Far-reaching effects of the lockdown on landlords and tenants’ policies

One of the consequences of the lockdown is the adverse effect on tenancies, affecting both landlords and tenants | iStock

The immediate strategy for dealing with the COVID-19 pandemic is the lockdown, suspending all economic activities other than essential services.

One of the consequences of the lockdown is the adverse effect on tenancies, affecting both landlords and tenants.

Basically, a lease is an agreement by which the owner of an immovable property gives possession of the property to another person for either residential or commercial use, on payment of an amount for agreed intervals of time, usually monthly (rent), with or without a premium.

Chapter V: ‘Leases Of Immovable Property’ of the Transfer of Property Act, 1882 states that all leases for a period of one year or more have to be in writing and registered.

As this involves stamp duties and registration charges, a certain practice has developed over time to write it as a license for 11 months, on a hundred rupee stamp paper, if not on plain paper. This may give comfort to the parties, but it is definitely an offence, as the document, even if it is seen as a license, is really a lease and cannot be produced in court as evidence, without getting impounded and paying a penalty.

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However, nothing is lost as the Act itself provides that, if there is no contract to the contrary, commercial lease will be taken as annual and residential leases will be taken as monthly tenancies.

This issue will become vital only when the person in possession denies that the property belongs to the lessor and that he is the tenant. Otherwise, we can proceed on the basis that there is a lease and the terms are stated in a registered document, which is binding on the parties. If there is no valid document, we can go by the statutory provisions governing the relationship.

The tenancy agreement regulates the relationship of the lessor and lessee with regard to the various aspects of the conduct of the parties such as possession, payment of rent, maintaining the property, payment of taxes, nature, and limits of the use.

Let us take the core component which is the reciprocal promise of the lessor to give possession for use of the lessee, who in turn, promises to pay the rent for that use. This reciprocal promise has not always been balanced. In the beginning, the lessor was in a dominating position to evict the lessee at his whim and this led to rent control legislation, which shifted the balance of power to the lessee. So, generally, the lessee can enjoy the property undisturbed, as long as he pays the rent.

What happens when the lessee is unable to pay the rent? There can be several reasons why he gets incapacitated. In the case of residential leases, the lessee may fall ill and his family may not have access to his funds; he may lose his job and not have any savings; if he is in business, he may become bankrupt. In the present context, any of these things could be due to COVID-19 or the lockdown.

As far as the lessor is concerned, he has a right to get the rent, but he is not getting the rent in time.

As far as the lessee is concerned, he has the right to possession and may feel that temporary default in payment of rent, for reasons beyond his control, should not deprive him of that right.

When the effect of the lockdown is universal, why should he alone bear the burden and why should the lessor not share it, or some social safety net be set in place, to save such lessees from eviction?

The same question can also be asked by the lessor. Loss of regular receipt of rent can be equally damaging to the lessor. He may have mortgaged the property and the rent may be servicing the loan; he might have a liability to pay EMIs which was linked to the rent; she may be a widow with the house as the sole asset, part of which was given on lease to earn a living and loss of rent may even be lack of daily bread.

Shouldn’t she be able to repossess the property and lease it to a better tenant? So when that remedy is blocked and the stream of income is choked, should there not be a safety net to break her fall into abyss? These are larger questions which need not take us off the track.

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Coming back to the context, a legal question raised is about the applicability of force majeure. This concept is more contractual than statutory. This term is defined in Black’s Law Dictionary as “an event or effect that can be neither anticipated nor controlled.”

“It is a contractual provision, allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.”

It is not defined nor specifically dealt with in any Indian statute. However, Section 56 of the Indian Contract Act, 1852 says that if any act, which was to be performed after the contract is made, becomes unlawful or impossible to perform, and the promisor could not prevent it, then such an act which becomes impossible or unlawful will become void.

However, there are two reasons why this will not apply to leases. First is that the Transfer of Property Act itself provides that if the property itself is destroyed by fire or any other reason, the lease is void. So, when a specific law governs the terms of the lease, the general law of contract cannot apply.

Secondly, the liability to pay the rent cannot be wiped out by the inability to pay. However, when the inability to pay is temporary, it is always open to the parties to renegotiate the terms, to provide or delay payment or provide for payment in instalments and therefore there is no question of frustration.

Many lessors also take several months of rent as a security deposit which may buffer the loss. We also have a latest judgement of the High court of Maharashtra on this point stating that inability to pay cannot frustrate the liability to pay.

The legal adage is that every right has a remedy. In the case of default in payment of rent, the remedy of the lessor is to evict the tenant, which he cannot do without going to court.

The track record of the court in such cases is dismal and also biased in favour of the tenant. In one case, the Supreme court gave in August 1975 one year’s time to the defaulting lessee to vacate, even after dismissing his appeal against the orders of eviction passed by the lower courts in March 1972, observing that “a long-standing running cinema with outstanding contracts with film distributors cannot be uprooted overnight without considerable financial and business trauma to the affected party”.

In a typical case, the tenant offered to clear the arrears by the end of 1965 to save him from eviction, but the final order of eviction, after he went on asking for further time, was made in June 1971. Today, due to the lockdown, courts all over the world are closed. So this remedy is as good as dead.

The Government of India proposed a Model Tenancy Act, 2019 to regulate the relationship between the landlord and tenant realistically. The new law limits the security deposit to two months’ rent and lists penalties for tenants overstaying and not adhering to the contractual terms of their rental agreements.

An overstay will cost a tenant twice the rent for the first two months, then quadruples in subsequent months. However, during such a period, the landlords are not allowed to cut off essential utilities like water and electricity. Tribunals are to be set up to adjudicate and evict the defaulting tenants.

The new Maharashtra Rent Control Act, Delhi Rent Control Act, Tamil Nadu Rent Control Act, and Karnataka Rent Control Act have provisions for resolving disputes among the landlords and tenants.

Each of the State Rent Acts provides for fixation of Standard Rent as well as decree for possession. However, they are not yet fully operational. Also the procedure for the lessor to get arrears of rent or get back possession may not be less arduous or costly as with the courts.

We can turn to alternate dispute resolution mechanisms and see where it takes us. The prospective is equally dim. Though most of the lease deeds provide for arbitration, lockdown has blocked this avenue too for the present. Besides, arbitration has also become equally expensive and time consuming though comparatively less as limited to a year or two.

Ultimately, it is left to the parties concerned to settle the matter between themselves. If they are exploitative, fight and might method will rule the roost. If they are civilised and rational, they may understand the contours of the situation and work around it to find an amicable solution. The World bank has recommended in its report on Good Practices in Courts that we can encourage Neutral Evaluation, which is a process in which each party is provided with the opportunity to present a summary of the case to a neutral person, an “evaluator,” who is most often an attorney or expert in the subject matter. The evaluator then presents the parties with a non-binding assessment of the merits of the case, including the strengths and weaknesses of each party’s evidence and arguments and how the dispute could be resolved between themselves.

In this background, it is time to revive the traditional method of resolving issues by consensus. Why take private differences to court – let the courts deal with public law alone. Competent service minded people can help by providing such neutral evaluations services free, to those who contribute to the PMCares Fund, which is designed to provide the safety net.

(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal.)

(The author is a former judge of Madras and Andhra Pradesh High Courts)

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