As the lockdown had an impact across sectors, the tenants have started approaching the owners of the offices, shopping malls, commercial complexes etc. seeking suspension/ waiver of the lease rentals till the time the lockdown subsists. Some are invoking the force majeure clause under the lease agreements/ lease deeds/ license agreement while the others are pleading the benefit of the doctrine of frustration of contract enshrined under Indian law. Know COVID 19: Impact Of The Contagion On Commercial Tenancies, All You Should Know About Force Majeure
Whether a force majeure: This has led to deliberation amongst all the stake holders (viz. the real estate developers, malls/ office complexes owners, tenants etc.) as to whether the outbreak of Covid 19 can be categorized as a force majeure event.
The tenancy agreements where the words like epidemic, government order and any other situation making conduct of business impossible are used in the force majeure, the spread of Covid 19 may be argued to be categorized as a force majeure event. The ambiguity arises either when the agreements contain narrowed definition of force majeure, like limiting it to physical damage to the business premises or change in law or policy, OR when there is no definition of force majeure at all in an agreement.
Whether frustration of contract doctrine: In cases where there is a narrowed definition of force majeure or no definition at all the parties may have to look beyond the terms of the agreement. In such a situation, one available option is the doctrine of frustration of contract which provides for the scenario where the performance of the contract becomes impossible. In such cases, it will need to be proved that the event i.e. Covid 19, has changed the circumstances totally, to upset the very foundation of the agreement, thereby rendering the agreement impossible to perform. Mere economic difficulty or loss may not be “sufficient” basis to trigger the doctrine of frustration of contract.
Having said that, in some cases the courts have taken contrary views and held that it is not necessary for the contract to be impossible and he doctrine may be invoked even when it has become impracticable for parties to perform the contract. Additionally, in most cases where doctrine of frustration is involved, the jurisprudence suggests that the contract cannot be performed and hence is sought to be terminated, which may not be the case with most tenants who would only want a temporary abeyance of rent payment as against to losing the premises altogether. Similarly, even property owners would not want to go for termination of rent generating properties in such times and thereby making it a compassionate decision rather than a purely legal one.
Office/ Commercial Spaces: The impact of the lockdown on commercial office spaces may not be same as the retail malls. Some of the commercial office building owners whose tenants may be engaged in manufacturing or provisioning of essential services (such as telecom or media agencies)), are approaching the relevant government authorities to obtain permits/approvals/ curfew passes to be able to operate their buildings/premises/ complexes so that tenants can operate consequently from such buildings. Also, in some instances the tenants are still operating their skeleton infrastructure from the office buildings.
The owners are also under pressure to ensure compliance with the lockdown guidelines and conditions imposed by the GOI and the state government. Financial burden of keeping the premises open, maintaining the requisite infrastructure and ensuring that all facilities (such as HVACS, lifts, gensets etc.) available within the premises are properly maintained and are operational is hampering the business of the owners, since they are also struggling to claim the cost of maintenance from most of the tenants who are anyway under the financial burden. These are all, in addition to the huge manpower and workmen related costs which the owners bear to maintain office buildings.
Ongoing Battle: Considering the unprecedented situation that the commercial real estate core asset market is going through, while it is certain that tenancy disputes will rise, nonetheless it is worthwhile to wait and watch the jurisprudence and the government and how they come to the rescue to help end, or minimize the crises. COVID 19: Impact Of The Contagion On Commercial Tenancies, All You Should Know About Force Majeure
For more updates, stay connected on Facebook.