Highlights
The commercial tenants could invoke ‘force majeure’ – a provision used to absolve them from rental payments during “an event beyond the parties’ control”.
Sequoia Capital, one of the world’s leading venture capital firms, called Coronavirus the ‘Black Swan of 2020’. Black swans are rare and so is the virus. The pandemic has been spreading at an alarming rate, pushing economies to an unprecedented standstill, and placing a period on the rental incomes of landlords.
In the wake of mass unemployment, salary cuts and loss in investment values has compelled the government to provide several rent relief measures, especially for the lower strata of the society. To prevent a wave of homelessness, the Central Government introduced several rent relief measures looking out for tenant’s interests. In a recent order, the Central Government discouraged landlords from demanding rent from poor and migrant workers. The Uttar Pradesh government also issued a magisterial order in the Noida region asking landlords to postpone rent collection by a month and includes a punishment of upto 1 year imprisonment or fine or both for landlords found in violation of the order.
Recently, the Maharashtra Housing Department also advised landlords and home owners to postpone rental collections from tenants for at least THREE MONTHS owing to the lockdown and not evict tenants for non-payment of rent. This circular, however, is only an advisory to landlords in Maharashtra and should not be misconstrued as absolute or legally enforceable. The rationale behind the order was to provide some breather to tenants unable to pay rents during a crisis.
This decision was welcome by tenants across the state. Lodha Group announced a full waiver for its retail tenants in its properties until the lockdown. However, not all landlords have taken similar action to mitigate the suffering of small businesses. In fact, relaxations meant to secure a roof over tenants may jeopardize those landlords whose survival largely dependent on rental incomes, especially senior citizens. For the lack of respite by the government, landlords continue to bear electricity and water charges, property taxes, insurance, maintenance and mortgage payments.
To provide fiscal stimulus and liquidity, RBI announced a 3-month EMI Moratorium on loans such as housing loans, personal loans, auto loans, working capital loans, even credit card dues, to name a few, without negatively impacting the credit scores of borrowers. This move is likely to abate the potential ripple effect across the real estate and banking sectors caused by colossal loan defaults. However, there is a caveat that interest is not waived off and will continue to accrue on the outstanding loan amount. Furthermore, such forbearance programs only defer mortgage payments, rather than completely forfeiting or discounting the cost.
Maharashtra Housing Department’s unenforceable circular coupled with RBI’s EMI Moratorium may leave startups and small businesses with low cash reserves struggling to survive the crisis. Unfortunately, commercial lesssees may not directly benefit from these orders as many banks have the prerogative of formulating relief packages and evaluate applications to determine who can avail the facility. The government’s move fails to provide an all-encompassing blanket protection, especially to corporates in need and as a result, many businesses may not be able to see light at the end of the crisis.
Additional remedies available to the landlords and tenants shall depend on the language of the contract and the legal relationship between the parties – be it lessor-lessee, licensor-licensee, or landlord-tenant. The commercial tenants could invoke ‘force majeure’ – a provision used to absolve them from rental payments during “an event beyond the parties’ control”. However, force majeure events are not exhaustively laid out under the law and applicability of this provision depends on the language of the rental agreement and interpretation of the courts. Therefore, the parties must review and, as mutually agreeable, revise the terms of the agreement in order to meet a consensus and provide breathing room to both parties.
Regardless of the government efforts, individual circumstances indicate foreclosures across the country. Fortunately, the Supreme Court held, “A tenant cannot be arbitrarily evicted by using the provisions of the SARFAESI Act as that would amount to usurping the statutory rights of protection given to the tenant.” Thus, in the event of a landlord’s failure to repay the loan, Section 35 of SARFAESI Act cannot be used to bull doze the statutory rights conferred on the tenant by the Maharashtra Rent Control Act, 1999.
Therefore, in a crisis, where resources and revenues drain faster than expenses, only time will tell whether the government’s measures for protecting the interests of the tenants will leave landlords grappling to survive the crisis without any respite. In a jurisdiction that hugely favours tenants in rental disputes, landlords, though perceived as rich and greedy, may bear the brunt in the wake of rent relief measures announced by the Central and State governments. Though normalcy appears to be a distant dream in India, a deep of collaboration between parties to a contract with a shared objective of contractual performance, may keep litigation off the charts and provide a win-win solution to all.
Author- Sonam Chandwani, Managing Partner, KS Legal & Associates
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