LEGAL ISSUE: Whether an agreement is a lease under Section 105 of the Transfer of Property Act, 1882, or merely an agreement for a lease.
CASE TYPE: Contract Law, Property Law
Case Name: Ramnath Agrawal & Ors. vs. Food Corporation of India & Ors.
[Judgment Date]: 13 May 2020
Date of the Judgment: 13 May 2020
Citation: (2020) INSC 374
Judges: N.V. Ramana, J., Sanjiv Khanna, J., Krishna Murari, J. (Majority Opinion by Krishna Murari, J.)
Can a contract to lease property be considered a lease itself? The Supreme Court of India recently addressed this crucial question in a dispute between Ramnath Agrawal and the Food Corporation of India (FCI). The core issue revolved around whether an agreement between the parties was a lease, which would grant immediate rights, or merely an agreement to enter into a lease at a future date. The Supreme Court, in a judgment authored by Justice Krishna Murari, clarified the distinction between a lease and an agreement to lease, emphasizing that a lease requires an actual transfer of interest in the property.
Case Background
In 1976, the Food Corporation of India (FCI) sought offers for the construction of godowns on private lands, with a subsequent lease agreement to be made with the owners. The offer included assistance for securing loans from state-owned banks, with rent payments being deposited with the banks to repay the loan.
Ramnath Agrawal and others (the appellants) submitted an offer that was accepted by FCI. An agreement was signed on December 16, 1976, stipulating that the appellants would construct six godowns, which FCI would then lease. On the same day, a loan was sanctioned to the appellants by the State Bank of Indore, based on FCI’s recommendation.
FCI sent letters on February 6, 1977, July 27, 1977, November 6, 1977, and December 2, 1977, to the bank, detailing the construction progress, based on which the bank disbursed funds to the appellants. The appellants contended that the letter dated December 2, 1977, certified the complete construction of the godowns.
However, FCI, in a letter dated December 17, 1977, asked the appellants to complete the construction and hand over the godowns by December 31, 1977. The appellants responded on December 25, 1977, stating that the construction was complete and requested FCI to take possession.
On January 5, 1978, FCI officials inspected the godowns. Based on an inspection report by Shri K. N. Rao, FCI recommended taking over only four of the six godowns, citing defects in the remaining two. The appellants claimed that possession of the four godowns was taken on February 8, 1978.
The appellants sent a legal notice on May 14, 1978, demanding rent with 11% interest for all six godowns from January to April 1978, along with electricity and security charges.
FCI replied on June 9, 1978, stating that rent was payable from the actual date of possession (February 8, 1978) and not from January 1, 1978. FCI also noted that the appellants had not issued bills for the four godowns and that no rent was payable for the two disputed godowns until the defects were rectified.
FCI eventually took possession of the remaining two godowns on May 14, 1979, which was acknowledged by FCI on May 15, 1979. The appellants, on August 11, 1979, sought damages from FCI for the delay in taking over the two godowns.
When their demands were not met, the appellants filed Civil Suit No.3-B/81 in the Trial Court at Indore, seeking damages of Rs.5,90,000, including arrears of rent, enhanced rent rates, security wages, electricity charges, and interest.
FCI filed a written statement denying the appellants’ claims, asserting that the letter dated December 2, 1977, was not a final completion certificate, that the inspection on January 5, 1978, revealed defects, and that rent was payable only from the actual date of possession. FCI also contended that the possession taken on May 14, 1979, was by unauthorized officials.
During the pendency of the suit, the appellants and FCI entered into a lease agreement on February 6, 1986, for all six godowns.
The Trial Court ruled in favor of the appellants on April 29, 1990, ordering FCI to pay Rs.5,77,274.59 with 11% interest, and enhanced rent of Rs.20,68,950 with 11% interest. The Trial Court relied on the evidence of PW-1, 2, and 5, who had issued completion and fitness certificates, and the letter dated May 15, 1979, acknowledging possession of the two godowns.
FCI appealed to the High Court, which reversed the Trial Court’s decision on July 2, 2008, stating that the agreement of December 16, 1976, was not a lease but a contract, and the rights and liabilities were governed by the contract’s terms. The High Court rejected the evidence of PW-1, 2, and 5, stating that the inspection was not in accordance with the terms of the agreement.
Timeline
| Date | Event |
|---|---|
| 1976 | FCI invited offers for construction of godowns. |
| 16.12.1976 | Agreement between appellants and FCI signed. Loan sanctioned to appellants. |
| 06.02.1977, 27.07.1977, 06.11.1977 and 02.12.1977 | FCI notified the progress of the construction of the godowns to the bank. |
| 02.12.1977 | Appellants claim FCI certified 100% completion of godowns. |
| 17.12.1977 | FCI asked appellants to complete construction by 31.12.1977. |
| 25.12.1977 | Appellants informed FCI that construction was complete. |
| 05.01.1978 | FCI officials inspected the godowns. |
| 14.02.1978 | FCI recommended taking over four out of six godowns. |
| 08.02.1978 | Appellants claim possession of four godowns was taken. |
| 14.05.1978 | Appellants issued legal notice to FCI demanding rent. |
| 09.06.1978 | FCI replied, stating rent was payable from 08.02.1978. |
| 14.05.1979 | FCI took possession of the remaining two godowns. |
| 15.05.1979 | FCI acknowledged taking possession of the two godowns. |
| 11.08.1979 | Appellants sought damages from FCI. |
| 1981 | Appellants filed Civil Suit No.3-B/81. |
| 06.02.1986 | Appellants and FCI entered into a lease agreement for all six godowns. |
| 29.04.1990 | Trial Court decreed the suit in favor of the appellants. |
| 02.07.2008 | High Court allowed FCI’s appeal, dismissing the suit. |
| 13.05.2020 | Supreme Court dismissed the appeal. |
Course of Proceedings
The Trial Court at Indore decreed the suit in favor of the appellants, ordering the FCI to pay Rs. 5,77,274.59 with 11% interest and an enhanced rent of Rs. 20,68,950 with 11% interest. The Trial Court relied on the evidence of PW-1, 2, and 5, who had issued certificates of completion and fitness of the godowns, and the letter dated 15.05.1979, in which FCI acknowledged the handing over of the possession of the two godowns.
FCI appealed to the High Court of Madhya Pradesh, Bench at Indore, challenging the Trial Court’s judgment. The High Court allowed the appeal, holding that the agreement dated 16.12.1976 was not a lease agreement but a simple contract. The High Court discarded the evidence of PW-1, 2, and 5, stating that their inspection was not done in the presence of FCI officials and was not in accordance with the specifications laid down by the FCI.
Legal Framework
The central legal issue in this case revolves around the interpretation of Section 105 of the Transfer of Property Act, 1882, which defines a lease. The Supreme Court examined whether the agreement dated December 16, 1976, constituted a lease or merely an agreement to enter into a lease.
Section 105 of the Transfer of Property Act, 1882 defines a lease as:
“A lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.”
The court also considered the definition of “agreement to lease” as interpreted in previous judgments, particularly in relation to Section 2(7) of the Indian Registration Act, which includes “an agreement to lease” within the definition of a lease.
The Supreme Court also referred to Clauses 6 and 7 of the agreement dated 16.12.1976, which are crucial to understanding the nature of the agreement:
“6. Upon completion of the godowns and the services referred to above in all respect, and after obtaining a completion certificate from party no. 2 or any of its officers nominated by Party no. 2 in this behalf, party no. 1 would hand over the godown/godowns to party no. 2 under a lease agreement to be executed between parties in the standard form obtaining in the FCI.
7. It shall be understood that in the event of any delay in completion of the building or services or if there is a faulty workmanship or the structure is defective on the basis of the findings of the FCI officers, which will be final, party no. 2 would not be bound to take the structure on lease.”
Arguments
Appellants’ Arguments:
- The appellants contended that the letter dated 02.12.1977 issued by FCI certified the completion of the godowns and no subsequent certificate was necessary.
- They argued that the possession of the four godowns was taken over by FCI on 08.02.1978, and they were entitled to rent from that date.
- The appellants claimed that the letter dated 15.05.1979 issued by FCI acknowledged the handing over of the possession of the two godowns.
- They contended that they were entitled to rent for all six godowns, as well as enhanced rent, security wages, electricity charges, and interest.
- The appellants relied on the evidence of PW-1, 2 & 5, who had issued certificates regarding the completion and fitness of the godowns.
Respondents’ (FCI) Arguments:
- FCI argued that the letter dated 02.12.1977 was not a certificate of final completion as no inspection was carried out by the competent officials of the FCI by that date.
- They contended that the inspection on 05.01.1978 revealed defects in two godowns, and hence, possession was taken over only for four godowns.
- FCI stated that rent was payable from the actual date of possession, i.e., 08.02.1978, and no rent was payable for the two disputed godowns until the defects were rectified.
- FCI argued that the possession of the two godowns on 14.05.1979 was taken by officials who were not authorized to do so and were later punished in a departmental enquiry.
- FCI argued that the agreement dated 16.12.1976 was not a lease agreement but a contract, and the rights and liabilities of the parties were governed by the terms of the contract.
| Main Submission | Sub-Submissions (Appellants) | Sub-Submissions (FCI) |
|---|---|---|
| Nature of Agreement | Agreement was a lease, entitling them to rent. | Agreement was an agreement to lease, not a lease itself. |
| Completion Certificate | Letter dated 02.12.1977 was a completion certificate. | Letter dated 02.12.1977 was not a final completion certificate. |
| Possession of Godowns | Possession of four godowns taken on 08.02.1978. Possession of two godowns taken on 14.05.1979. | Possession of four godowns taken on 08.02.1978. Possession of two godowns taken on 14.05.1979 was unauthorized. |
| Rent Entitlement | Entitled to rent from 01.01.1978 for all godowns, along with enhanced rent. | Rent payable only from actual possession date and no rent for defective godowns. |
| Evidence | Relied on PW-1, 2, & 5 and letter dated 15.05.1979. | Inspection on 05.01.1978 revealed defects and letter dated 15.05.1979 was manufactured. |
Issues Framed by the Supreme Court
The Supreme Court framed the following issue for consideration:
- Whether the agreement dated 16.12.1976 was a lease agreement under Section 105 of the Transfer of Property Act, 1882, or an agreement for a lease giving rise to only obligations arising out of the said contract.
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reason |
|---|---|---|
| Whether the agreement dated 16.12.1976 was a lease agreement or an agreement to lease. | The agreement was an agreement to lease, not a lease. | The agreement required a completion certificate from FCI and a subsequent lease agreement. The agreement did not create an immediate demise of the property. |
Authorities
Cases Relied Upon by the Court:
| Authority | Court | Legal Point | How it was used by the Court |
|---|---|---|---|
| Rani Hemanta Kumari Debi Vs. Midnapur Zamindari Company Ltd, AIR 1919 PC 79 | Privy Council | Distinction between a lease and an agreement to lease. | The Court relied on this case to emphasize that an agreement to lease must effect an actual demise and operate as a lease, creating a present and immediate interest in the land. The Court held that an agreement that a lease would be granted upon the happening of a contingent event is not a lease. |
| Tiruvenibai v. Lilabai [1959 Supp 2 SCR 107 : AIR 1959 SC 620] | Supreme Court of India | Meaning of “agreement to lease” under Section 2(7) of the Indian Registration Act. | The Court reiterated that an agreement to lease must create an immediate and present demise in the property, citing the Privy Council’s decision in Rani Hemanta Kumari Debi (supra). |
| State of Maharashtra & Ors. v. Atur India Pvt. Ltd. (1994) 2 SCC 497 | Supreme Court of India | Distinction between a lease and an agreement for a lease. | The Court quoted Hill & Redman and Mulla on the Transfer of Property Act to distinguish between a lease and an executory agreement to lease, emphasizing that a lease creates a tenancy while an agreement to lease binds parties to enter into a lease in the future. |
Legal Provisions Considered by the Court:
| Legal Provision | Description | How it was used by the Court |
|---|---|---|
| Section 105 of the Transfer of Property Act, 1882 | Defines a lease of immovable property. | The Court used this definition to determine whether the agreement between the parties constituted a lease. |
Judgment
| Submission by Parties | How it was treated by the Court |
|---|---|
| Appellants’ claim that the agreement was a lease | Rejected. The Court held that the agreement was an agreement to lease, not a lease itself. |
| Appellants’ claim that the letter dated 02.12.1977 was a completion certificate | Rejected. The Court held that the letter was not a completion certificate as the inspection was carried out on 05.01.1978. |
| Appellants’ claim for rent from 01.01.1978 | Rejected. The Court held that rent was payable only from the date of actual possession, i.e., 08.02.1978. |
| Appellants’ claim for rent for two disputed godowns | Rejected. The Court held that no rent was payable for the two disputed godowns as they were not completed as per the specifications of FCI and the possession of the disputed godowns were not taken over by FCI at the time of filing of the suit by the appellants. |
| Appellants’ claim for enhanced rent. | Rejected. The Court found no covenant in the agreement stipulating enhancement of rent. |
| FCI’s argument that the agreement was an agreement to lease. | Accepted. The Court agreed that the agreement was an agreement to lease, not a lease itself. |
| FCI’s argument that the letter dated 02.12.1977 was not a completion certificate. | Accepted. The Court agreed that the letter was not a completion certificate as the inspection was carried out on 05.01.1978. |
| FCI’s argument that rent was payable from the actual date of possession. | Accepted. The Court agreed that rent was payable only from the date of actual possession, i.e., 08.02.1978. |
| FCI’s argument that no rent was payable for the two disputed godowns. | Accepted. The Court agreed that no rent was payable for the two disputed godowns as they were not completed as per the specifications of FCI and the possession of the disputed godowns were not taken over by FCI at the time of filing of the suit by the appellants. |
The court held that the agreement dated 16.12.1976 was not a lease but an agreement to enter into a lease. The court emphasized that the execution of a lease deed was contingent upon the completion of the godowns and issuance of a completion certificate by FCI.
The court observed that the suit was for damages arising out of breach of the agreement dated 16.12.1976. The court reiterated that the rights and obligations of the parties had to be decided in accordance with the terms and conditions of the contract.
The court also noted that the appellants had failed to obtain a completion certificate from FCI before handing over the possession of the godowns, and the findings of the FCI officials regarding defects in the godowns were final.
The court discarded the evidence of PW-1, 2 & 5, stating that the inspection was not carried out in the presence of FCI officials and was not in accordance with the specifications laid down by FCI.
The court also held that no rent was payable for the two disputed godowns as they were not completed as per the specifications of FCI and the possession of the disputed godowns were not taken over by FCI at the time of filing of the suit by the appellants.
The court held that the appellants were not entitled to claim enhanced rent as there was no such covenant in the agreement.
The Supreme Court upheld the decision of the High Court, dismissing the appellants’ appeal.
The Court observed that the letter dated 15.05.1978, wherein FCI is said to have acknowledged taking over possession is totally misplaced. No reliance can be placed on the said letter which was manufactured in connivance with the delinquent officers of the FCI who were charge-sheeted and subsequently punished in a departmental enquiry for the same.
The Court relied on the following authorities:
| Authority | How it was viewed by the Court? |
|---|---|
| Rani Hemanta Kumari Debi Vs. Midnapur Zamindari Company Ltd, AIR 1919 PC 79 | The Court followed the principle that an agreement to lease must effect an actual demise and operate as a lease, creating a present and immediate interest in the land. |
| Tiruvenibai v. Lilabai [1959 Supp 2 SCR 107 : AIR 1959 SC 620] | The Court reiterated that an agreement to lease must create an immediate and present demise in the property, citing the Privy Council’s decision in Rani Hemanta Kumari Debi (supra). |
| State of Maharashtra & Ors. v. Atur India Pvt. Ltd. (1994) 2 SCC 497 | The Court relied on this case to distinguish between a lease and an executory agreement to lease, emphasizing that a lease creates a tenancy while an agreement to lease binds parties to enter into a lease in the future. |
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the terms of the agreement dated 16.12.1976 and the legal distinction between a lease and an agreement to lease. The Court emphasized that the agreement was contingent upon the completion of the godowns and issuance of a completion certificate by FCI, which did not happen for all the godowns. The Court also noted that the inspection on 05.01.1978 revealed defects in two godowns, and the findings of FCI officials regarding defects were final.
The Court rejected the appellants’ claim for rent for the two disputed godowns and for enhanced rent, finding no such covenant in the agreement. The Court also disregarded the letter dated 15.05.1978, wherein FCI is said to have acknowledged taking over possession, as it was found to be manufactured in connivance with the delinquent officers of the FCI.
| Sentiment Analysis of Reasons | Percentage |
|---|---|
| Terms of the contract | 40% |
| Legal distinction between lease and agreement to lease | 30% |
| Factual findings of defects and lack of completion certificate | 20% |
| Rejection of fabricated evidence | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 60% |
| Law | 40% |
Logical Reasoning
The court considered alternative interpretations but rejected them because the agreement clearly stipulated that the lease would be executed after the completion of the godowns and the issuance of a completion certificate by FCI. The court also noted that the inspection on 05.01.1978 revealed defects in two godowns, and the findings of FCI officials regarding defects were final.
The decision was reached by applying the legal principles to the specific facts of the case, emphasizing the importance of adhering to the terms and conditions of the contract.
The Supreme Court held that the agreement dated 16.12.1976 was not a lease but an agreement to enter into a lease. The court emphasized that the execution of a lease deed was contingent upon the completion of the godowns and issuance of a completion certificate by FCI.
The court also held that the appellants were not entitled to claim enhanced rent as there was no such covenant in the agreement.
The Supreme Court upheld the decision of the High Court, dismissing the appellants’ appeal.
The Supreme Court quoted the following from the judgment:
“An “agreement to lease”, which a lease is by the statute declared to include, must in their Lordships’ opinion be a document which effects an actual demise and operates as a lease.”
“An agreement to lease may effect an actual demise in which case it is a lease. On the other hand, the agreement to lease may be a merely executory instrument binding the parties, the one, to grant, and the other, to accept a lease in the future.”
“The terms and conditions clearly demonstrate that the execution of the lease deed was contingent upon the construction of godowns being completed and the same being approved by issuance of completion certificate by the Competent Authority of FCI.”
There was no minority opinion in this case. All the three judges concurred with the majority opinion.
The court’s decision underscores the importance of clear contractual language and the distinction between a present transfer of interest (lease) and a future agreement to transfer (agreement to lease). The court’s analysis of the facts and the legal principles led to the conclusion that the agreement was not a lease and hence, the appellants were not entitled to the claims they made.
The potential implication of this case for future cases is that it reinforces the need for clear and unambiguous language in contracts, especially those involving leases. It also makes it clear that the courts will look at the substance of the agreement to determine whether it is a lease or an agreement to lease.
This case serves as a reminder that an agreement to lease is not the same as a lease and that the rights and obligations of the parties are governed by the terms of the contract.