Insufficiency of the Applicable Laws to Parties in a Rental Relationship under the Doctrine of Good
[Tasha is a lawyer who recently graduated from Jindal Global Law School.]
The outbreak of the COVID-19 virus brought in disruption to the normal activities of individuals, corporates and functioning of the governance systems. A specific legal issue which arose relates to rental agreements (residential and commercial). Complications arose in terms of breaches of obligations taking place on commercial and residential lease contracts. This article discusses the legal remedies available to tenants who have contractual terms in their contracts and those without such terms or such contract. The article analyses the laws and highlights their insufficiency under the ‘good faith’ doctrine. It considers how incorporation of this doctrine will promote contractual and social solidarity.
Applicable contract law provisions to parties in the presence of a contract/contractual term
A contract would typically be governed by the Indian Contract Act 1872 (ICA). The existence of a force majeure (FM) clause expressly containing terms such as 'epidemic' or 'pandemic' would bring in the application of Section 32 of the ICA. The effect of this clause is to allow temporary suspension in payment of rent due to the occurrence of a specified event or termination in case the event continues to exist beyond the specified period. However, the tenant has to be willing to surrender his/her rights of possession and enjoyment. If there is a complete absence of this FM clause, parties may resort to Section 56 of the ICA which deals with frustration of the contract. This means that performance of the parties becomes impossible or illegal due to change in circumstances or the effect of a supervening event, making the contract void in nature.
Applicable property law provisions to parties in the absence of contractual terms
In the absence of a contract, as in the case of tenancy at-will, there would be application of the Transfer of Property Act (TOPA). Section 108B(e) in TOPA provides for an ‘irresistible event’ being necessary. This ‘irresistible force’ must ‘wholly’ damage any material part of the property or render a material part ‘substantially and permanently unfit’ for the purposes for which it was let. Meeting the requirements of this section would make the lease void at the instance of the tenant.
Applicable common law doctrine to parties having a rental relationship
It was in Ramanand & Ors. v. Dr. Girish Soni & Ors. decided by the Delhi High Court that the equitable jurisdiction of the court was invoked. The parties used the doctrine of suspension of rent, a common law derived principle where rent could be suspended in certain circumstances. It is usually used when the landlord has committed voluntary acts of interference against the tenant and where due process of law has not been followed. In Ramanand, it was held that suspension/relaxation to obligations would be based on terms and clauses within the contract between the parties, and the court stipulated several important parameters for deciding these cases. It stated there could be no strait-jacketed formula to decide these cases uniformly. The stated parameters take into account the financial and social status of the parties, amount of rent, and the nature of the property, etc. However, the court denied the suspension of rent to the concerned party but permitted deferred payment.
Insufficiency of existing legal provisions under the doctrine of ‘good faith’
Terminating the rent would be against the interest of one party while complete suspension of rent payment may hurt the interests of the other. There is a strong need to ensure a balance of interests due to the harsh economic conditions created by the pandemic and its impact on both parties. Thus, there is a need to invoke the doctrine of good faith to ensure an equitable and fair solution is reached in the performance of parties. The good faith doctrine is an attitude that one adopts when contracting with another party. It attaches itself in the performance of the contractual obligations and entails the freedom to contract and the aspect of a collaborative effort to perform. It espouses honesty and observance of reasonable commercial standards of fair dealing. Invoking the doctrine would promote the continuance of contractual solidarity and ensure that rights do not get violated in a completed bargain.
If one were to invoke an existing FM clause, it would result in declaring the contract as void and avoid payment of rent. Even if the term 'epidemic'/'pandemic' is missing from the FM clause, the court must use the principle of ejusdem generis to read an implied term of 'epidemic'/'pandemic' as a FM event, if the other events mentioned can be equated to acts of God and other natural calamities. However, these methods would only serve the interests of one party while adversely affecting the interests of the other party, and thereby not take into account the negative economic impact of the pandemic on the other party. This avoidance of performance can be construed as a type of bad faith as it permits a party to take advantage of the necessitous circumstances of the other party by wilful failure to mitigate damages. Instead of permitting avoidance, the tenant should be made to consider the duty to mitigate and/or explore alternate means of performance in the form of renegotiation/inclusion of terms in the contract. The renegotiation/inclusion can be seen as ex-post measures to continue contractual relations. These clauses must permit a certain relaxation given to the tenant in terms of meeting payment obligations or a reduction of rental payment, while still continuing the payment to the owner. This would help in protecting the economic interests of the owner and allow the balancing the interests of both the parties.
In the complete absence of a FM clause altogether, parties could resort to the doctrine of frustration. However, the courts have already taken a stance stating that the doctrine only applies to ‘executory’ contracts, and that rental agreements are of the nature of being ‘executed’ or ‘completed’, despite the aspect of periodic payment being rendered. This seems in line with the doctrine of good faith whereby the parties are precluded from maneuvering within the contract to avoid performance or destroy the right to receive the fruits of the contract. Parties facing difficulties can resort to renegotiation/inclusion of terms in the contract. This would promote the shared values of trust and confidence between the parties.
With respect to section 108B(e) of TOPA, the threshold to be met to declare the lease as void is certainly much higher than the threshold set out under the ICA. Once met, the lease is seen as void. Some concerns to be addressed is if the nature of the pandemic is equivalent to that of an ‘irresistible force’ that causes damage entirely or substantially, or even permanently. The pandemic would bring economic hardships on the tenant, making it difficult to meeting his/her obligations. However, the court has held that economic hardships cannot be used as a ground to avoid payment of rent. Further, it has also been held that temporary non-use of the premises does not lead to it being unfit for use. Also, unless the tenant makes a positive declaration in the form of a ‘notice’ to this effect, the tenant would still have to meet payment obligations of this residential lease. Sending the notice is seen as intention of the tenant to surrender the premises. This higher threshold on the tenant is cumbersome. However, it indirectly promotes the continuance of contractual relationships and thereby social solidarity in a difficult economic period. A possible way to circumvent the troubles of the tenant under TOPA would be to permit the incorporation contractual clauses within their contracts which, permit the relaxation of rental payment for the period of the pandemic to ensure fairness to both parties. This can be done using price adjustment clauses, limitation or exclusion clauses, material adverse change clauses, and other such clauses in order to limit the liabilities arising from non-performance or partial performance of their contractual obligations.
In Ramanand, the doctrine of suspension of rent was considered; however, an important parameter that was also considered was the effect of the executive order on commercial and residential rental agreements. The court with respect to this aspect held that the executive order would only apply to residential leases and not commercial leases. This difference of application of the executive order seems to unfairly deny any kind of relief to commercial tenants during the lockdown. To deny this treatment to commercial tenants would be to overlook the irregular flow of income and disruption of business caused by the lockdown and prevent owners from acting in an opportunistic manner or in bad faith.
The applicable laws available under contract and property law do not sufficiently balance the interests of the owners and that of the tenants. The invocation of the good faith doctrine while applying these laws is important to ensure the protection of interests of both parties. This will help in balancing the interests of the parties during the pandemic. It would also promote contractual and social solidarity between parties by mandating faithfulness in their agreed common purpose.