COVID-19 – INVOCATION OF FORCE MAJEURE CLAUSE IN AGREEMENTS OF LEASE, LEAVE & LICENSE AND CO-WORKING SPACES
Renting of commercial premises for carrying out one’s business or profession is a viable option for many who either cannot afford to buy the property or do not wish to block their liquidity in real estate. In addition to the traditional lease agreements, which are covered under the Transfer of Property Act, 1882 (‘TOPA’), businesses have the option of entering into leave and license agreements which are quite common in metropolitan cities and commercial hubs. In recent times, with the surge in the number of startups and first generation entrepreneurs with limited dispensable income, some innovative solutions have also been created to cater to them. One such example is co-working spaces. The arrangement in co-working spaces is even narrower and limited as compared to leave & license and can be loosely equated to a hotel accommodation with limited rights to enter into the premises and occupy the same for a specified period.
While the commercial clauses pertaining to rentals, due date, fit out period, interest free deposit etc. are subject matters of tough negotiations, the Force Majeure clause is typically not examined minutely.However, in the light of the outbreak and spread of COVID-19, the same has come under the spotlight and this rather ignored clause has become the most debated one.
Owing to the outbreak of COVID-19, certain peculiar and extraordinary circumstances arose, which could have beenneither anticipated nor expected by anybody. From mid – March 2020, when the slew of directives started pouring in from the Central and State Governments, closing down various establishments like malls, theatres, cinema halls etc. to eventually closing of all commercial establishments (barring the ones providing essential services), we have seen parties who have taken premises on rental basis, attempting to take refuge under the Force Majeure clause to obtain a waiver of the rent or to terminate the agreement.In this Article, we shall be considering Force Majeure clauses, their purport and consequences of absence of Force Majeure Clauses in three types of “rental agreements”, viz. lease, leave & license and agreements for Co-working spaces.
At the very outset, it is essential to examine the Force Majeure clause as inserted in an agreement. The term Force Majeure translates to “superior force” and is also commonly referred to as “act of God”.The definitions of Force Majeure as inserted in agreements are many times illustrative, i.e. they specifically list different events that are to be considered under the agreement as Force Majeure. At times, the illustrative definition could conclude with a larger phrase /term, for instance “such other acts of God”. However, Force Majeure clauses are to be interpreted and read in harmony with the language used in the rest of the clause and intent of the clause. It is a common understanding that in the event, an agreement does not provide for a Force Majeure clause, then the parties have to rely on the provisions of the Indian Contract, 1872 (“Contract Act”)particularly Section 56 which states that an Agreement to do an impossible act is in itself void. The same is also referred to as the doctrine of frustration. In this background, let us now consider the three agreements vis. Agreements for lease, leave & license and co-working spaces.
Lease of immovable property has been defined under Section 105 of the TOPA as inter aliaa transfer of right to enjoy the property. It is a settled position that so far as a lease of immovable propertyis concerned, the general doctrine of frustration or Section 56 of the Indian Contract Act do not apply. This is so because, section 108 of TOPA provides for specific conditions under which a lease can be rendered void.
Section 108 of TOPA states that if by fire, tempest or flood, or violence of an army or of a mob, or other irresistible force, any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let, the lease shall, at the option of the lessee, be void.
The essential elements to render a lease void are accordingly (i) the damage caused to the property must be by forces beyond the control of the parties such as the ones stated in the Section and (ii) the damage must be such that it destroys the very substratum of the contract, i.e. the property itself in such a way to such an extent that it cannot be used for the purposes for which it was leased.
Section 56 of the Contract Act is a much general provision as compared to Section 108 of TOPA which is specific provision pertaining to leases. However, where there is a general law and a special law dealing with a particular matter, the special lawprevails over the general law. Accordingly, section 108 will have precedence over Section 56 of the Contract Act.
It is further important to note that while Section 56 has an automatic operation, Section 108 provides that in the existence of the elements as stated above which have rendered the leased property substantially and permanently unfit to be used, it is at the option of the lessee to declare the lease as void. Accordingly, a deliberate and overt action is required to be taken by the lessee to render the lease void and the same shall not happen automatically.
From the above consideration of Section 108 of TOPA, it is evident that it is a complete code on Force Majeure and frustration of contract so far as leases are concerned. Accordingly, a lease can be declared as void or frustrated only if it falls within the ambit of Section 108. A situation like COVID-19, however does not render the property substantially and permanently unfit for use. While there is no bar or restriction on parties inserting such Force Majeure clause in their lease agreement as they may consider appropriate to protect them against unforeseen event, in the absence of a Force Majeure clause that specifically provides for a situation like COVID-19 or in the event the lease agreement does not have a Force Majeure clause at all, it is unlikely that a situation like COVID-19 can exempt the lessee from discharging his/her obligation of payment of rent under a lease agreement.
Leave & License
Leave & License or simply license, in respect of property is a much narrow and limited entitlement as compared to lease. In fact a license is a mere permission by the licensor to the licensee to enter upon the property/premises of the licensor for such purposes and to carry out such acts as the licensor may allow.
An agreement for leave and license can have such Force Majeure clause as the parties may deem fit keeping in mind the purpose for which the license is granted to the licensee. Accordingly if the clause provides for an epidemic or a quarantine situation to be considered as a Force Majeure event, as many agreements do, then COVID- 19 and the lock-down would get covered under it.
On the other hand, for instance, if a Force Majeure clause in a leave and license agreementonly envisages a physical damage to the property and provides that the licensee shall be discharged from paying the license fee if the licensed premises are destroyed/damaged and rendered unfit for use owing to natural forces like storm, rain, tempest, fire etc., then clearly a situation like COVID-19 cannot be read to be covered under the Force Majeure clause as COVID-19 or the consequent lock down does not render the premises unfit for use.
Accordingly, if the parties have included a Force Majeure clause in the leave & license agreement, then the same will have to be followed for seeking a discharge from performance of obligations thereunder. In the event, however, if the leave & license agreement does not have a Force Majeure clause then Unlike lease, Section 56 and the general doctrine of frustration have an application on leave & license agreements.COVID-19 could be a Force Majeure event leading to frustration of contract in many cases. To plead frustration, the obligations/acts to be performed by a party under the agreement must be such that they are impossible to be performed. For instance, an agreement of sale of goods between a buyer and a manufacturer in India wherein time was of essence and certain raw materials were to be procured by the manufacturer from China. However, before the date of performance, owing to COVID-19, China completely shuts down and eventually India also closes its borders. Under such circumstances, the agreement becomes impossible to perform within the timelines agreed therein and accordingly stands frustrated. The parties can very well enter into fresh understandings and agreements. However, the original agreement would be frustrated.
The above analogy, however may not apply in the case of a leave & license agreement as a lock – down/quarantine situation owing to COVID-19 does not itself render the agreement for leave & license impossible to perform as the licensor has already given the permission to the licensee to enter upon the premises and do such acts as agreed in the agreement. A situation like COVID-19, in the absence of a Force Majeure clause may not render the agreement frustrated. The parties could, however,enter into talks and agree on a suspension/partial suspension of the obligations of the licensee to pay rent till the time the lock-down continues.
Coming to the rather novel concept of co-working spaces, it is observed that such agreements, typically allow the party availing the co-working space (‘customer’) to enter upon the premises and occupy a small portion (a designated cabin or designated number of workstations) in a larger commercial premises in exchange of a service fee. The customers are allowed access for a fixed number of hours which could be extended after availing permission from the management/owner of the co-working space, depending on the policies of the particular premises.
As mentioned above, the arrangement between a customer and co-working space bears resemblance to the one between a hotel and its guest.The onus is accordingly, on the service provider to provide the service and to keep the premises accessible to the customers.
Owing to the lock-down, the co-working spaces were closed and could not provide access to the premises to their customers. The situation is accordingly slightly differentin the case of co-working spaces. While in the case of a lease or a leave & license, once the lessor transfers the right to enjoy the property to the lessee or the licensor permits the licensee to enter upon the premises, the lessor’s or licensor’s obligation stands discharged (unless there are certain additional terms and conditions in the agreements). However, in the case of a co-working space, the owner of the premises/service provider has a day to day duty to provide access to the premises and facilities agreed upon to the customers, which could not be performed during the lock-down.
Most agreements for co-working spaces have a Force Majeure clause and many of themallow mutual suspension of obligations in a situation like lock-down. However, there are instances wherein the Force Majeure clauses in such agreements are one sided, discharging only the service provider from all liabilities and yet making the customer liable to pay the rents/ service fees. If, however, the agreement does not provide for a Force Majeure clause, then the doctrine of frustration and Section 56 could have an application on such an arrangement.
In light of the above discussion, it can be concluded that it is essential to pay close attention to Force Majeure clauses at the time of entering into any agreement and before invocation thereof. While, there are events and instance, which fall under the four corners of an agreement, certain events may occur like the COVID-19 that require parties to revisit the clauses inserted in the agreement. In a situation like this, if the agreements do not provide for a specific Force Majeure Clause, it is upto the parties to enter into talks and manage the situation in a way that ensures best interest of all involved to the best extent possible.
It can be anticipated that many notices under Force Majeure issued during the period of lock-down seeking waiver of rent or termination of agreement, will be contested, thereby culminating into a dispute which will have to be adjudicated by courts having jurisdiction to deal with disputes between lessor-lessee / licensor-licensee. – Importance of a well drafted Force Majeure clause to avoid long drawn disputes.
Disclaimer :The content of this article is intended to provide a general guide to the subject matter and is not intended to be a legal opinion. Specific and expert advice from a professional should be sought before taking any action your specific circumstances.