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COVID – 19 : Effects on Tenancy in India

Contributed by: Athena Legal

The rent control laws of India consist of the centrally enacted Rent Control Act, 1948 and respective rent control acts enacted by each state, since land constitutes as a subject of state legislation. Rentals covered by the Rent Control Act, 1948 pertain to renting or leasing of property for a period of 12 months or more, and are mainly governed by the Indian Contract Act, 1872 and Transfer of Property Act, 1882. Due to the fact that the Rent Control Act was enacted decades ago without being amended to match the value of real-estate and economic growth in the present times, the same has come to be archaic and in much need of reform and repurposing. In view of this, the Ministry of Housing and Urban Affairs had drafted a Model Tenancy Act, 2019 (“MTA”) which aims to overhaul the legal framework of rental arrangements in India because the current Rental Laws are archaic as they do not address the relationship between the Lessor and the Lessee realistically and fairly. The same is however, yet to be brought into force.

The outbreak of Covid-19 around the world has forced hardship on every individual’s lives in some form or the other. One of the situations that require attention and deliberation are the lessor-lessee relationships. Many tenants have been facing the hardship of having to pay rent for both commercial and residential properties in light of the fact that there have been close to no earnings owing to the nationwide lockdown. The scenario is not quite happy for the landlords as well since many tenants have in fact stopped paying rents due to financial

hardships, who solely depend of income through these rental earnings.

Recently, the Delhi High Court pronounced the judgment dated 21.05.2020 in “Ramanand & Ors. v Dr. Girish Soni & Anr.” bearing RC. Rev No. 447 of 2017 dealing with the operation of lessor-lessee contracts during the period of lockdown owing to the outbreak of Covid-19. The Delhi High Court has examined certain scenarios in light of precedents and has finally held that payment of rent cannot be suspended even during a lockdown. A brief analysis of the Delhi High Court’s judgment on the said issue is provided below:

1. Contracts with Force Majeure clauses:

These contracts are generally governed by Section 32 of the Indian Contract Act which provides for enforcement of contracts on the occurrence of an event. Section 32 provides for a contract to become void when the occurrence of an event becomes impossible and consequently, the performance of that contract becomes impossible.

Under such contracts, a lessee is only entitled to claim relief in terms of suspension of the rent only if the force majuere clause of the contract provides for it. However, if the force majuere clause does not provide for the same, a lessee may not be entitled to claim anything more than the contract becoming void on the impossibility of its performance and consequently surrender the premises to the owner.

2. Doctrine of Frustration of Contract

Section 56 of the Indian Contract Act deals with situation where an agreement has become impossible to perform. In the absence of a force majuere clause in a contract, the Doctrine of Frustration of Contracts (or the “impossibility of performance” as envisaged in section 56 of the Act) comes to play. Citing a judgment of the Supreme Court in Raja Dhruv Dev Chand v Raja Harmohinder Singh & Anr., AIR 1968 SC 1024, the Delhi High Court held that the Doctrine of Frustration of Contracts is not applicable to lease agreement since these agreements are completed conveyance or executed contracts. The High Court has opined that Section 56 of the Act can only be invoked when the contracts are executory in nature.

3. Property substantially and permanently unfit for use

Section 108(B)(e) of the Transfer of Property Act entitles the tenant to call the contract void in case the property becomes substantially and permanently unfit for use due to fire, tempest, flood, army/mob violence or any other irresistible force. However, once again citing the Supreme Court’s judgment in Raja Dhruv (supra), the Delhi High Court has opined that temporary non-use of the premise does not make the property substantially and permanently unfit for use and thus, the Transfer of Property Act as well does not come to the aid of the lessee. A lessee can only take aid of section 108 of the Transfer of Property Act only when there is a complete and permanent destruction of the property.

4. Contracts with profit sharing arrangement

In such contracts a lessee can seek suspension of rent strictly in terms of the clause only if the scenario has affected the ability of the tenant to earn profits. In such cases, no force majeure event will have any overriding effect on the contract.

Further, the Delhi High while taking into consideration the extenuating circumstances held that mere non-use of a rental property without giving up possession would not entitle a renter/lesser to suspension of rent payments. Given the aforesaid judgment, it must also be noted that the landlords are not entitled to evict the tenants without sufficient cause and by law solely owing to the outbreak of Covid-19.

In fact, the Ministry of Home Affairs and other State Governments since the beginning of the lockdown has advised the landlords to not seek payment of rents where its plausible and to not evict tenants unreasonable. It must also be noted that the Delhi High Court in the aforesaid case has finally directed the payment of rent by the tenant, however after a period

of a month from when it was due, basing its judgment on the nature of property and location and status of parties involved. However, it must also be kept in mind that India sees a large population in rural areas and sub-urban areas where numerous tenants are leased out properties without any contractual basis, simply on the payment on a monthly rent. In such cases, the Rent Control Legislations of concerned states are applicable.

The Ministry of Finance, in recognition of the fact that performance of contracts and contractual obligations will suffer because of the lockdown imposed by the Government of India, has given an advisory to the Ministry of Housing and Urban Affairs and Union Territories on May 13, 2020 recognizing the disruptions affecting transportation, manufacturing and distribution of goods and services in the country and its subsequent effect on fulfilment of contractual obligations. This essentially means that any issues of non- performance caused due to Covid-19 and ensuing government regulations would be covered under force majeure clause of such a contract.

Renters may benefit to some extent from the operation of such force majeure clauses in their lease/rental contract. However, in case of absence of the said clause, there is not much that remains to aid renters/lessees. Even the Doctrine of Frustration of a contract under Section 56 of the Indian Contract Act may not be applicable in light of the precedents set down by the Supreme Court holding that Section 56 would not be applicable when the rights and obligations of a party arise from the transfer of property under a lease.1 Additionally, a tenant can claim suspension of rent in the circumstance that tenant was dispossessed.2 However, tenants in the subject conditions of Covid-19, prohibited from travelling back to their home states due to suspension of working of aircrafts, trains and barricading on state borders, could find themselves in a fix, since in most cases, rent suspension would be allowed if possession of the premises is vacated.

While the Government has directed all employers to pay wages/salaries to their employees during this time, which might give landlords some hope of honouring of rent payments by

their tenants, the same has not been followed. Over and above deductions in salaries by many employers, hundreds and thousands of people are being laid off by companies due to lack of income in the past few months owing to the lockdown. Further, considering the fact that most renters are migrants from other states, the issue of mobilising migrant workers also comes into play.

The Government has also issued advisories requesting landlords to not charge rent during the period of lockdown, with Delhi CM Arvind Kejriwal requesting landlords to excuse payment of rent for 3 months, even promising to contribute in payment of rentals by the Government in turn. The Delhi Government has further directed for strict compliance of its order directing landlords to not demand rent from labourers and students for at least a month. Further, by an order dated March 24, 2020, the Delhi Government has directed for strict penal action to be taken against landlords/house-owners from evicting doctors/ paramedical staff/ healthcare workers.

It is further interesting to note that the Ministry of Electronics and Information Technology

has waived the rent due from 01.03.2020 to 30.06.2020 for all IT companies operating from

Software Technology Parks of India. Similarly, Ministry of Shipping has reportedly asked

major Indian ports to defer the lease rentals and licence fees-related charges for April, May

and June.

It is also important to note that the rentals that are collected by landlords go towards mortgage payments, electricity and water charges, insurance, maintenance, property taxes, etc., essentially taking a hit on state revenue in turn. While tenants/lessees having a specific force majeure clause in their rental/lease agreements can seek to avail the same, others may execute fresh contracts or execute addendums to incorporate the force majeure clause. If tenants/lessees have the option to travel back to their home states, they may immediately notify their landlords/house-owners of the same and declare their lease/rental deeds void quoting force majeure clause. However, the current situation demands further intervention and aid by the Government of India so as to not force people out of their homes in light of the Covid-19 pandemic, making such people more vulnerable to the said pandemic.

Contributed by Athena Legal

Disclaimer: This update is intended for your general information only. The information and opinions contained in this document are derived from public sources which we believe to be reliable and accurate but which, without further investigation, cannot be warranted as to their accuracy, completeness, or correctness. It is not intended to be nor should be regarded as legal advice and no one should act on such information without appropriate professional advice. Athena Legal accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material.

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