COVID-19 and Real Estate Contracts – A Tangled Situation to Understand

Kunal Garg*

The ongoing outbreak of COVID-19 has very badly impacted the real estate sector of India. Many
residential and commercial projects are on halt due to the restrictions placed in initial phase of lockdown.
But when the government has allowed construction work to resume, another major challenge before the
builders is shortage of workforce. It’s because of the huge migration of migrant labors to their native
place.

Amid this pandemic, real estate contracts such as lease deed, leave and license agreement, agreement
to lease etc. are being re-looked upon by the contracting parties. Some parties are also inclined towards
invoking force majeure clauses or exploring the frustration of contract option, as a possible remedy
against their obligation of performance of contract. Further, lessee/ licensee are also seeking suspension
of their lease rentals by referring to these clauses under their respective contract. But whether such lease
rentals or other obligations can be suspended or not is dependent upon the contractual terms agreed
between the parties. So, before initiating further discussion, one first needs to refer to the concept of force
majeure and Doctrine of Frustration.

‘Force Majeure’, which is a French term, means “Superior Force”. Events such as war, flood, natural
calamity, earthquake, act of god etc. which are outside the control of natural human being and prevent
the parties to fulfil their contractual obligations are some of the examples of force majeure events. The
essence of the same can be found under Section 32 of the Indian Contract Act, 1872 (“ICA”) which
pertains to the contingent contract. Force Majeure clause generally forms part of the contract executed
between the parties and accordingly will be applicable in terms thereof.

Whereas the Doctrine of Frustration means impossibility to perform the contract on account of happening
of any event and the result of the same makes the contract void. The statutory basis of Doctrine of
Frustration can be found under Section 56 of ICA. The Doctrine of Frustration shall apply when the
contract does not contain a force majeure clause as held by the Supreme Court in Energy Watchdog &
1
Ors. v/s Central Electricity Regulatory Commission & Ors. A major difference between force majeure and
Doctrine of Frustration is that prima facie force majeure allows for temporary suspension of contractual
obligations of the parties and if force majeure events continue for certain duration then gives the right to
terminate the contract to the parties while the Doctrine of Frustration makes the contract void. However,
whether the parties have right to terminate the contract in case of continuation of force majeure events
will depend upon the respective contractual term agreed between them.

Now, let’s discuss some real estate contracts in the back drop of the circumstances created by COVID-19
pandemic:

Leases:

Leases are governed under the provisions of Transfer of Property Act, 1882 (“TPA”). By giving property
on lease, the lessor transfers to the lessee the right and possession to enjoy such property for a certain
period of time. The rights and obligations with respect to such transfer are covered under a document
termed as Lease Deed. The applicability of force majeure in leases will be as per the terms agreed
between the parties in Lease Deed and the clause shall be read strictly and narrowly. However, in the
absence of any such term or clause, the lessee shall take the route of Section 108(e) of TPA and not
‘Doctrine of Frustration’ as embodied under Section 56 of ICA, which has been expressly excluded from
applicability on leases by Supreme Court. Section 108(e) of TPA grants lessee a right to terminate the
lease if events like fire, flood, violence of an army or mob or other irresistible force destroy the property or
affect it substantially and permanently, making unfit for the purpose for which it was let.

*
The author is a corporate lawyer currently working as an Associate with Kapil Sapra & Associates, New Delhi.
1
Energy Watchdog & Ors. v/s Central Electricity Regulatory Commission & Ors., (2017) 14 SCC 80.

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With respect to the applicability of Section 56 of ICA on leases, the Supreme Court in the case of Dhruv
2
Dev Chand v/s Harmohinder Singh & Ors. held that the same is not applicable as leases are governed
under TPA. The court stated that:

“By its express terms s. 56 of the Contract Act does not apply to cases in which there is
a completed transfer. The second paragraph of s. 56 which is the only paragraph
material to cases of this nature has a limited application to covenants under a lease. A
covenant under a lease to do an act which after the contract is made becomes
impossible or by reason of some event which the promisor could not prevent unlawful,
becomes void when the act becomes impossible or unlawful. But on that account the
transfer of property resulting from the lease granted by the lessor to the lessee is not
declared void.”

The above position was also confirmed by the Supreme Court in Sushila Devi & Ors. v/s Hari Singh &
3
Ors.

In view of the legal position discussed above, every case has to be asserted separately as it depends
upon the respective force majeure clause agreed between the parties in their Lease Deed. If the force
majeure clause doesn’t specify ‘pandemic’ or ‘government action’ as of the event then the lessee doesn’t
have option to invoke it. But if such events are covered, then it is to be seen whether force majeure
clause is linked to the ‘right’ or ‘performance of obligations’ of the lessee. If it is linked to the obstruction of
right of lessee to enter into the premises then there is high probability that lessee can invoke it for
suspending his obligations. But on the other hand if force majeure is linked to the performance of
obligations of lessee then it’s very hard for lessee to take the benefit of this clause as COVID-19 is not
affecting the main obligation of lessee i.e. to pay rent to the lessor.

Leave and License Agreement:

Leave and License Agreement is governed by the provisions of Indian Easements Act, 1882 (“IEA”). As
slightly different from leases, it merely gives the right to use the property to the licensee without creating
and transferring any other right or interest in the property. With respect to the applicability of force
majeure clause in such agreements, same as others, the clause shall be strictly read and accordingly its
applicability will be determined. Further, Section 62(d) of the IEA also contemplates a force majeure
situation wherein a license shall be deemed revoked if the property, affected by such license, is destroyed
or any superior force permanently alters the property in such manner that the licensee can no longer
exercise his right. Under Leave and License Agreement, the parties have also the option to take recourse
under Section 56 of ICA if there is no force majeure clause agreed between them.

The main point to light up here is the difference between force majeure clause in a Leave and License
Agreement and Section 62(d) of IEA. Section 62(d) is a deeming provision by virtue of the opening line of
the section and does not come with the condition that it will apply only when there is no contrary terms
agreed between the parties as mentioned under Section 108 of TPA. Further, Section 62(d) talks about
destruction or permanently alteration of property which makes the licensee unable to exercise his right.
So, in case if the licensed property is destructed or permanently altered then Section 62(d) will
automatically apply and license will be revoked while in case of other force majeure events the force
majeure term as agreed in the agreement will be looked upon. Another point to discuss here is the
interplay between Section 62(d) of IEA and Section 56 of ICA. As discussed, Section 62(d) has limited
scope and covers the situation of destruction of property only while any other impossibility apart from this
can be claimed under Section 56 of ICA provided that the agreement does not have a force majeure
clause.

2
Dhruv Dev Chand v/s Harmohinder Singh & Ors., AIR 1968 SC 1024.
3
Sushila Devi & Ors. v/s Hari Singh & Ors., AIR 1971 SC 1756.

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Referring to the current situation, COVID-19 pandemic and the government lockdown are neither
destroying any immovable property nor making it unfit to use. Further, it’s also not hampering the
obligation of the licensee i.e. to pay the rent. In light of the said discussion, the licensee shall look upon
towards performing their obligations or as the other option can terminate the agreement in accordance
with relevant clause.

Agreement to Lease:

Agreement to Lease is an executory document between the parties which states the arrangement
between lessor and lessee for entering into a lease transaction at a later date. Till the lease is granted
and the lease deed is stamped & registered with the appropriate authority, Agreement to Lease does not
create any right in property and thus governed by the provisions of ICA. So, in case of applicability of
force majeure, amid COVID-19 pandemic, Section 32 of ICA shall be read with the force majeure clause
of the agreement. In case the agreement does not have force majeure clause then the parties can claim
impossibility to perform the contract under Section 56 of ICA as a possible remedy.

As discussed, it’s a settled position that force majeure clause shall be read stricto sensu in a contract with
very narrow interpretation. So, if the force majeure clause provides for suspension of agreement or its
termination due to any pandemic or government lockdown then only parties have the option to invoke the
same. But in most cases, force majeure clause doesn’t contemplate these events and the lessees are at
disadvantageous position. As a possible measure in such cases, lessees can look for termination of the
agreement as Agreement to Lease is mere an executory document which does not grant any right and
possession of property. Due to the nature of this agreement, it’s easy to terminate basis the terms agreed
between the parties than terminating a lease deed.

Under Construction Projects:

COVID-19 has significantly impacted real estate promoters in meeting the timelines of under construction
projects. Restrictions which were placed in initial phase of lockdown and continuous shortage of laborers
are creating a big hurdle for promoters to complete the project. Although, Section 6 of Real Estate
(Regulation & Development) Act, 2016 (“RERA”) provides option for promoters to seek extension of
project due to force majeure but the same has to be analyzed in respect of the force majeure definition
provided under the section. The said definition is exclusive and includes events like war, flood, drought,
fire, cyclone, earthquake or any other calamity cause by nature which affects the regular development of
the project.

In light of this force majeure definition, it seems very difficult for promoters to treat COVID-19 pandemic
as force majeure event and take shelter under the said provision. But however, the RERA authorities of
certain states like Maharashtra, Uttar Pradesh, and Tamil Nadu has extended the project completion
timelines in their respective states treating COVID-19 as force majeure event. On May 13, 2020, the
Central Ministry of Housing and Urban Affairs has issued an advisory for all States and Union Territories
to treat COVID-19 as force majeure event and issue necessary order/ direction for extending the
registration timeline under RERA.

Besides this, any real estate project also requires parties to enter into various contracts like construction
contract, development contract, agreement between promoter and allottee etc. The terms of these
contracts are mutually decided by the contracting parties and the same are governed by the provisions of
ICA. The extension granted by the government for real estate projects does not apply on such contracts/
agreements and the parties are bound by whatever contractual terms agreed between them.

Conclusion:

Concerning the current situation, it’s very difficult to invoke force majeure clause until and unless events
like pandemic or government action is mentioned. Further, the COVID-19 pandemic has neither
destroyed any immovable property nor impeded the main obligation of lessee, which is to pay rent, which

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makes it more difficult for lessees to use it as a defense while invoking force majeure clause. Therefore,
the best suitable option for the lessees is to negotiate with landlords for temporary suspension of lease
rental or if it doesn’t work out then an early termination of the contract. With respect to the under
construction projects, advisory from Ministry of Urban and Housing Affairs has come as a big relief for the
promoters to seek extension under RERA in such unprecedented times. The COVID-19 pandemic though
affected almost everything but taught everyone a good lesson that it’s very significant to draft contractual
agreements very carefully giving room to every type of crisis.

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