The COVID-19 pandemic and the consequent national lockdown has led to serious business disruption across all sectors, in particular leasing / licensing of immovable property. With business coming to a grinding halt, companies are combing through the clauses in their agreements to establish their rights and remedies in law, whether it is their right to claim the rent / license fees or whether it is a right to seek suspension of the same. While negotiations are largely influenced by commercial understandings, parties may negotiate their obligations, whilst being mindful of their legal positions and the consequences which follow. Thus, let us examine how the negotiations will be impacted, as a repercussion of COVID-19.
Negotiations are based on the facts of each case and differ based on company policies, inter se relationships of the parties etc. For fruitful negotiations from a business continuity perspective, parties must ascertain the relevant determining and driving factors applicable.
The “Force Majeure” clause, which has recently gained prominence must also be reviewed and usually entails the following:
(i)A water tight clause explicitly covering “pandemic, epidemic and government notification / orders” as a Force Majeure event;
(ii)Absence of the clause;
(iii)A clause, not explicitly covering the present situation as “Force Majeure event”
Scenario (i) leaves little room for negotiation by the Landlord / Licensor, being explicitly in favour of the tenant / licensee. However, compliances, if any, should be fulfilled by the tenant / licensee diligently to take full advantage of the clause.
Scenario (ii) provides sufficient room for negotiation between the parties, as the agreement is silent. Considering the costly and cumbersome legal system in India, it would be prudent for both parties to arrive at an amicable solution. While negotiating, parties may inter alia consider deferment, waiver, temporary change in the payment scheme, entering into a fresh agreement and term.
Scenario (iii) has room for a potential dispute and so it is important that parties negotiate any issues instead of seeking termination or approaching the courts. Litigation may lead to further business disruption, defeating the purpose of ensuring business continuity. Based on the facts and circumstances of the case, negotiations combining minimum guarantee of rent, revenue sharing models, extended terms etc. may benefit both parties. Before seeking termination, it is necessary for a party to fully grasp the consequences which may arise therefrom, including potential litigation, costs, delays etc.
Many tenants / licensees are claiming reliefs pertaining to their rent / license fees on the ground of disruptions in economy. In the interest of fairness while negotiating, we must consider whether such rent / license fee has any nexus with the business / profit of the tenant / licensee. In the alternative, would a surge in the business / economy, justify the Landlord / Licensor seeking higher rent / license fees?
In order to successfully negotiate, the propositions put forth by parties must be fair and mutually beneficial. In the event the burden is imposed on one party, the negotiations will not fructify. In the interest of business continuity, it may be sagacious for all parties to compromise at a temporary meeting point, so as to prevent any form of litigation.
Moving forward, it may be prudent for parties to ensure that their agreements provide for tools and measures for equitable allocation of risk, whether in the form of a revenue model or a margin for increase / decrease in the rent or a longer cure period. That being said, every situation is unique and it may be a good idea to consult a professional to negotiate and draft the necessary safety nets in contracts.
DISCLAIMER: This article is for informational purposes only, and not intended to be an advertisement or solicitation. This article is not a substitute for professional advice. Hariani & Co. disclaim all responsibility and accept no liability for consequences of any person acting or refraining from acting on the basis of any information contained herein.
