The rapid outbreak of the disease COVID 19 presents a significant impact on the commercial businesses that the world is grappling with. In order to mitigate the widespread disease, the Government and Authorities are instituting various restrictive measures including, shutting down of non-essential businesses, restaurants, retail outlets, hotels, leisure places.
Due to the continuous steep decline in the revenue, many Tenants are seeking to either exit the leased premises or asking their Landlord for rent abatement. At Century Maxim International, we in this note will highlight challenges to the legal obligations that the Landlords and Tenants have towards each other and the remedies they are left with to ease the impact in such a situation.
February 21, 2020
by Farhat Ali Khan
First and foremost the Landlords and Tenants affected by the COVID 19 should closely review their Lease Agreements to ensure the obligations that they have towards each other in the time when the businesses gets affected by an event that is beyond the control of either party or by the restrictions imposed by the governments and authorities and see if the terms of Lease offer any remedies in such situations.
As the rights and obligations of the Landlord and Tenant are set out in the Lease Agreement/ Tenancy Contract, therefore unless such Agreement/Contract provides otherwise the Landlord does not have any prima facie duty to propose any rent suspension or rent abatements in the event of the pandemic/epidemic outbreak, the failure to pay rent in these circumstances or abandonment of the leased premises would constitute a breach of the Tenant’s obligation under the Lease Agreement.
The concept of Force Majeure “FM” is a judicially recognized principle under the UAE Civil Law. Usually most of the Lease Agreements formed in the region contain a provision of FM which can be invoked by the affected Party in the happening of an external event that are beyond the control of either party, hence preventing them from discharging their obligations. In such circumstances the affected Party has a right to claim relief such as suspension of contractual obligation which may include the abatement or suspension of rent payment, barring of certain liabilities from the failure or delay in the performance or termination of the Agreement in extreme circumstances. As there is no universal accepted definition of the FM, the scope of the definition is limited to the Parties agreement under the relevant contract. The Lease Agreement generally incorporates a procedure to invoke the provision of FM such as the affected party would have to provide a written notice to the other party within a period of time from the date of the commencement of such event. However, the existence of the FM provision does not automatically give the right to the affected party to claim relief under it. Thus for the event such as COVID 19 to be used for invoking FM clause is a matter of interpretation and which differs from the agreement to agreement and the drafting of the FM clause.
Even if there is no express contractually agreed provision of FM, still the affected Party can claim relief under UAE Civil Code (“Civil Code”) which contains various Articles that offer assistance in the event of FM and any other exceptional circumstances. Article 273 of the Civil Code specifically provides that if a FM event supervenes which render the performance of the contract impossible, all contractual obligations will cease and the contract will be automatically be terminated. However one must note that mere difficulty in performing the contractual obligation cannot be a valid ground for claiming impossibility under Article 273 of the Civil Code.
Article 249 of the Civil Code talks about the Principle of Exceptional Circumstances, it states that if an exceptional circumstances of a public nature that could not have been foreseen occur which makes the obligor’s contractual obligation oppressive if not impossible so as to threaten him with grave loss then the Court or an Arbitral tribunal will reduce the oppressive obligation to a reasonable level. The question whether COVID 19 can amount to an event of FM under the Civil Code is matter for the Court to decide.
The law relating to the FM is recognized under the Article 32 of the Indian Contract Act (“ICA”). Section 32 provides for the enforcement of contracts contingent on the happening of an event and if the event becomes impossible then such contracts become void. ICA does specifically provide for the FM but as long as the contract stipulates the event of FM and the relief under it, the same can be challenged before the Courts by the affected Party. In number of cases the Courts of India have interpreted the provision of FM for allocating appropriate relief. In the case Energy Watchdog v. Central Electricity Regulatory Commission the Hon’ble Supreme Court of India observed that the FM clause does not exhaust the possibility of unforeseen events occurring outside natural and/or non-natural events. The Hon’ble court further added that to justify a nonperformance in the event of FM, such performance may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties.
For invoking the provision of FM in other jurisdictions, the Tenant will basically have to prove three conditions as a general rule:
Further, the affected Party seeking relief under the clause must also prove that the preventive/alternative measure on its part could have mitigated the event of FM.
Doctrine of Frustration
In certain jurisdictions this common law doctrine can also be invoked by the Tenant in order to terminate the lease. To invoke the doctrine of Frustration there are two requirements that must be fulfilled:
It may be difficult to avail relief under the doctrine where the Tenant is able to use the premise for more than one purpose. For example, if restaurant is closed for the public to dine in during the lockdown for the COVID 19 but operates the food delivery services then such Tenant will not be able to terminate the lease under this doctrine. In Li Ching Wing v Xuan Yi Xiong (2004), a Hong Kong case decided during the SARS epidemic the Court had refused the claim of Tenant under the doctrine of Frustration and stated that “even though the outbreak of SARS could arguably be considered an unforeseeable event, such event did not go far as to radically alter the fundamental rights and obligations arising from the tenancy contract”.
Alternative Approach / Negotiated Solution
With this experience of a situation never seen before, it is recommended that in a contract between a Landlord and Tenant, parties may consider adding terms such as:
As there are very limited contractual recourses that the Tenant can claim under their Lease Agreements, the other option that take an alternative approach in this unprecedented crisis. However, in order to move forward in this direction, the Landlord and Tenant are advised to work mutually to achieve their desired way out.
Disclaimer: Century Maxim International (“CMI”) is a Company incorporated in UAE. This is an informational document and should not be construed as a recommendation of any format.
This document contains certain key points of legal structures as implemented/applicable in a particular jurisdiction. No information as given herein by CMI should be construed as an advise or recommendation or solicitation, nor should it be considered as a legal, regulatory, credit, tax or accounting advice.
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