COVID-19: Legal Issues and perspective relating to Real Estate in India
In this article, we are attempting to lay down certain preliminary thoughts on the possible business and legal issues due to coronavirus on the real estate sector. The growth of human civilization has witnessed a rise in pandemics as well. But what is a pandemic? Answering this question which has been typed and searched on various search engines multiple times, one can simply say that a pandemic is an epidemic that spreads beyond a country’s border. While outbreaks are almost constant even in this modern period, not every outbreak reaches the pandemic stage as the Novel coronavirus (COVID-19) has.
This situation has brought all countries into a crisis handling mode on the immediate healthcare threat. Beyond the obvious health repercussions, this global pandemic has presented major disruptions for global businesses. While on one hand, where we can see direct commercial impacts on specific sectors, with interruptions to supply chains, challenges in meeting contractual obligations and implications under funding arrangements, other impacts are universal.
Ranging from workplace health and safety obligations, the impact of travel restrictions and containment measures, increased record keeping, protecting sensitive personal data to business continuity planning, businesses throughout the world are grasping at straws. Corporations would need to assess the viability of any measure within their respective workplace and come up with solutions depending upon the nature of their business and interaction with the public.
Coronavirus has brought with it innumerable legal challenges faced by the real estate industry. These issues can be broadly classified as those covering Commercial Office Real Estate, Retail Commercial Real Estate and those affecting Real Estate linked businesses.
The spread of this deadly virus can prove to be the
biggest black swan event for the real estate sector. Where all commercial real
estate may see a decline, retail businesses may find that their regular flow of
customers substantially reduced. Service businesses may face similar
consequences like the other two. They may experience a reduction in their work
hours because employees are quarantined or because customers do not want to
come to a place where they have to physically interact with employees, such as
barbershops, restaurants, and beauty parlors. Commercial property values may
decline, rent rates may decline, and the ability of tenants to make their lease
payments may increase loan default rates.
Real Estate Legal Issues Due to Coronavirus –
Force majeure and the law of frustration: Force majeure clauses allow for parties to get out of certain
obligations in the event of unforeseen or uncontrollable events, but just how
the clauses are worded is critical. Leases generally don’t contain force
majeure clauses allowing parties to end the lease, unlike development
agreements or construction contracts, which often do. Instead, if prevented
from occupying their premises, tenants may look to the doctrine of frustration
provided under Section 56 of the Indian Contract Act, 1872 to see if that can
help get them out of their lease obligations.
However, frustration is a high bar: a contract will
be frustrated if the circumstances are changed after the contract is made, that
renders it impossible to perform any obligation or the obligation is radically
different to that originally envisaged when the contract was made.
In the cases of Dhruv Dev Chand v. Harmohinder
Singh[1], and Sushila Devi v.
Hari Singh[2],
the Supreme Court has held that the doctrine of frustration can be applied to
leases. In lieu of real estate, lease frustrations by a tenant are bound to be
reason with regard to coronavirus in India. This is because, during this period,
a tenant is unable to occupy and/or use the premises (which seems the likely
scenario at the moment).
Suspension and/ or Withholding of rent: Most leases don’t allow the tenant to suspend and/or withhold rent
regardless of the circumstances. In such situations, it would be prudent to
communicate the concern with the lessor before such a decision is taken, in
order to avoid future disputes.
In case of Suspension/ Withholding of rent, the
Lessor may require the Lessee to ensure the premises are closed and no
operations are performed from the premises for the time duration when the suspension
and/ or withholding of rent is requested. The Lessee may request the Lessor to
permit limited operations, to ensure the good-will of the business is not hurt
and the Lessee can pay employee salaries from such revenues to avoid a default
of loan or complete closure of the store/ outlet due to surmounting losses.
Insurance: It’s
unlikely that most tenants will have business interruption insurance that will
cover this scenario. Tenants may have procured business interruption policies,
but this is usually linked to property damage. Non-damage business interruption
cover (which might cover the impact of an epidemic) is available in the
insurance market, but not commonly bought. In India, the government has termed
coronavirus a “notified disaster”. Fulfilling the formal requirements of many
insurance policies, it has provided a ray of hope to those who have business
interruption cover. They may now be able to claim under it, depending on the
specific terms of their policy.
Keep-open clauses in leases: Retail and other tenants with keep-open clauses in their leases will
need to consider the impact of closing their outlet if it becomes necessary.
Depending on the provisions of the lease and the government’s official
guidelines and rules at any given time, keep-open clauses can trigger conflicts
between landlord and tenant.
As above, most Indian commercial leases will
contain an obligation on the tenant to comply with the statute. Failing to
comply with any clear health and safety direction issued by the government,
such as the closing of premises, the tenant would be considered breaching the
covenant. If, however, an occupier was forced to close its premises based on
health and safety guidelines or emergency legislation, how would these measures
be reconciled with a keep-open clause?
In India, only in the most exceptional cases will
the courts enforce keep-open covenants by ordering specific performance. Where
theoretically claiming the damage by landlords is hasslefree if a tenant
breaches its keep-open covenant, it will be difficult for a landlord to
substantiate its loss. It is particularly difficult if there are no turn-over
rent provisions in the lease. For example, how do you value a drop in footfall?
The remedy available for a landlord is “specific performance”. This is a court
order obliging the tenant to re-open the premises and recommence trading.
We expect that a court would view the
compliance-with-statute clause as taking precedence over the keep-open
provisions in the lease. This may, however, give rise to a further dispute as
to whether a landlord should expect to continue to receive rental income under
the lease provisions as rent suspension clauses (not very common in regular
leases) will normally apply only in the event of any material damage and
destruction to the premises. It is likely that landlords will be able to
enforce rental provisions: one could argue that the tenant’s business could
continue to trade online, or it could implement agile working policies. But it
remains to be seen how courts would treat this should any tenant dispute the
matter.
Landlord duties amidst Legal Issues Due to
Coronavirus
Health and safety: Ranging from the assessment of risks regarding the health of employees
or customers to taking effective protective and preventive measures, in almost
all cases, it will be for the tenant to consider any threat to the health and
safety of its employees. Tenants must ensure that they have access to competent
health and safety advice. It is their duty to consult employees about their
risks at work and current preventive and protective measures.
Although, such duties are not limited to tenants only. Landlords who are employers will also have duties towards their staff and others regarding risks posed from infectious diseases. Landlords may also have responsibilities to the extent that they exercise relevant control over parts of premises (and their ability to implement measures). Failure to fulfil these criteria will result in serious consequences- for organisations and individuals alike.
However, as per the specific health and safety
regulations, a landlord is not obliged to prevent or contain the spread of
coronavirus COVID-19 on its premises. The hazardous substances regulations
which provide a framework to control the risks from a range of hazardous
substances under Pollution Control and Environment Health and Safety laws may
be relevant, as the coronavirus is a biological agent. Whether such obligations
towards tenants exist under the law largely depends on the level of control a
landlord has over the property. This will be dictated both by the terms of the
leases granted and the physical characteristics of the property.
For example, if a landlord has granted a long lease
of the whole building and has no ongoing maintenance or services obligations
towards its tenant, then the landlord is unlikely to have any responsibility
under the regulations. If, however, a landlord has granted a lease of just one
floor in a multi-let office block, with shared air conditioning and other
common services and areas, and it retains responsibility for maintaining and
providing them, its obligations may be more extensive.
Nevertheless, in a confirmed case of coronavirus
COVID-19, measures will primarily be dictated by the government, and the best
approach to comply with health and safety obligations will be to follow these
dictations.
Occupier’s liability amidst Legal Issues Due to
Coronavirus: A landlord may be in control of whole or any part
of the premise and so he automatically is liable to take the requisite measures
concerning any person, be it invited/uninvited entering the premise. It is
unlikely that any additional liabilities will result from such legislation.
Landlord’s ability to recover costs of enhanced
cleaning and regulatory compliance
Commercial landlords responsible for common parts
(Common Area Maintenance) are providing more frequent and thorough cleansing of
those common parts, particularly frequently touched surfaces (e.g. door
handles, elevator buttons and toilets), although, there is no legal obligation
on them to provide such services to prevent the spread of the virus. Supplying
these extra cleaning services will have cost implications, and commercial
landlords should check the service-charge provisions in their leases to ensure
such charges are recoverable.
Most service-charge provisions contain a sweep-up provision allowing the landlord to recover reasonable costs incurred in line with the principles of good estate management. Some service-charge provisions will also allow costs incurred as a result of complying with “applicable laws” to be recovered – although whether a landlord can rely on this type of provision will depend on whether the government imposes prescriptive measures. In each case, the recoverability of a landlord’s costs for such enhanced cleaning measures would be subject to any tenant-negotiated service-charge cap or specific exclusions in the list of services contained in the lease.
This gives birth to many questions like whether the landlord is required to provide certain services or if the landlord has the discretion to carry out such services? whether such discretion is exercised per the contractual provisions? Interpretation of what constitutes reasonable costs is also a debatable issue. For example, if coronavirus COVID-19 becomes more widespread, would providing a hand sanitiser to every occupier that comes onto the premises be a cost that is recoverable as a service charge or otherwise?
Wider regulatory issues regarding any steps taken (such as cleaning or surface disinfection) by a commercial landlord or its managing agents should also be addressed. For example, municipal permission for commercial premises will often contain conditions that restrict or limit the hours within which such operations may take place. This could possibly catch enhanced or additional cleaning activities, for example, if additional rubbish clearance is required or additional traffic and noise is caused.
Municipal authorities have the power to take
enforcement action if activities are carried out in breach of a planning
condition, and often will if the disturbance is caused to neighbouring
occupiers. Those responsible for building or premises management should,
therefore, check for restrictions on servicing or access arrangements and
ensure that, wherever possible, enhanced measures are carried out in compliance
with them. This may mean scheduling work at specific times and could require
more detailed collaboration with tenants and occupiers.
The applicability of force majeure clauses in
construction contracts
Coronavirus COVID-19 is already affecting
engineering, fabrication and procurement contracts that contemplate inputs of
labour, services, and goods from affected regions.
Many international and domestic construction
contracts contain force majeure clauses to give relief in these circumstances.
The purpose of a force majeure clause is to avoid the legal and commercial
uncertainty of events that would otherwise frustrate the performance of the
contract. The operation of the force majeure clause may differ in each case and
specific legal advice should be sought.
What about contracts negotiated now? Force majeure
clause may not be of benefit to the parties since the existence of coronavirus
COVID-19 is already known. A better approach would be to incorporate a
provision wherein a specific relief with regard to coronavirus COVID 19 is duly
captured, whether this is a disruption to supply chains and labour resources or
the result of the government introducing any emergency powers. The exact relief
and provisions therein would depend on the precise nature and location of the
project and therefore the legal experts would have to ensure mindful drafting
and capturing of the relief.
Practical steps to be taken
For businesses likely to be affected by coronavirus COVID-19, the following steps could be beneficial:
- Be up to date with the latest guidelines issued by the WHO and the Indian government;
- Review any obligations in leases, construction contracts and other real estate contracts;
- Insert epidemic wording into any new real estate contracts;
- Provide adequate cleaning measures to frequently touched surfaces;
- Make suitable arrangements for laptops to be taken home on a pre-emptive basis for remote or homeworking for employees;
- Prepare IT systems for potential additional remote-access usage and capacity enhancement.
[1] A.I.R. 1968 S.C. 1024
[2] (1971) l.S. C.W.R. 697
Contributed by –
Aurelia Menezes – Partner
Latha Shanmugam – Associate
For queries get in touch at aurelia@ksandk.com or latha@ksandk.com
King Stubb & Kasiva,
Advocates & Attorneys
New Delhi | Mumbai | Bangalore | Chennai | Hyderabad | Kochi
Tel: +91 11 41032969 | Email: info@ksandk.com
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