Supreme Court clarifies the rights of tenants under the SARFAESI Act in mortgage disputes: Bajarang Agarwal vs. Central Bank of India (2019)

Introduction

Date of the Judgment: 11 September 2019
Citation: [Not Available in Source]
Judges: N.V. Ramana, J., Mohan M. Shantanagoudar, J., and Indira Banerjee, J.

Can a bank, seeking to recover dues from a borrower, evict a tenant from a mortgaged property? The Supreme Court of India addressed this critical question in Bajarang Shyam Sunder Agarwal vs. Central Bank of India & Anr., clarifying the extent to which the SARFAESI Act overrides the rights of tenants. This judgment delves into the complexities of tenancy rights when a property is mortgaged and the borrower defaults on loan repayment. The core issue revolves around whether a tenant can claim protection against eviction when the bank initiates proceedings under the SARFAESI Act to take possession of a secured asset.

The judgment was delivered by a three-judge bench comprising Justices N.V. Ramana, Mohan M. Shantanagoudar, and Indira Banerjee. The opinion was unanimous, with Justice N.V. Ramana authoring the judgment.

Case Background

The case revolves around a residential flat in Mumbai, measuring approximately 1020 sq. ft., which was mortgaged by the second respondent (borrower/landlord) with the first respondent (Central Bank of India) on 20 May 2000, by depositing title deeds to secure a credit facility. When the borrower failed to repay the loan, the bank classified the account as a Non-Performing Asset (NPA).

On 30 April 2011, the bank issued a demand notice under Section 13(2) of the SARFAESI Act, demanding payment of Rs. 10,72,10,106.73. When the borrower failed to repay, the bank applied under Section 14 of the SARFAESI Act to take physical possession of the secured asset. The Chief Metropolitan Magistrate, Mumbai, allowed this application on 9 March 2012, directing the Assistant Registrar to take possession and hand it over to the bank.

The appellant claimed to be a tenant of the secured asset since January 2000, based on an oral agreement with the borrower, and stated that he had been paying rent since then. The tenant received a legal notice dated 25 July 2012, from the borrower to vacate the premises within 15 days. Following this, the tenant filed a suit before the Court of Small Causes at Mumbai, and on 18 September 2012, the court granted an interim injunction restraining the borrower from disturbing the tenant’s possession.

Timeline:

Course of Proceedings

The High Court of Bombay, in a Public Interest Litigation, held that a Magistrate could pass an eviction order without hearing the tenant under SARFAESI proceedings. However, this was challenged in the Supreme Court in the case of Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd., (2014) 6 SCC 1. The Supreme Court directed that Magistrates must give tenants an opportunity to be heard before deciding on applications under Section 14 of the SARFAESI Act.

Following this, the appellant-tenant filed an application before the Chief Metropolitan Magistrate, Mumbai. By an order dated 31 December 2014, the Chief Metropolitan Magistrate rejected the application, holding that the tenant, lacking a registered instrument, was not entitled to possession of the secured asset for more than one year from the date of the unregistered tenancy agreement, as per the law laid down in Harshad Govardhan Case.

Legal Framework

The judgment references several key legal provisions:

• Section 13 of the SARFAESI Act: This section deals with the enforcement of security interest. It allows banks to take possession of secured assets if the borrower defaults on loan repayment. Specifically, Section 13(2) mandates a notice to the borrower, and Section 13(13) restricts the borrower from creating any further encumbrance on the property after receiving the notice.
  “Section 13 of the SARFAESI Act provides for the enforcement of security interest. This is a self-executory mechanism for the banks. Once the process of realizing the secured interest takes place, the secured creditor acts as trustee having de-jure/symbolic possession of the property and is required by law to realize it strictly in accordance with the provisions of Section 13, 14 and 15 of the SARFAESI Act.”
• Section 14 of the SARFAESI Act: This section outlines the procedure for taking possession of secured assets.
  “Section 14 of the SARFAESI Act provides for the procedural mechanism for taking possession of property and documents with respect to the secured assets, from the borrower.”
• Section 17 of the SARFAESI Act: This section provides the right to appeal to the Debts Recovery Tribunal (DRT) for any person, including the borrower, aggrieved by the measures taken under Section 13(4).
  “Section 17 of the SARFAESI Act, dealing with the Right to Appeal has been amended in the year 2016. However, we are only concerned with the earlier law which reads as under”
• Section 35 of the SARFAESI Act: This section gives the SARFAESI Act overriding effect over any other law that is inconsistent with it.
  “The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”
• Section 65-A of the Transfer of Property Act: This section allows a mortgagor to lease the mortgaged property, but this right is extinguished once a notice under Section 13(2) of the SARFAESI Act is issued.
• Section 107 of the Transfer of Property Act: This section states that a lease of immovable property from year to year, or for any term exceeding one year, can only be made by a registered instrument.
  “Section 107 of the Transfer of Property Act provides that a lease of immovable property from year to year, or for any term exceeding one year or reserving a yearly rent, can be made “only by a registered instrument” and all other leases of immovable property may be made either by a registered instrument or by oral agreement accompanied by delivery of possession.”
• Section 111 of the Transfer of Property Act: This section deals with the determination of leases.

Arguments

The appellant-tenant argued that:

• He was a protected tenant under the Maharashtra Rent Control Act, 1999, and had been in occupation of the premises since October 2005.
• Even without a registered lease deed, the fact of tenancy could be demonstrated through rent receipts.
• The Small Causes Court had made a prima facie determination of rights in his favor.
• His case was covered by the rulings in Harshad Govardhan Case and Vishal N. Kalsaria v. Bank of India, (2016) 3 SCC 762.

The respondent-bank contended that:

• The tenant and the borrower had colluded to commit fraud on the bank. The tenant was not genuine and was brought in to misuse the legal process.
• At the time of creating the mortgage, the bank was informed that the borrower’s family was residing in the property. The bank was never informed about any existing tenancy.
• The borrower had given a non-encumbrance certificate to the bank at the time of creating the mortgage.
• In 2016, the Housing Society confirmed that the property was occupied by the borrower and there were no third-party rights on it.

The innovativeness of the argument by the appellant was in relying on the previous judgments to claim protection under the Rent Act, despite not having a registered lease. The bank’s argument was innovative in highlighting the discrepancies in the tenant’s claims and the lack of evidence, suggesting a fraudulent intent.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issues addressed can be summarized as:

1. Whether the law declared in Harshad Govardhan Case and Vishal N. Kalsaria Case accurately reflects the legal position regarding the protection of tenants under the SARFAESI Act.
2. Whether these rulings apply to the facts of the present case, particularly concerning the validity of the tenancy claim.
3. Whether a tenant can claim protection under the Rent Act when the tenancy is not supported by a registered instrument and the tenant is considered a ‘tenant in sufferance’.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court analyzed the submissions and authorities as follows:

The Court’s view on each authority:

• Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd., (2014) 6 SCC 1: The court followed the ruling regarding the need to determine the lease as per Section 111 of the T.P. Act, but clarified that a tenant with an unregistered instrument or oral agreement is not entitled to possession for more than one year.
• Vishal N. Kalsaria v. Bank of India, (2016) 3 SCC 762: The court agreed that tenancy rights under the Rent Act need to be respected, but held that the non-obstante clause under Section 35 of the SARFAESI Act does not apply only to laws operating in the same field.
• Section 13 of the SARFAESI Act: The court emphasized the importance of the notice under Section 13(2) and the restriction on creating encumbrances under Section 13(13).
• Section 35 of the SARFAESI Act: The court clarified that this section has an overriding effect over other laws, including the Rent Act.
• R.V. Bhupal Prasad v. State of A.P. and Ors., AIR 1996 SC 140: The court used this case to define a ‘tenant in sufferance’ and held that such tenants have no legal rights.

The Court’s reasoning was as follows:

• The Court emphasized that the SARFAESI Act was enacted to facilitate the efficient recovery of bad debts and that its provisions should be interpreted to achieve this objective.
• The Court held that a valid tenancy created before the mortgage cannot be disturbed by the secured creditor. However, if the tenancy is created after the mortgage, it must satisfy the conditions of Section 65A of the T.P. Act.
• The Court clarified that if a tenant claims possession for more than a year, it must be supported by a registered instrument. In the absence of a registered instrument, the tenant is not entitled to possession for more than the period prescribed under Section 107 of the T.P. Act.
• The Court found that the appellant-tenant’s claim was not supported by conclusive evidence. The tenant had provided inconsistent dates of the tenancy and had only produced xerox copies of rent receipts.
• The Court held that the appellant-tenant was a ‘tenant in sufferance’ because the tenancy was created after the notice under Section 13(2) of the SARFAESI Act, and such tenants do not have legal rights.

The Court rejected the argument that Section 35 of the SARFAESI Act only applies to laws operating in the same field. The Court held that Section 35 has a broader application and overrides any inconsistent law.

The Court also noted that the lower courts were correct in ordering the delivery of possession to the bank, as the tenancy stood determined.

The Court’s decision was unanimous, with all three judges agreeing on the reasoning and the final order.

The Court’s decision implies that banks must conduct due diligence to ascertain if a property is tenanted before accepting it as a mortgage. It also means that tenants cannot claim protection under the Rent Act if their tenancy is not valid or if they are ‘tenants in sufferance’. The decision also clarifies that the SARFAESI Act has an overriding effect over other laws, including the Rent Act, when it comes to the recovery of secured debts.

The judgment introduces the principle that a tenant who continues in possession after the expiry of a lawful lease is a ‘tenant in sufferance’ and has no legal rights. This principle clarifies the position of tenants in such situations under the SARFAESI Act.

The Court analyzed arguments for and against the application of the Rent Act in such cases, ultimately rejecting the argument that the Rent Act provides protection to ‘tenants in sufferance’ under the SARFAESI Act.

“We may now consider the contention of the respondents that some of the appellants have not produced any document to prove that they are bona fide lessees of the secured assets.”

“The non-registration of the tenancy deed cannot be used against the tenant. For leasehold rights being created after the property has been mortgaged to the bank, the consent of the creditor needs to be taken.”

“Tenant at sufferance is one who comes into possession of land by lawful title, but who holds it, by wrong after the termination of the term or expiry of the lease by efflux of time. The tenant at sufferance is, therefore, one who wrongfully continues in possession after the extinction of a lawful title. There is little difference between him and a trespasser.”

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the lack of credible evidence supporting the tenant’s claim and the need for efficient debt recovery under the SARFAESI Act. The court emphasized the importance of due diligence by banks and the need to prevent fraudulent practices. The court also considered the legal position of a tenant at sufferance and the overriding effect of the SARFAESI Act.

The ratio of fact to law that influenced the court’s decision is presented below:

Logical Reasoning

The court’s logical reasoning for the issues is as follows:

Key Takeaways

The Supreme Court’s judgment in Bajarang Shyam Sunder Agarwal vs. Central Bank of India & Anr. has significant implications for tenants, banks, and the legal interpretation of the SARFAESI Act. Here are the key takeaways:

• Tenants’ Rights: Tenants cannot claim protection against eviction under the SARFAESI Act if their tenancy was created after the mortgage or if it is not supported by a registered instrument, especially if the tenancy is for more than a year.
• Tenant in Sufferance: A tenant who continues in possession after the expiry of a lawful lease is considered a ‘tenant in sufferance’ and has no legal rights under the SARFAESI Act.
• Overriding Effect of SARFAESI Act: The SARFAESI Act has an overriding effect over other laws, including the Rent Act, when it comes to the recovery of secured debts.
• Due Diligence by Banks: Banks must conduct due diligence to ascertain if a property is tenanted before accepting it as a mortgage.
• No Protection for Fraudulent Tenancies: The court will not protect tenants who are found to have colluded with the borrower to create a tenancy to obstruct the bank’s recovery process.
• Registered Lease Deeds: For a tenancy to be valid, it must be supported by a registered lease deed, especially if the tenancy is for more than one year.
• Section 13(2) Notice: The issuance of a notice under Section 13(2) of the SARFAESI Act restricts the borrower from creating any further encumbrance on the property, including tenancies.
• Limited Scope of Rent Act: The Rent Act does not provide protection to tenants who do not have valid leases or are ‘tenants in sufferance’ under the SARFAESI Act.
• Importance of Evidence: Tenants must provide conclusive evidence to support their claim of tenancy, including registered lease deeds and consistent rent payment records.
• Need for Transparency: Borrowers are required to be transparent with banks about any existing tenancies on the property at the time of creating the mortgage.

Future Implications

The judgment in Bajarang Shyam Sunder Agarwal vs. Central Bank of India & Anr. is likely to have several future implications:

• Increased Scrutiny of Tenancy Claims: Courts are likely to scrutinize tenancy claims more rigorously, especially in cases involving secured assets under the SARFAESI Act.
• Emphasis on Registered Lease Deeds: Tenants will be required to produce registered lease deeds to prove their tenancy, especially if the tenancy is for more than one year.
• Due Diligence by Banks: Banks will need to conduct more thorough due diligence before accepting properties as mortgages to ascertain the existence of any tenancies.
• Reduced Protection for Tenants: Tenants who do not have valid leases or are ‘tenants in sufferance’ will have limited protection against eviction under the SARFAESI Act.
• Impact on Rent Laws: The judgment clarifies the limited scope of Rent Acts in cases involving secured assets under the SARFAESI Act.
• Precedence for Similar Cases: This judgment will serve as a precedent for similar cases involving the rights of tenants in the context of secured assets and debt recovery under the SARFAESI Act.
• Increased Awareness: The judgment will increase awareness among tenants about the importance of having valid lease deeds and the limitations of their rights under the SARFAESI Act.
• Potential for Fraud: The judgment highlights the potential for fraudulent tenancies to obstruct the recovery process and emphasizes the need for transparency.
• Impact on Borrowers: Borrowers will need to be more transparent with banks about any existing tenancies on the property at the time of creating the mortgage.
• Efficient Debt Recovery: The judgment will facilitate the efficient recovery of bad debts by banks under the SARFAESI Act.

Conclusion

The Supreme Court’s judgment in Bajarang Shyam Sunder Agarwal vs. Central Bank of India & Anr. provides a crucial clarification on the interplay between the SARFAESI Act and the rights of tenants. The court emphasized that while tenancy rights should be respected, such rights must be valid and supported by appropriate documentation, particularly registered lease deeds for tenancies exceeding one year. The judgment clarifies that a ‘tenant in sufferance’ has no legal rights under the SARFAESI Act and that the Act has an overriding effect over other laws, including the Rent Act, when it comes to the recovery of secured debts.

The court’s decision underscores the importance of due diligence by banks and the need for transparency by borrowers. It also highlights the limitations of the protection afforded to tenants under the Rent Act in cases involving secured assets under the SARFAESI Act. The judgment is likely to have a significant impact on future cases involving similar issues and will serve as a key reference for courts, banks, and tenants alike.

The judgment reinforces the importance of the SARFAESI Act in facilitating efficient debt recovery and provides a clear framework for balancing the rights of secured creditors and tenants. It also emphasizes the necessity of having valid and legally sound tenancy agreements and the consequences of not adhering to these requirements.