at all there is any need for imposing the same.

Out of box situations do demand out of Court settlement-mediation, conciliation and negotiation- as Courts have their own limitations, we must be conscious of. And to deal with an event of this unprecedented magnitude, the last resort and the ultimate saviour could only be the State and its practical policies.