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The impact of COVID-19 on the landlord-tenant relationship

By 19/12/2020March 12th, 2021No Comments

Sequoia Capital, a leading venture capital company, termed the novel Coronavirus as the ‘Black Swan of 2020’. Black swans are rare, and so is this virus. The pandemic has been spreading at an alarming rate, pushing economies to an unprecedented standstill, and placing a period on the rental incomes of landlords. In the wake of mass unemployment, salary cuts and loss in investment values, the Central and State governments were compelled to provide rent relief measures to tenants, especially for the lower strata of the society.

Thus, to prevent a wave of homelessness, the Central Government introduced several rent relief measures. In a recent order, the same discouraged landlords from demanding rent from poor people and migrant workers. The Uttar Pradesh government also issued an order in the Noida area with regards to asking landlords to defer the collection of rent by a month. The order also included a punitive action in the form of imprisonment up to one year, or a hefty fine or even both of the aforementioned, for landlords found to be violating the said order.

Recently, the Maharashtra Housing Department also advised landlords and homeowners to postpone rental collections from tenants for at least three months, and not evict tenants for non-payment of the same. This circular, however, is only an advisory to landlords in Maharashtra, and should not be misconstrued as absolute or legally enforceable. The rationale was to grant relief to tenants who are not able to fulfill their rental obligations during the current crisis.

This decision was welcomed by tenants located across the state. One prominent real estate developer announced a full waiver for its retail tenants in its properties until the end of the lockdown. However, not all landlords have taken similar actions to mitigate the suffering of small businesses. In fact, relaxations meant to secure a roof over tenants may jeopardise those landlords whose survival largely dependent on rental incomes, especially in the case of some senior citizens. For the lack of respite by the government, landlords continue to bear electricity and water charges, property taxes, insurance, maintenance and mortgage payments.

To provide fiscal stimulus and liquidity, RBI announced a three-month moratorium on Equated Monthly Installments (EMI) of loans, such as housing loans, personal loans, auto loans, working capital loans, even credit card dues, to name a few, without negatively impacting the credit scores of borrowers. This move is likely to abate the potential ripple effect across the real estate and banking sectors caused by massive loan defaults. However, there is a caveat that interest is not waived off, and will continue to accrue on the outstanding loan amount. Furthermore, such forbearance programs only defer mortgage payments, rather than completely forfeiting or discounting the cost.

Maharashtra Housing Department’s un-enforceable circular coupled with the EMI moratorium imposed by the Reserve Bank of India (RBI) may leave startups and small businesses with low cash reserves, struggling to survive the ongoing crisis. Unfortunately, lessees (commercial) might not be able to benefit directly from these orders, since many banks have this prerogative of creating relief packages, and evaluating applications to avail for the same. The government’s move fails to provide all-encompassing blanket protection, especially to corporates in need. As a result, many businesses may not be able to see the light at the end of the crisis.

Additional remedies available to landlords and tenants shall depend on the language of the contract and the legal relationship between the parties – be it lessor-lessee, licensor-licensee, or landlord-tenant. The commercial tenants could invoke the clause of Force Majeure, which could be used to absolve them from clearing rental dues in the midst of an event beyond their control, which affects their ability to operate.

Nevertheless, events under the said clause are not stated exhaustively under the law, and the applicability of the same depends upon the language of the contract and its interpretation by the Courts. Therefore, the parties must review and, as mutually agreeable, revise the terms of the agreement in order to meet a consensus and provide breathing room to both parties.

Regardless of government efforts, individual circumstances indicate foreclosures across the country. Fortunately, the Supreme Court observed, “A tenant can not be evicted arbitrarily via the use of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI Act) since that would amount to usurping the statutory rights of protection provided to the said tenant.” Therefore, in case of a landlord failing to repay a loan, the same can not use section-35 of the SARFAESI Act to bulldoze the statutory rights provided to the tenant as under the Maharashtra Rent Control Act, 1999.

Therefore, in a crisis, where resources and revenues drain faster than expenses, only time will tell whether the government’s measures for protecting the interests of the tenants will leave landlords grappling to survive the crisis without any respite. In a jurisdiction that hugely favors tenants in rental disputes, landlords, though perceived as wealthy and greedy, may bear the brunt in the wake of rent relief measures announced by the Central and State governments. Though normalcy appears to be a distant dream in India, a deep of collaboration between parties to a contract with a shared objective of contractual performance, may keep litigation off the charts and provide a win-win solution to all.

Sonam Chandwani

Sonam Chandwani

Sonam Chandwani is the Managing Partner at KS Legal & associates and heads the firm’s Corporate Litigation Practice.

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