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Lockdown & Suspension Of Rent : Delhi HC Shuts Its Door For Unpaying Tenant While Leaving The Equity Gateway Ajar

Rohan Batra & Dhruv Sethi
25 May 2020 1:26 PM GMT
Lockdown & Suspension Of Rent : Delhi HC Shuts Its Door For Unpaying Tenant While Leaving The Equity Gateway Ajar
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On May 21, Delhi High Court pronounced a crucial verdict[1] on a seminal and pressing issue- Can tenants claim waiver/suspension of rent owing to the COVID-19 lockdown crisis?

Prime real estate at meagre tent

Housed in one of Asia's most premium streets- Khan Market, the tenant was running a shoe store called "Baluja" on a commercial lease with the landlord-dentist for a paltry sum of INR 300 per month since 1975. Evicted in 2017 under the Delhi Rent Control law, the tenant challenged the eviction before the Delhi High Court.

In the interim, the Delhi High Court had stayed the eviction order while directing the tenant to pay INR 3.5 lakhs per month. Following the lockdown, the tenant moved for suspension/postponement/part-payment of monthly rent.

Delhi HC Rejects Tenant's Claim For Suspension of Rent Due To Lockdown, Allows Postponement Of Payment Schedule[Read Order]

Legal Parameters

Referring to various forms of tenancy, the court broadly categorized them into- those with a force majeure clause and those without it.

In the former category, the "fundamental principle" laid down was that tenants/lessees could seek waiver or non-payment of monthly rent if the force majeure clause permits so. In certain cases, tenant may claim that the lease has become void and surrender the premises. Adding an important caveat, court observed that "…if the tenant wishes to retain the premises then in such case rent would be payable and the contract could not be claimed to be void."

In the latter category, i.e. absent a force majeure clause, the tenant may attempt to invoke the

"Doctrine of Frustration' of contract or `impossibility of performance'. Drawing a distinction between 'executed contracts' and an 'executory contract', the court, in view of the settled legal position, held that the doctrine of impossibility does not apply to "lease agreements" which are cases of executed contracts though involving monthly rent.

Viewed from the dimension of transfer of property law, the Court ruled that in cases of lack of contract or contractual stipulation, lessees can, at their option, avoid the lease provided there is a "complete destruction of the property, which is permanent in nature due to the force majeure event." Here, temporary non-use of the premises due to the lockdown cannot form a basis to avoid rental payment, the court ruled.

However, the more critical finding is- in cases marked by absence of contract or contractual stipulation, a tenant may, in a given case, seek suspension of rent due to temporary non-use of premises.

Doctrine Of Frustration Under Section 56 Of Contract Act Not Applicable To Lease Agreements : Delhi HC [Read Judgment]

Allowing room for how pandemics like COVID-19 can affect different contracts, the court carved out an exception in favour of certain unconventional lease agreements. In leases premised on profit-sharing arrangement or rental payment linked to sales turnover, the "tenants may be entitled to seek waiver or suspension of rent strictly in terms of the contract itself", by claiming no sales/profit. It was clarified that this claim has more to do with there being no sales or profits than with the force majeure event.

Since there was no written lease for the Baluja store, tenant's case did not fall in the first category of tenancy. The second form of tenancy was equally ruled out as it fell under Delhi Rent Control Law. No recourse to plea of complete and permanent destruction of property was taken, sideling the transfer of property law angle.

On the equity front, the court, after considering the following factors:

  • nature of the property,
  • financial and social status of parties,
  • amount of rent,
  • contractual conditions,
  • protection under any executive orders(s); and
  • other factors,

rejected application for suspension of rent, particularly because the tenant had no intention of surrendering the premises. However, owing to the lockdown, the court deferred the schedule of payment.

For the future

Although the lease in question was a commercial one, the reasoning applied by the Delhi High Court can possibly stretch to residential leases. However, the more important takeaways are:

  • Force majeure clause in a lease deed can be used to seek waiver/suspension of rent and in certain cases, avoiding the lease altogether provided the tenant wishes to walk out of the premises;
  • Though contracts lacking a force majeure clause may find it difficult to invoke doctrine of impossibility or take recourse to transfer of property law, tenants can find reprieve in court's equity jurisdiction provided the factors listed above make a strong case for waiver,
  • In the not-so traditional leases, where consideration is based on profit-sharing or sales turnover models, like those employed by OYO, or co-working space aggregator like WeWork, a case for waiver of rent can be made if no sales or profits are reported.

Separating wheat from chaff, this judgment has offered much need respite to tenants and landlords seeking to navigate their way through this sticky dilemma.

While the Delhi High Court has shut its door on tenants intending to use the property without paying rent, it has kept its equitable jurisdiction ajar for deserving cases and carved out a special exception for contracts which are "not classic tenancy or lease agreements"

(Rohan Batra is Partner at R&R Law Chambers and may be reached at rohan.batra@rrchambers.com. Dhruv Sethi is an Associate at R&R Law Chambers)
 
 

[1] RAMANAND & ORS. v. DR. GIRSH SONI & ANR.; RC. REV. 447/2017 dated 21.05.2020

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