‘Balance Rent’ During The Lock-In Period Is A Genuine Pre-Estimate Of Loss, Requires No Further Of Actual Loss: Delhi High Court

The High Court of Delhi has upheld an arbitral award wherein the arbitrator held that the ‘Balance Rent’ during the lock-in period is a genuine pre-estimate of loss which requires no further proof of loss.

The bench of Justice V. Kameshwar Rao held that when the contract provides for payment of entire balance rent for the lock-in period if the deed is terminated before the expiry of the lock-in period, it would be a genuine pre-estimate of the losses that the lessor would bear for the early termination of the contract/deed. It held that lock-in period acts an assurance for the lessee that his possession would not be disturbed and it also guarantees the lessor a certain sum of money for a definite period and any breach involves consequences for both the parties.

Facts

A Perpetual Lease Deed dated 10.06.2005 was entered into between the President of India acting through the Land and Development Officer („L&DO‟), Ministry of Urban Development, Government of India, and the respondent wherein the subject property was demised unto the respondent.

The parties executed a sub-lease deed dated 06.11.2016 by which the subject premised were leased out to the petitioner for a period of 18 years. The deed provided for a period of three years as the lock-in period and it further provided for a 9 months rent-free period which was extended to 12 months. Clause 8 of the deed provided for the termination of the deed during the lock-in period and the consequences flowing from the termination.

Clause 8(A) provided that that the respondent could terminate the deed if the petitioner fails to pay the rent for two consecutive months on time provided that the default was not cured even after a 30 days’ notice period. In that eventuality, the respondent would be entitled to ‘Balance Rent’ for the months remaining in the lock-in period.

Clause 8(B) provided the petitioner with the right to terminate the deed during the lock-in period in the event of an act of God that prevents the use of the Property for the purposes for which the Property has been sub leased for a continuous period of ninety (90) days after giving thirty (30) days prior notice to the respondent in writing intimating its intention to do so and the Deed of Sub Lease shall terminate on the expiry of the notice period. In that eventuality, the petitioner would not be liable to pay any balance rent.

After the expiry of the rent-free period, the petitioner defaulted twice on its obligation to pay the monthly rents, however, it had cured the default in the notice period. Finally, the respondent terminated the deed on 12.06.2020 after the petitioner failed to pay its rent for the month of April and May and also failed to cure the default within the notice period. It demanded the payment of the balance rent from the petitioner and invoked the arbitration clause.

Thereafter, the petitioner also issued a notice of termination on account of Covid-19, however, by that time the deed was already terminated by the respondent under Clause 8(A).

The dispute was referred arbitration and the tribunal vide its award dated 04.02.2022 allowed the claims of the respondent and directed the petitioner to pay the balance rent with interest and GST. Aggrieved by the findings of the tribunal, the petitioner challenged the award under Section 34 of the Act.

Contention of the Parties

The petitioner challenged the award on the following grounds:

• The tribunal erred in not appreciating the fact that the deed was terminated by the petitioner under Clause 8(B) which provided that the petitioner would not be liable to pay the balance rent. The onset of the Covid-19 and the consequent nationwide lockdown was an Act of God which rendered the rented properties non-usable for the purpose for which it was rented.
• The tribunal erred in awarding the balance rent in favour of the respondent without any proof of actual loss by treating the amount as a debt or a genuine pre-estimate loss.
• The tribunal erred in not appreciating the fact that a person claiming any damages for the breach of the deed has to prove actual loss before the Court and any amount given under the deed is not the actual amount but a ceiling amount. The tribunal awarded the amount without any proof of loss suffered by the petitioner. Therefore, the award is contrary to the principles of law on damages.
• The tribunal awarded the entire balance rent without taking into considerations factors such as mitigation of losses by the respondent.

The respondent made the following submissions in favour of the award:

• The scope of interference under Section 34 is extremely narrow and does not permit reappreciation of evidence and any decision of the tribunal based on the appreciation of evidence and interpretation of the terms of the deed does not call for any interference.
• The terms of the deed are to be construed strictly and given its normal meaning.
• The ‘Balance Rent’ was a genuine pre-estimate of loss which would be suffered by the lessor if the deed is terminated pre-maturely in the lock-in period.
• The entire lock-in period was for 3 years out of which the petitioner enjoyed a rent-free period of 12 months and paid the rents only for 6 months before defaulting on its obligation to pay the monthly rent. The lock-in period coupled with the principle of balance rent ensures that the petitioner cannot terminate the deed at its own whim and fancy after enjoying a long rent-free period. If the petitioner was allowed to terminate the deed, without any consequences, after enjoying the rent free period, it would amount to a windfall gain to the petitioner.
• The tribunal rightly held that the termination of the deed by the petitioner was not valid as the deed already stood terminated under Clause 8(A). The tribunal rightly held that in terms of Clause 8(B), the petitioner could issue notice of termination only after a period of 90 days from the onset of the lockdown, however, before that could happen, the respondent had already terminated the deed on account of its failure to pay the rents for the months of April and May.
• The tribunal rightly held that the balance rent was not in the nature of liquidated damages and even if it was to be assumed that it was in the nature of the liquidated damages, it required no proof of loss as it was a genuine pre-estimate of loss to be suffered by the lessor in case of termination during the lock-in period.

Analysis by the Court

The Court held that the finding of the tribunal qua the issue of termination of deed is correct. It held that the deed was terminated by the respondent under Clause 8(A) and the attempted termination by the respondent under Section 8(B) was not valid as the deed already stood terminated before the timeline as prescribed under Clause 8(B) could become effective.

Next, the Court examined whether the tribunal was correct in awarding the balance rent to the respondent. It held that when the deed provides for payment of entire balance rent for the lock-in period if the deed is terminated before the expiry of the lock-in period, it would be a genuine pre-estimate of the losses that the lessor would bear for the early termination of the deed. It held that lock-in period acts an assurance for the lessee that his possession would not be disturbed and it also guarantees the lessor a certain sum of money for a definite period and any breach involves consequences for both the parties.

The Court held that the view taken by the tribunal regarding the balance rent being a genuine pre-estimate of loss is a plausible view which requires no interference.

Accordingly, the Court dismissed the challenge petition.

Case Title: DAG PRIVATE LIMITED V. RAVI SHANKAR INSTITUTE FOR MUSIC AND PERFORMING ARTS

Citation: 2023 LiveLaw (Del) 487

Counsel for the Petitioner: Mr. Sanjeev Puri, Sr. Adv. with Mr. Faisal Sherwani, Mr. Aditya Vikram, Ms. Sanjukta Kaushik & Mr. Shashwat Dhyani, Advs.

Counsel for the Respondent: Dr. Amit George, Mr. Dhilip Philip, Mr. Dhiraj Philip, Mr. Piyo Harold Jaimon and Mr. Samuel David, Advs

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