With the recurrence of Covid in
mutation form of Omicron & other variants and given the disruption caused
by Covid-19 pandemic, the performances under many contracts will be delayed,
interrupted or even suspended.
Many of the corporate tenants in
commercials lease may seek to delay and/or waive the commercial rentals for the
duration especially during the 21 days lockdown. This unprecedented Covid-19
has legitimately prevented them from carrying out their business.
With the outbreak of Covid-19 and
government lockdown, commercial property landlords and corporate tenants should
carefully review the following sections of their leases in particular to
identify the impact of Covid-19 and help mitigate risk:
a) “Force Majeure” Provisions Effect on Rent
Payment: Force majeure refers to a legal
doctrine under which a party may be relieved from liability for non-performance
if circumstances beyond the party’s control prevent the party from fulfilling
its obligations under a contract. Force majeure provisions are standard in
retail & commercial leases but can vary greatly depending on how they were
drafted by the parties. While most force majeure provisions are unlikely to
list disease, epidemics, or quarantine specifically, many include general
provisions covering such things as natural disasters, “acts of God,” acts of
government, or “other circumstances beyond the parties’ control.” The Covid-19
presents a somewhat unique situation in that it includes both a naturally
occurring component (the virus itself) and a government action component
(including the quarantines and other measures put in place in response to the
outbreak). Commercial landlords and
corporate tenants should carefully review the force majeure provisions in their
leases to determine whether they apply. Many commercial leases expressly exempt
“payment of rent” from the force majeure clause. That means many corporate
tenants may be required to continue to pay rent even if they otherwise would
have had a valid force majeure claim.
b) If the force majeure clause does not cover
an event such as the COVID-19 outbreak (or there is no force majeure clause at
all), consider the question of whether the contract has been frustrated. A
contract will terminate automatically when a frustrating event occurs, i.e.,
one which is: (1) unexpected; (2) beyond the parties’ control; and (3) makes
performance impossible or radically different from that which the parties
contemplated at the time of entering into the contract.
If a claim of force majeure will
not lie, the next consideration is whether any of the following established
grounds to founding a successful claim of frustration apply:
i. Temporary unavailability –
e.g., a person or object that is essential for performance of the contract is temporarily
unavailable.
ii. Method of performance
impossible – e.g., 21 days lockdown by the government makes it impossible to
enter into the premises of the property. However, a contract will not be
frustrated where performance is possible by a different method, and the
difference between the two methods of performance is not sufficiently
fundamental.
iv. Illegality – e.g., a contract
for airline services that are now subject to a flight ban. Consider also
whether the illegality clause of the contract is invoked.
If successful, the effect of
frustration is automatic termination of the contract. Parties can recover
amounts paid under the contract before it was frustrated (less the other
party’s expenses).
c) Payment of Rent as an
Independent Covenant: Many retail & commercial leases expressly provide
that the corporate tenant’s obligation to pay rent is independent from any of
landlord’s covenants or obligations under the lease. That means that even if a
landlord is clearly in breach of the lease due to Covid-19 outbreak, the
corporate tenant may be required to continue to pay rent. Tenants should
carefully review their retail leases to see if they contain this provision.
d) Covenant of Quiet Enjoyment:
Most retail leases contain an express covenant of quiet enjoyment where the
landlord represents and warrants that the corporate tenant will have quiet and
peaceful enjoyment of the commercial leased premises for the permitted use.
Corporate tenants may be able to claim that the Covid-19 impacts violate the
covenant, in particular in the case of closing of the premises. Depending on
how the covenant is drafted, it may be expressly limited by force majeure
events.
With the on-going Covid-19, which
may result in disruption of the business, the parties may look for remedies
based upon the terms and covenants of their leases:
a. Immediate termination of the
lease, as Covid-9 is the force majeure event;
b. To put the rentals and other
obligations to be waived off or temporarily suspended till Covid-19 and
government lockdown is over and to restart once business commence as normal;
c.If the lease may provide for
limitations time after which either party, landlord or corporate tenant may
terminate the lease with written notice
to the other party, since the performance and continuance of the lease is not
possible any further.
In summary, it is important for
the commercial lease industry, both landlords and corporate tenants, to
carefully review their leases now in order to mitigate their risk of suffering
negative impacts from the Covid-19 and government lockdown.
To know further details,
clarifications or any advice on commercial lease, please connect with us at
admin@equicorplegal.com / +91 8448824659