Can a tenant walk away from their lease liabilities in the times of Covid-19?

Photo credits: Carl Pei, Co-founder of One Plus

In what is undoubtedly the first principle of business life, nothing is worth doing unless it makes commercial sense! In our Covid ravaged times, a lot of tenancies are not making commercial sense anymore! Let me illustrate. You rented a place to run a restaurant. The government locked it down but asked you to keep paying your waiters. The landlord expects to be paid his rent. You have no revenue stream. You have no expectation that the government will let you function before July. By then, you would have been closed for 4 months. There is no way you can close any business for four months and still expect to earn a profit. More likely, you will spend most of next year only recouping your losses. Basically, you are up the creek without a paddle. Does the law have a solution for you?

The theoretic answer is yes. The law has a basic concept called ‘Force Majeure’. Simply put, it means an event which is beyond the reasonable control of a party to a contract and impairs that party’s ability to perform his obligations under the contract. Naturally, you can claim this right of Force Majeure if your lawyer was smart enough to write it into your lease deed.

The question then becomes: what precisely did your lawyer write into this clause? Does it refer to epidemics, plague, pandemics or health emergencies? Does it identify impossibility of performance? Does it define the actions of governmental authorities as force majeure events? The scope of a Force Majeure clause is ultimately limited by its language. Since pandemics resulting from the consumption of exotic animals are rare events, you would not expect businessmen and lawyers to write such clauses into their contracts.

What if it was not your fate to have this super smart lawyer advice you when you needed it? All is still not lost. The ‘Doctrine of frustration’ as enshrined in Section 56 of the Indian Contract Act may come to your rescue! Frustration is the result of an event which makes it impossible for a party to perform its obligations under a contract. In such a situation, the law does not ask a party to do what is impossible for that party to do.

If history is any judge, courts do not apply the doctrine of frustration to lease agreements. In the influential 1968 case of Raja Dhruv Dev Chand v. Harmohinder Singh, the Supreme Court of India was asked to decide if recurring communal riots and the disruption of India’s partition were reason enough for a owner of agricultural land to refund the rent to the tenant. The Court declined to interfere, holding that rent was payable. It did provide a detailed explanation as to why it thought so. This same approach has informed the actions of every court that has been asked to decide similar questions in the next sixty years.

Recently, on May 21, 2020, the Delhi High Court in Ramanand & Ors. vs. Dr. Girish Soni & Anr. relied on Raja Dhruv Chand Supra and concluded that a lease is a completed conveyance though it involves monthly payments. It held that the doctrine of frustration cannot be invoked to claim waiver or suspension of payment of rent. Nevertheless, in a moment of compassion, even while rejecting the tenant’s plea for suspension of rent, it nevertheless allowed the tenant to delay payment of rent by one month. It seems clear that this order may serve as a touchstone for tenant-landlord relationships in the post-Covid-19 world. It is a possibility that a court decides that a tenant can be allowed to enjoy the tenanted premises because Covid-19 made it impossible for him to pay rent!

While still in context, we need not be distracted by the plethora of political speeches being made by our leaders encouraging tenants to defer payment of rent. There are a number of advisories to landlords to defer rent obligations but they are advisories and will remain so. These moralistic encouragements by public servants are nothing theatre. In the end, the law is the law!

The law states that the parties have to perform their obligations under a contract. Frustration of a contract can only be pleaded if a contract is impossible to perform. Sure, the outbreak of Covid-19 was never anticipated and no party is at fault. The true test will be if Covid-19 has affected the ability to perform their obligations under a contract. The sanctity of law has to be preserved. After all, onerous performance and impossibility remain a legal distinction.

So what now? Thus far, most leases don’t allow the tenant to withhold rent for reasons such as pandemics. Considering the devastating consequences that such events have, this practice is probably set to change. Increasingly, we may find that going forward, pandemic clauses will find place in new lease deeds.

Our Covid ravaged times have above all demonstrated once again the savage truth about the law of unintended consequences. We shut down the country to save lives, but we have destroyed livelihoods and we have destroyed lifestyle. The real question facing millions of people right now is this: does the law allow us to save at least our life savings? This becomes especially critical for people who live or run their businesses in rented properties.

The impact of Covid-19 on lease deeds is something we have to live with, just like the virus. It is possible that the recent Delhi High Court order becomes the ‘new normal’. Different judges may take different positions. Some may lean towards compassion and others will preserve the sanctity of law. Ultimately what prevails are the facts of each case based on the contractual language, if at all.

Originally published on June 10, 2020 in LinkedIn


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