Operations

- Payal Chandra


The pointers in this Primer enhance the details of some of the issues we covered in our earlier posts in this section.


In the operations focus, we will look at aspects of rent and supply change challenges.




Rent

Context:

One of the key issues faced by MSMEs and small business owners in general is the payment of rent – an issue which has been exacerbated by the pandemic and the resultant declining revenues. While this problem was more grave during the initial stages of the lockdown and the subsequent “unlock” phases and gradual opening up of businesses would have eased the associated issues, the situation is still far from normal - the pandemic-related apprehensions and the havoc that the pandemic has wreaked means that it will be a while before normalcy resumes. As a result, payment of rents (which are typically towards the higher side in commercial premises) will likely continue to remain a problem in the near future. Not everyone can permanently shift to a work from home format, and even then, most businesses will continue to have the need to maintain at least basic office spaces.

Key Issues:


a. Can I stop paying rent for my premises?

Assuming that you have a written rent agreement with your landlord, rent and the terms of payment are typically governed by the specific clauses of the agreement. Courts have also recognised that payment of rent is a purely contractual / commercial sphere and do not easily interfere with the contractual terms. Whether or not you can demand a waiver of rent due to the pandemic will depend entirely on the agreement you are able to reach with your landlord.

Legally, a waiver of rent may be claimed if your agreement contains a force majeure clause (and other limited circumstances as described here). Typically, force majeure clauses will not be found in short-term or month-to-month tenancies. However, if your agreement does have a force majeure clause, it will excuse the performance of a contract upon occurrence of a force majeure event – these events are uncontrollable events and are defined in the agreement itself (usually set out in boiler plate clauses) and include events such as earthquakes, floods, cyclones, wars, epidemics and strikes. If your agreement contains a force majeure clause, which in turn includes epidemics or like events, you would not be obligated to pay the rent for the months where the epidemic has made it impossible for you to occupy and work out of the premises.

b. What are my options if I am unable to pay rent?

In the absence of a force majeure clause in your rent agreement, options may be limited unless your landlord agrees to a waiver or deferral. Even if there is a force majeure clause, if you continue to occupy the premises, complete suspension of rent cannot be sought as a matter of right. Temporary non-use of the premises does not ordinarily entitle the tenant to any reliefs absent an agreement from the landlord. Read the terms of your rent agreement very carefully to determine what your remedies there are – this is the only document on the basis of which you can exercise your options. Under exceptional circumstances, you may be able to approach courts for appropriate reliefs, however, the decision to grant the reliefs would be purely at the discretion of the court and this is generally a time consuming process. Factors such as the nature of the property, the financial and social status of the tenant and the landlord, amount of rent, are likely to weigh with the court while deciding your case. The best course would be to revisit the terms of your rent agreement with your landlord.

The judgment of the Delhi High Court in Ramanand & Ors. v. Girish Soni & Ors. (R.C. Rev. 447 of 017) discusses the various options in this regard, including in case of an oral contract, a revenue-sharing agreement or a tenancy based on percentage of sales turnovers. A complete reading of this judgment will help you assess what your position will be.

c. What actions can my landlord take against me if I cannot pay rent?

Your landlord can take actions as contemplated within your rent agreement including demanding payment of rent / arrears, initiating appropriate proceedings, and seeking eviction of the premises.

d. Is there any legal remedy that I can avail if I am unable to pay rent?

No, unless your rent agreement has a waiver clause which your landlord is not respecting. Non-payment of rent will be dealt with as a contractual issue – if you are unable to pay rent, your landlord will be within his rights to demand the arrears or ask you to vacate the premises (depending on the specific terms of your agreement). The Delhi High Court has also refused to pass a blanket order for waiver of rents in the case of Gaurav Jain v. Union of India and Ors. (Writ Petition (Civil) No. 3519 of 2020). Your remedy will solely lie in negotiating favourable terms with your landlord.

However, keep in mind that this answer may vary depending on the exact terms of your rent agreement. It is important to seek proper legal advice as different terms of the agreement, such as force majeure clauses, and their interpretation will be important determinative factors.

e. Are there any government policies which help MSMEs in case of non-payment of rent?

Previously, the Central Government had provided rental waiver to small IT units operating out of the Software Technology Parks of India for the period from 1 March to 30 June 2020 (https://pib.gov.in/PressReleasePage.aspx?PRID=1615052). 12 major ports too had been instructed to allow a waiver of lease, rental, license fee and similar charges for three months to the extent of the volume of cargo dropped, compared to the monthly average cargo volume of the last calendar year (https://www.businessinsider.in/business/news/covid-19-major-ports-to-defer-lease-fee-waive-rentals-penalty-in-view-of-exim-cargo-drop/articleshow/75280940.cms). State governments, such as the Governments of Maharashtra (https://www.thehindu.com/news/states/do-not-collect-rent-for-three-months-govt-tells-landlords/article31371418.ece), Delhi (https://www.financialexpress.com/india-news/covid-19-delhi-govt-orders-landlords-not-to-demand-rent-from-labourers-students-for-one-month/1937431/), Uttar Pradesh (https://www.hindustantimes.com/india-news/landlords-in-noida-can-t-force-tenants-to-pay-rent-for-one-month-orders-district-magistrate/story-y2FdwERcGaHNbJrf1pO9WN.html) and Telangana (https://www.outlookindia.com/newsscroll/telangana-asks-house-owners-to-defer-rent-collection-for-3-months/1807951) had issued instructions / advisories to defer rent collection under specific circumstances for certain covered categories to prevent eviction due to non-payment of rents and to provide some breather to tenants unable to pay rents during the crisis.

However, since the “Unlocks” have been announced, there do not appear to be any government advisories which would help an MSME or small business on rentals. It is upto the landlords to decide on the specific terms of waivers. For instance, DLF had offered its mall tenants or rental partners a rent waiver program (https://www.financialexpress.com/industry/unlock-1-0-dlf-offers-rent-waivers-to-mall-tenants/1992604/). Other mall operators are also devising workable plans with their retailers (https://www.livemint.com/industry/retail/prolonged-mall-closure-rent-waivers-to-impact-operators-icra-11593695397394.html).

It is also advisable to check your respective state government’s housing and urban department website or the local news for any past notifications and keep abreast of the latest development to find out whether or not any such relief has been provided in your state and if yes, whether you fall under a covered category.

Suggestions for way forward:

Even though the economy is in unlock mode, if you continue to face issues, talk to your landlord to seek a waiver / deferral / reduction of rentals. Even if your landlord does not agree to a waiver, a deferred payment plan may be acceptable to both parties. Remember to be mindful and understanding of your landlord’s situation as well – the pandemic has had an equal impact on him too.

Consider renegotiating the terms of your existing rent agreement with your landlord to include a force majeure clause.

If executing a new rent agreement, make sure that your force majeure clause is appropriately worded to account for situations such as the present pandemic. It is important that you seek proper legal advice to make sure you are adequately protected.

If your rent agreement is due for a renewal and contains a periodic increment clause, speak to your landlord well in advance to assess his position on the situation, including with respect to deferment of rent increment.

Resources:

Delhi High Court judgments: http://164.100.69.66/jsearch/

Keywords:

MSMEs, small businesses, landlord, waiver of rent, rents

Supply Chain Challenges

Context:

The pandemic has severely affected the economy and an immediate impact has been on the global supply chain. During the initial phases of the lockdown, these issues related to the transport of the goods given the movement restrictions. With the gradual opening of the economy, the supply chain challenges would relate to either non-supply of the goods or failure to make timely payments – what one may consider the traditional non-pandemic related challenges. Given the current state of the economy, all supply chain challenges / disputes need to be dealt with promptly and efficiently to ensure a seamless supply chain and avoid monetary distress. Registering as an MSME under the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”), if applicable to the business, is particularly helpful in this context.

Key Issues:


a. What are my remedies if the buyer does not pay for the goods that I have supplied or services that I have rendered?

Under the MSMED Act, the buyer is required to pay for the goods or services within 45 days of the date of acceptance / deemed acceptance of the goods or services. While the parties can agree to a lesser period of time, the parties cannot extend this period by agreement. The date of acceptance is the date of actual acceptance of the goods or services or the date on which any objections are removed by the MSME (if such objections are raised within 15 days of the date of actual date of delivery of goods or rendering of services). If the buyer fails to make payment within this period of 45 days, he becomes liable to pay compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India. This rate of interest is irrespective of any other agreement between the buyer and the MSME.

If the buyer fails to pay the amounts due from him to you, you may make a reference to your Micro and Small Enterprises Facilitation Council which will conduct conciliation and on its failure, arbitration under the applicable rules. These proceedings are time-bound and arbitration is ideally to be completed within 90 days of the date of initiation.

You may consider having a notice sent to the buyer in the first instance and then follow it up with a reference to the Facilitation Council in the event of non-payment.

b. How can I make a reference to the Micro and Small Enterprises Facilitation Council?

As an MSME, you can make a reference online at https://samadhaan.msme.gov.in/MyMsme/MSEFC/MSEFC_Welcome.aspx. Please bear in mind that a maximum of three work orders and three invoices can be uploaded online (even though multiple invoices can be clubbed into a single PDF). In case you have more invoices which remain unpaid by a single buyer, please opt for making a hard-copy submission. Check the specific rules of your state’s Micro and Small Enterprises Facilitation Council to see if there are any state specific rules that need to be complied with. A list of all state Facilitation Councils with their addresses and contact details is available here: https://samadhaan.msme.gov.in/MyMsme/MSEFC/CouncilAddress.aspx#.

c. What are my remedies if a vendor does not supply goods or render services in terms of our agreement?

The MSMED Act deals with a situation where the MSME is the supplier and the buyer has not paid for the goods or services. In case the MSME is the buyer, your remedies will be governed by the specific terms of your contract. You can consider having a notice sent to the vendor and then follow that up with appropriate legal proceedings (whether civil proceedings, arbitration, mediation, etc.). Please seek legal advice, as a determination of the most appropriate steps will depend on the specific terms of your agreement as well.

d. What are the consequences if I fail to make payment to the vendor?

The vendor’s remedies will be governed by the terms of your contract. The vendor may choose to sue you in case of non-payment which can be in the form of court proceedings or arbitration, depending on the terms of your agreement. However, please note that the Insolvency and Bankruptcy Code, 2016 has been suspended till 31 March 2021. As a result, a vendor cannot initiate insolvency proceedings against you for non-payment of dues if the default occurs between 25 March 2020 and 31 March 2021. However, if the default is prior to 25 March 2020, the moratorium will not apply.

e. What are the consequences if I fail to supply goods or render services in terms of my agreement?

The remedies available to your counterparty in such a case will be governed by the terms of your contract and your counterparty may sue for non-compliance.

Suggestions for way forward:

If you have not been paid by a buyer, or if a vendor has failed to supply goods / render services to you, consider having a legal notice sent to them for non-compliance. On their failure to comply with the terms of the notice, appropriate legal proceedings may be initiated, whether under the MSMED Act or otherwise.

If you have defaulted, seek legal advice on the way forward.

If you are a small business which fulfils the eligibility criteria and has not yet registered under the MSMED Act, it may also be advisable to do so – the MSMED Act and the applicable rules and regulations provide statutory benefits to registered MSMEs, including with respect to the interest payable for delayed payment. To register, go to https://udyamregistration.gov.in/Government-India/Ministry-MSME-registration.htm. With effect from 1 July 2020, the following enterprises are eligible to be registered under the MSMED Act: (a) where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees, the enterprise is eligible to be registered as a micro enterprise; (ii) where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees, an enterprise is eligible to be registered as a small enterprise; and (iii) where the investment in plant and machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees, an enterprise is eligible to be registered as a medium enterprise. The method for calculation of the value of investment, calculation of turnover, process for registration, etc. are stipulated in the MSMED Act and can also be accessed at http://egazette.nic.in/WriteReadData/2020/220191.pdf, https://msme.gov.in/sites/default/files/RBI-NOTIFICATION.pdf, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11934&Mode=0.

Resources:

Keywords:

MSMEs, disputes, supply chain challenges, non-payment of dues, goods not supplied / services not rendered



Payal is an advocate who practices before various courts,tribunals and forums including the Delhi High Court and the National Company Law/ Appellate Tribunal with a focus on commercial litigation and arbitration.