There is a government-mandated lockdown and quarantine across the globe which prohibits the licensees / lessees / tenants to access the Premises which are / licensed / leased out to them for commercial purposes.
In commercial lease / leave and license agreements, if there is either a specific provision which regards such governmental action as a force majeure event, or if there is a general “catch-all” provision to the effect that any event beyond the reasonable control of the Parties will be considered as a force majeure event, then, the present government-mandated lockdown on account of Covid-19 undoubtedly qualifies as a force majeure event under such agreements.
However, a question arises as to, – can the Lessees / Licensees refuse to make payment to the Lessors / Licensors on account of the non-usage of the Premises till the time this event of lockdown subsists? As this Force Majeure Event of Lockdown is unprecedented, there can be divergent views on this question. This Research Update throws some light on these views and also provided some important points to be considered by each party in this regard.
BROAD ARGUMENTS IN FAVOUR OF LICENSORS / LESSORS / LANDLORDS
Even while the force majeure event has occurred, such event does not incapacitate / prevent the Licensee / Lessee from performing its obligations (i.e. to pay the rent). Unless, there is a specific carve-out in the Agreement which gives the right to Licensee / Lessee to suspend the payment of rent in case of such Force Majeure Event, the obligation to pay rent continues.
Business losses / liquidity issues / financial hardships arising out of this Lockdown cannot be used a defence for refusal to pay rent. Therefore, regardless of the loss (actual or notional) caused to the Licensee / Lessee on account of stoppage of business operations, the same cannot be a reason for not paying the rent.
While the Licensee / Lessee is not occupying the premises, its machinery / stock in trade / other equipment / furniture and fixtures is nonetheless lying in the premises; thereby arguing that the premises continues to be ‘in use’, meriting continued rent payments.
Lockdown restrictions are of a temporary character which does not affect the long-term usefulness of the property.
Lockdown cannot be equated with other Force Majeure Event such as earthquake, fire, hurricane etc which causes physical damage to the Premises, making it impossible to use.
BROAD ARGUMENTS IN FAVOUR OF LICENSEE / TENANTS / LESSEES
Even while the Licensee / Lessee is not prevented from paying the rent, the very purpose of right to use (from which the obligation to pay rent originates) has got ‘temporarily’ frustrated due to the lock down ordered as an outcome of Covid-19 Force Majeure Event.
Even while the Lockdown is different from natural calamities like earthquake / fire / flood etc which causes a physical damage to the premises, the ultimate effect of the lock down is same as that of any other natural calamity, that is, it nonetheless prevents the accessibility of the Premises. In case of Lock Down, the premises is “constructively” destroyed (and hence inaccessible). Therefore, when the licensee / lessee is unable to access the premises only in the first place not because of its own default, the obligation to pay the rent (which originates from the right to use and occupy the Premises) cannot arise.
Lockdown is a supervening event outside the power and control of the parties which renders the use of the property during the license period impossible and in fact unlawful. This supervening event has the effect that, without default of either party, a contractual obligation becomes “constructively” incapable of being performed because the circumstances in which performance (to pay the rent) is called for would render it a thing radically different from that which was undertaken by the contract. In other words, the obligation to pay rent is tied to the right to access and use the premises. When this right is taken away because of the Lockdown, the obligation also gets suspended.
The question of mitigating the effect of a government mandated lockdown does not arise in case of lock down particularly in those cases where manufacturing activities are being carried out from the Premises, where it is neither practical nor possible to operate remotely.
In ‘leave and license’ transaction, technically, the possession of the property remains with the owner (or licensor) while the tenant (licensee) has limited permission to enter and use the property for a specific purpose. Now, due to this lockdown, this very basic right of licensee of accessing and using the Premises has been taken away neither on account of fault of the Licensor nor the Licensee. Therefore, each Party has to bear this loss. As the Licensee has to bear the loss of not being able to use the Premises, the Licensor too has to forego the rent.
Even when the machinery / equipment / furniture and fixture of the Licensee / Lessee continue to lie in the Premises, this is only incidental to carrying out the business activities, unless the Premises is used specifically for warehousing purpose only.
In England and Wales, the Coronavirus Act 2020, which became law on 25 March, 2020 has suspended a landlord’s ability to take forfeiture action for business tenancies (as defined by the Landlord and Tenant Act 1954) in England and Wales, so that business tenants who cannot pay their rent (which is defined to include all sums payable under a lease) will be protected from forfeiture. These measures, effective from 26 March 2020, mean no business tenant can be forced from their premises if they miss a payment in the next three months (ending on 30 June 2020 – a date capable of being extended by the government). Even while this law is not applicable to India, reference can be made to show the steps taken by Government in England and Wales to ease the burden on commercial tenants.
SOME PRACTICAL CONSIDERATIONS FOR LESSEES / LICENSEES AND LESSORS / LICENSORS FROM LITIGATION PERSPECTIVE
Firstly, the Licensees / Lessees must carefully see whether a Lockdown qualifies as a Force Majeure Event under the Agreement. If yes, then it should be checked whether or not that there is no continuing obligation to pay rent, despite the occurrence of such event.
Secondly, it is important to see if any specific duration is provided for continuance of the Force Majeure Event which triggers the rights of respective Parties.
Thirdly, careful consideration must be given to the language of Force Majeure provisions as to usage of the terms “prevented”, “hindered” or “delayed” with respect to the obligation to pay rent. Each of these words set out the degree of requisite impact, ranging from the more onerous standard of performance being “prevented,” to lower standards such as being “hindered” or “delayed”.
Fourthly, check the time frame within which you are required to notify the Licensor / Lessor about the event and the details required to be provided (if any)
Fifthly, evaluate your objective of are invoking Force Majeure. Are you seeking only for more time to pay the rent or do you want to outright deny paying the rent?
Lastly, it is important to be mindful of the right of the Licensor / Lessor vis-à-vis invocation of Force Majeure in the event the Licensor / Lessor consider the invocation of Force Majeure as a breach of contract by the Licensee / Lessee. Does the Licensor have the right to terminate the contract? Is there any Security Deposit against which the Licensor can adjust the unpaid rent? Is there any quantified / liquidated damages clause in case of a breach? Is there any arbitration clause in the Agreement? One must be prepared from litigation perspective and the likely costs involved.
From the Licensor’s / Lessor’s perspective, the following points should be taken into consideration vis-à-vis your contractual rights:
If you want to terminate and re-enter the Premises then you would have to search for a new tenant. The premises would remain vacant for a reasonable time and you would loose on that rent.
Owing to the impending economic crisis, you may not fetch the same rent which you are getting from the present tenant.
If the Licensee challenges your termination and particularly if there is an arbitration clause, substantial costs would have to be incurred towards arbitration. Also, the Licensee / Lessee may have a right to be indemnified / seek damages as per the Leave and License Agreements for wrongful termination. If the Licensee / Lessee wins the case then it may ask for damages including but not limited to excess differential rent being paid at its new premises taken on lease / license, undue hardship and it may also ask for re-entering in the premises which may be a potential risk to the new tenant who is in possession of the premises in place of the one who is evicted.
Licensors / Lessors also need to consider the reputational issues in being seen to look to terminate the lease / license as a result of the licensee’s / lessee’s inability to comply with their obligations. Tenant loyalty and maintaining long term relationship is also important.