Supreme Court bats for Tenant’s rights –  SARFAESI cannot override State rent control laws

Supreme Court bats for Tenant’s rights – SARFAESI cannot override State rent control laws

Murali Krishnan

The Supreme Court has held that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) will not override various Rent Control laws enacted by State governments to the disadvantage of a tenant.

The ruling came on January 20 in the case of Vishal N Kalsaira v. Bank of India & Ors. by a Division Bench of V Gopala Gowda and Amitava Roy JJ. Senior Advocate Pallav Shishodia appeared for the Appellant, while Senior Advocates Vikas Singh, Amarendra Sharan and MT George represented the Respondents.

The case has its genesis in a property which was a mortgaged by the landlord (one of the Respondents) for securing a loan from Bank of India. The Appellant was a tenant in that property. When the landlord failed to pay the dues, the Respondent-Bank filed an application before the Chief Metropolitan Magistrate, Mumbai under Section 14 of the SARFAESI Act seeking possession of the mortgaged properties. The CMM allowed the Bank’s application pursuant to which, the landlord served a notice on the Appellant, asking him to vacate the premises.

The Appellant filed a Rent Suit before the Court of Small Causes, Bombay. The Small Causes Court allowed the application and passed an ad interim order of injunction in favour of the Appellant, restraining the landlord from obstructing the possession of the Appellant during the pendency of the suit.

Subsequently, the Appellant filed an application as an intervenor to stay the execution of the order passed by the Chief Metropolitan Magistrate. The Chief Metropolitan Magistrate, however, dismissed the application and held that when the secured creditor takes action under Section 13 or 14 of the SARFAESI Act to recover the possession of the secured interest and recover the loan amount by selling the same in public auction, then it is not open for the Court to grant an injunction under Section 33 of the Rent Control Act.

The Appellant had approached the Supreme Court by way of Special Leave Petition.

The broad point considered by the Court was whether a ‘protected tenant’ under The Maharashtra Rent Control Act, 1999 (Rent Control Act) can be treated as a lessee, and whether the provisions of SARFAESI Act will override the provisions of the Rent Control Act.

Pallav Shishodia, representing the Appellant, had contended that prior tenancy in respect of the mortgaged property to the Bank is protected in terms of the Rent Control Act. He had placed reliance on the case Harshad Govardhan Sondgar to buttress his case. The Respondents had made two main arguments. Firstly, they had submitted any encroachment on SARFAESI Act should not be permitted since it was enacted by the Parliament under Entry 45 of List I of the Constitution of India and it is a special Act with a special purpose and procedure laid down for the recovery of the secured asset of the debtor by the Bank to recover the amount due to it. It was their contention that any encroachment would defeat the laudable object of the Act.

Secondly, they had questioned the position of the relation of tenancy between the Appellant and landlord since the sale deed had not been registered and hence no valid document existed to prove tenancy.

The Court first considered the question as to which Act will have predominance. After analysing the objects of the two statutes, the Court held that SARFAESI Act cannot be used to override the Rent Control Act; else it will leave tenants to the mercy of landlords.

“There is an interest of the bank in recovering the Non-Performing Asset on the one hand, and protecting the right of the blameless tenant on the other. The Rent Control Act being a social welfare legislation, must be construed as such. A landlord cannot be permitted to do indirectly what he has been barred from doing under the Rent Control Act, more so when the two legislations, that is the SARFAESI Act and the Rent Control Act operate in completely different fields….

The provisions of the SARFAESI Act cannot be used to override the provisions of the Rent Control Act. If the contentions of the learned counsel for the respondent Banks are to be accepted, it would render the entire scheme of all Rent Control Acts operating in the country as useless and nugatory. Tenants would be left wholly to the mercy of their landlords and in the fear that the landlord may use the tenanted premises as a security interest while taking a loan from a bank and subsequently default on it….

The decision of this Court rendered in the case of Harshad Govardhan Sondagar (supra) cannot be understood to have held that the provisions of the SARFAESI Act override the provisions of the Rent Control Act, and that the Banks are at liberty to evict the tenants residing in the tenanted premises which have been offered as collateral securities for loans on which default has been done by the debtor/landlord.”

The Court concluded that if a tenant is arbitrarily evicted using SARFAESI Act, it will be a violation of Rule of law and would also render a valid Rent Control statute enacted by the State Legislature in exercise of its legislative power under Article 246 (2) of the Constitution of India useless and nugatory.

Regarding registration of lease deed, the court held the following:

“If the two parties are executing their rights and liabilities in the nature of a landlord-tenant relationship and if regular rent is being paid and accepted, then the mere factum of non-registration of deed will not make the lease evidence in the proceedings under Section 14 of the SARFAESI Act before the learned Magistrate. Further, in terms of Section 55(2) of the special law in the instant case, which is the Rent Control Act, the onus to get such a deed registered is on the landlord. In light of the same, neither the landlord nor the banks can be permitted to exploit the fact of non-registration of the tenancy deed against the tenant. itself nugatory. If no written lease deed exists, then such tenants are required to prove that they have been in occupation of the premises as tenants by producing such evidence in the proceedings under Section 14 of the SARFAESI Act before the learned Magistrate.”

The Court, therefore, set aside the judgments and orders passed by the lower courts and directed that enhanced rent by way of conditional interim order shall be continued to be paid to the respective Banks, which is to be adjusted towards debts of the debtors/landlords.

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