Whether The Outbreak Of Covid 19 Can Be Categorized As A Force Majeure Event?

COVID-19: In the recent months, the world is struggling with the novel Coronavirus Disease (COVID-19) which has severely affected the global markets and businesses, leading to disruption in supply chains, stalling of manufacturing operations, stoppage of operations of offices and imposition of travel restrictions.

Lockdowns: While the Government of India (“GOI”) is trying to tackle this unforeseen and unprecedented situation businesses have started to feel the impact of this disastrous outbreak. A significant step was taken by the GOI when the Hon’ble Prime Minister of India on March 24, 2020, announced a 21-day nationwide lockdown with effect from March 25, 2020. Following this announcement, the Ministry of Home Affairs (“MHA”) and various state governments issued orders/ notifications which provided for a complete lockdown in the entire country including shutting down of all offices, business, buildings, factories malls, cinema theatres, etc, along with a slew of other measures such as prohibition on assembly of four or more people in any area, suspension of the flights, etc. Any non-compliance with the aforesaid orders was also made a punishable offence under the Indian laws.

Loan & interest moratoriums: The GOI and the Reserve Bank of India (RBI) have tried to protect the interests of businesses by introducing various incentives such as loan and interest moratoriums; however, the businesses are still feeling the heat with some of these measures left to the discretion of the banks. The lockdown of the establishments, offices shopping malls, etc. did not particularly help the real estate sector as these were implemented around the time when most of the real estate developers were facing reduced demand, liquidity crunch and increasing litigations (including under insolvency laws).

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.

Retail Malls: Retail malls will face the most severe impact of the lockdown, since at the first instance of the outbreak of Covid19 in India, the cinema halls and malls were ordered to be shut down in various states. As the tenants have sent notices for no rent, the situation for mall owners becomes precarious as they are bound to pay interest on their loans and are also prevented from lowering the costs such as wage reduction, or labour retrenchment etc. While the GOI and the RBI have tried to ease the pressure by announcing the moratorium on the loans, nonetheless the interest keeps accruing on such loans. The situation will worsen if the mail owners do not get covered under their business interruption insurance policies, and most may not.

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.