June 18, 2020: Property owners have started to insert a lockdown clause in new agreements with tenants following disputes over payment of rent for the lockdown period. The period has been quite disruptive for all parties involved and the clause is a safety net or a clarity net for similar situations in future.
New agreements are being drawn up by lawyers stating that in case of a lockdown there will be no waiver of rent or mention a mutually consented percentage of the rent that could either be waived or delayed. The agreements are being redrawn for both commercial as well as residential properties.
The lockdown clause is gaining relevance as ‘force majeure’ clause — a common element in any contract which essentially absolves both parties from liability or obligation when an extraordinary event or circumstance occurs which is beyond their control.
The country has been under a nationwide lockdown since late March, bringing nearly all commercial activity for close to two-and-a-half months to a grinding halt. Tenants began defaulting on rent payments. When demands were raised by landlords, disputes ended up in court, jeopardising years of business relationships.
Confirming that clients are increasingly demanding lockdown clauses in their new rent and leasing agreements, a senior official with a leading international property consultancy said: “Yes, clients are making this demand for new contracts. Basically, they want force majeure clause modified to include pandemic-related impact as well as government-enforced lockdown scenarios.”
Although in commercial properties, owners are willing to offer a waiver, in residential properties owners want it made it clear that there will be no rent waiver under any circumstances.
The leave and license properties in Mumbai yield annual earnings (based on market value) of 2-3% for residential and 4-6% for commercial, which is lower than fixed deposits. In such a scenario, there is very little room for any negotiated settlement. So, newer leave and license agreements through various preferred words clearly state that the License Fees will be payable whatever the circumstances.
The pandemic as clause will be case specific as it will have different implications and contractual obligations for different parties, subject to the agreement between them.
The lockdown has disrupted the real estate rental business. It is only natural that both property owners and tenants are now seeking a solution by reframing of contracts with a force majeure clause.