Rental agreements with ‘lockdown’ clause
March 12, 2020
Real estate is going through a rough phase. The last few years witnessed developers struggling through a liquidity crunch for a very long time. Only the last few quarters of 2019 showed some hope for the property builders and owners as investors started to look forward to Indian Realty Market. But the onset of this year was accompanied by the pandemic Covid-19 that again shattered the rising hopes of real estate developers.
With most countries shutting down to prevent the spread of the deadly virus, the lockdown period resulted in various norms and reforms by the government. The property owners acknowledged some of the measures, but they also inserted a new agreement clause following the disputes over rental payment during the lockdown period.
The recent adjustment in the lockdown clause is regarding tenants who have refused to pay rent for the lockdown period. The clause is a clarity net for such situations shortly in adherence to all the parties involved.
Lawyers have redrawn new agreements for residential and commercial properties, stating that payment for rent will not be waivered in case of a lockdown. It also says that a mutually consented percentage of the lease could either be waived or delayed.
The lockdown clause has gained all the attention as the ‘force majeure’ clause. The clause depicts a typical section in any contract that fundamentally acquits both parties from liability or obligation in case of an extraordinary event or circumstance beyond their control.
The nation was put under lockdown for close to two-and-a-half months since March, and all the activities were halted. Offices were shut down, that led employees to take a pay cut, some of them were even out of jobs. Such inconvenience caused tenants to begin defaulting on rent payments. The first couple of months went smoothly as landlords agreed to make adjustments, but it was later when demands raised by landlords ended up as a dispute in court.
The landlords are now always demanding to add the lockdown clause in ew rent and leasing agreements. Confirming the same, a senior official with a leading international property consultancy said, “Yes, there are constant demands from clients to draft new contracts. They want to modify the force majeure clause to include the never before mention scenarios, pandemic-related impact as well as a government-enforced lockdown.”
Not willing to jeopardize years-long business relationships, commercial property owners are ready to make adjustments by offering a waiver in the rent. Still, the residential property owners are in no mood to wave off the rent under any circumstances.
Based on Mumbai’s market value, the statistics show that the leave and license properties yield 2-3% of annual earnings in residential properties, whereas it cites 4-6% fr commercial properties. This is quite lower than fixed deposits and hence leaves no room for any negotiations or settlement. According to the new leave and license agreements, the License Fees will be payable whatever the circumstances.
The agreements never mentioned a pandemic or circumstances leading to a nation-wide lockdown. Hence the drafting of new contracts will have an epidemic as a case-specific clause. The contractual obligations and implications will be different for different parties, subject to the agreement between them.
The sudden pause in the cash flow has disrupted every individual. The real estate rental business in suffering, and hence both property owners and tenants are now looking a way out through reframing contracts and a force majeure clause.