Supreme Court clarifies lease agreement and mesne profits in property dispute: Indian Oil Corporation Ltd. vs. Sudera Realty Private Limited (2022)

Date of the Judgment: September 6, 2022
Citation: 2022 INSC 784
Judges: K.M. Joseph, J. and Pamidighantam Sri Narasimha, J.
Can a lease agreement be considered valid even if a formal deed was not executed? The Supreme Court recently addressed this question while also clarifying the calculation of mesne profits in a property dispute between Indian Oil Corporation Ltd. and Sudera Realty Private Limited. The core issue revolved around whether the lease agreement was valid and when the lease period commenced, impacting the calculation of mesne profits for the period of alleged unlawful possession after the lease expired. The bench comprised Justices K.M. Joseph and Pamidighantam Sri Narasimha, who delivered a unanimous judgment.

Case Background

The case originated from a dispute between Sudera Realty Private Limited (the respondent), the owner of a property in Kolkata, and Indian Oil Corporation Ltd. (the appellant), the lessee. The respondent had leased the 2nd, 3rd, and 4th floors of the property, along with a guest house on the 9th floor, to the appellant for a period of 21 years. The lease agreement was formalized through a registered document dated 21st November 1968, with a supplementary agreement dated 12th September 1969. The dispute arose when the appellant failed to vacate the premises after the lease period expired, leading the respondent to claim mesne profits for the period of alleged unlawful possession. The respondent contended that the 21-year lease for the 2nd and 3rd floors commenced on 12th September 1969, and for the 4th floor on 18th December 1969, while the appellant argued that the lease period should start from 4th November 1970, when they claimed to have received full possession of all floors. The respondent sought mesne profits at the rate of Rs. 31 per sq. ft. per month for 57,105 sq. ft. of the property.

Timeline

Course of Proceedings

The learned Single Judge ruled in favor of the respondent, finding the appellant liable for mesne profits and appointed a referee to quantify the same. Both parties filed appeals against this order. The Division Bench of the High Court partly allowed the appeal filed by the appellant, modifying the starting point of the lease for the 2nd and 3rd floors to 17th September 1969, while affirming the start date for the 4th floor as 4th November 1970. The Division Bench held that the appellant was a tenant at sufferance after the lease expired and was liable to pay mesne profits. The appeals before the Supreme Court were against the judgment of the Division Bench.

Legal Framework

The judgment primarily revolves around the interpretation of the following legal provisions:

• Section 2(12) of the Code of Civil Procedure (CPC): Defines “mesne profits” as “those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession.”
• Section 106 of the Transfer of Property Act, 1882: Deals with the notice required to terminate a lease.
• Section 111(a) of the Transfer of Property Act, 1882: States that a lease is determined by efflux of time.
• Section 113 of the Transfer of Property Act, 1882: Concerns the waiver of notice to quit.
• Section 3 of the West Bengal Premises Tenancy Act, 1956: Specifies the applicability of the Act to certain leases, particularly those with a duration of not less than 15 years. Sub-section (2) states that the Act applies to all premises held under a lease entered into after the commencement of the West Bengal Premises Tenancy (Amendment) Ordinance, 1965.
• Article 51 of the Limitation Act, 1963: Specifies a three-year limitation period for suits related to profits from immovable property wrongfully received by the defendant.
• Article 113 of the Limitation Act, 1963: The residuary article, which provides for a three-year limitation period for suits not specifically covered elsewhere, from the date when the right to sue accrues.

The Court also examined the interplay between these provisions and the specific clauses within the lease and supplementary agreements to determine the validity of the lease, the commencement of the lease period, and the liability for mesne profits.

Arguments

Appellant (Indian Oil Corporation Ltd.) Arguments:

• The lease agreement dated 21st November 1968, stipulated that the 21-year lease term would commence from the date the premises were handed over. The premises were not ready for occupation until 4th November 1970.
• The supplementary agreement and mortgage deed dated 12th September 1969, indicated that the 2nd, 3rd, and 4th floors were still under construction.
• The respondent’s notice dated 19th October 1990, was a premature termination of the lease, entitling the appellant to protection under the West Bengal Tenancy Act, 1956.
• The notice issued by the respondent on 12th December 1977, terminated the lease and made the appellant a monthly tenant, thereby entitling it to the protection of the West Bengal Tenancy Act.
• The acceptance of rent after the termination notice created a new tenancy.
• A large portion of the claim for mesne profits was barred by limitation under Article 51 of the Limitation Act, as the claim for the period prior to three years before the filing of the suit was barred.

Respondent (Sudera Realty Private Limited) Arguments:

• The agreement of lease dated 21st November 1968, was a valid lease deed.
• The lease was not terminated in 1977, and the notice dated 7th December 1977, did not result in the actual determination of the lease. The parties did not act upon the termination notice and the lease ran uninterrupted for 21 years and expired by the efflux of time.
• The letter dated 19th October 1990, was merely an inquiry and not a notice of termination.
• The acceptance of occupation charges after the lease expiry did not create a monthly tenancy, as the payments were received “without prejudice.”
• The suit for mesne profits was not barred by limitation, as mesne profits accrue from day to day, and the cause of action is a continuing one.

Innovativeness of the Argument: The appellant’s argument that the 1977 notice resulted in a monthly tenancy, thereby attracting the protection of the West Bengal Tenancy Act, was a creative attempt to circumvent the liability for mesne profits. Similarly, the argument that the 1990 letter was a notice of termination was also an innovative approach to claim protection under the Tenancy Act.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the documents styled as agreement dated 21.11.1968 and the supplementary agreement for lease dated 12th September, 1969 constituted a lease?
2. Whether the possession of 2nd and 3rd floors were handed over on 17.09.1969 and 4th floor stood handed over on 04.11.1970?
3. Whether the appellant is a monthly tenant from November, 1969?
4. Whether there was a prior determination of the lease of 21 years by the respondent, and if so, whether the appellant is entitled to the protection of the Tenancy Act?
5. Whether the possession of the appellant was wrongful on the expiry of the lease?
6. Whether the suit is barred in relation to mesne profits beyond 3 years of the suit?

Treatment of the Issue by the Court

Authorities

Judgment

How each authority was viewed by the Court?

• The Court distinguished Calcutta Credit Corporation Ltd. & Another v. Happy Homes (P) Ltd. [1968 2 SCR 20], holding that the observations regarding a new agreement were obiter and that the old tenancy was not resurrected.
• Tayleur v. Wildin [(1867-68) LR 3 Ex Cases 303] was cited to support the principle that a notice of termination cannot be unilaterally withdrawn.
• Ranjit Chandra Chowdhury v. Mohitosh Mukherjee [(1969) 1 SCC 699] was distinguished, noting that it was based on the specific facts of the case and the tenant’s stand.
• Tayabali Jaffarbhai Tankiwala v. Messrs. Asha and Co. and another [(1970) 1 SCC 46] was distinguished by the court.
• Pabitra Kumar Roy and Another v. Alita D’Souza [(2006) 8 SCC 344] was relied upon to hold that a prior determination clause does not alter the character of a fixed-term lease unless the option is exercised.
• Nand Ram (Dead) Through Legal Representatives and others v. Jagdish Prasad (Dead) Through Legal Representatives [(2020) 9 SCC 93] was distinguished, noting that it did not consider the consequence of payment being collected.
• Shakti Bhog Food Industries Ltd. v. Central Bank of India and Another [(2020) SCC OnLine 482] was cited to support the respondent’s argument that limitation does not bar the suit because mesne profit is a continuing breach of contract.
• Sudhir Kumar Paul v. Indu Prova Ghose and others [AIR 76 Cal 274] and Khana Lahiri and others v. Suniti Kumar Chatterjee and others [(2006) SCC Online Cal 248] were cited to support the respondent’s argument that waiver of notice does not lead to a new tenancy.
• Atma Ram Properties (P) Ltd. v. Federal Motors (P) Ltd. [(2005) 1 SCC 705] was relied upon to determine that the tenant is liable to pay damages for use and occupation at the rate the landlord could have let out the premises.
• Ram Karan Singh and others v. Nakchhed Ahir and others [AIR 1931 Allahabad 429] and Raptakos Brett and Company Limited v. Ganesh Property [(2017) 10 SCC 643] were cited to support the respondent’s argument that mesne profits accrue daily and the cause of action is a continuing one.
• Messrs. Lakshmirattan Cotton Mills Co. Ltd. and Messrs. Behari Lal Ram Charan v. The Aluminium Corporation of India Ltd. [(1971) 1 SCC 67] was cited to explain the requirements of a valid acknowledgment under Section 18 of the Limitation Act.
• Dullabhbhai Hansji and Another v. Gulabbhai Morarji Desai [(1938) 40 Bom LR 100] was cited to interpret Article 51, emphasizing that the limitation period starts when profits are received, not when the cause of action arises.
• Dwarkas Nathamal v. Balkrishna Baliram [AIR 1964 Bom 42] was cited to clarify that the liability to pay mesne profits is not dependent on actual receipt of profits but on wrongful possession.
• Sri Raja Inuganti Venkata Rajagopala Rama Suryaprakasa Rao Garu v. Maharaja of Pithapuram and another [AIR 1948 PC 175] was cited to show that the residuary Article 113 of the Limitation Act applies when no specific article is applicable.
• Phiraya Lal Alias Piara Lal and another v. Jia Rani and another [AIR 1973 Del 186] and Rattan Lal v. Girdhari Lal and Another [AIR 1972 Del 11] were cited to highlight that mesne profits are measured by what the person in wrongful possession gets or ought to have got from the property.
• Bhawanji Lakhamshi and Others v. Himatlal Jammnadas Dani and Others [(1972) 1 SCC 388] was cited to show that a tenant holding over after the expiry of the lease is a tenant at sufferance with no right to transfer.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The plain language of the lease agreement: The Court emphasized that the lease agreement, along with the supplementary agreement, constituted a valid lease. The terms of the agreement clearly stated that the lease period would commence from the date of handing over possession.
• The conduct of the parties: The Court noted that the parties did not act on the termination notice of 1977. The appellant continued to occupy the premises and pay rent, indicating that the lease was treated as subsisting. The court also noted that the appellant had taken contradictory stands.
• The absence of a new tenancy: The Court found that the acceptance of occupation charges by the respondent after the lease expiry was without prejudice and did not create a new monthly tenancy.
• The nature of mesne profits: The Court highlighted that mesne profits are a continuing cause of action and are not limited by the three-year limitation period under Article 51 of the Limitation Act.
• The interpretation of the West Bengal Tenancy Act: The Court clarified that the mere inclusion of a pre-determination clause in a lease does not bring it under the ambit of the Tenancy Act unless the option is exercised.

Precedential Value: This case clarifies the legal position on the validity of lease agreements, the determination of lease periods, and the calculation of mesne profits in property disputes. It highlights that:

• A lease agreement can be valid even if a formal deed was not executed.
• The lease period commences from the date of handing over possession, as per the terms of the agreement.
• A tenant holding over after the expiry of the lease is a tenant at sufferance and is liable for mesne profits.
• Mesne profits accrue daily, and the cause of action is a continuing one, not limited by the three-year limitation period under Article 51 of the Limitation Act.

Conclusion

The Supreme Court’s judgment in Indian Oil Corporation Ltd. vs. Sudera Realty Private Limited reinforces the importance of adhering to the terms of lease agreements and clarifies the legal position on mesne profits. The Court upheld the High Court’s decision, holding the appellant liable for mesne profits for the period of unlawful possession after the lease expired. The judgment provides clarity on the interpretation of lease agreements, the commencement of lease periods, and the liability for mesne profits, setting a precedent for similar property disputes. The court also emphasized the importance of the conduct of the parties in determining the validity of the lease and the rights and liabilities of the parties. The judgment also clarified that a tenant at sufferance is liable to pay mesne profits for the period of unlawful possession.

Flowchart of the Case