The operation of the Rent Act cannot be extended to a ‘tenant-in-sufferance’ vis-à-vis the SARFAESI Act: Supreme Court

The Supreme Court bench of Justices N.V. Ramana, Mohan M. Shantanagoudar and Indira Banerjee held that the operation of the Rent Act cannot be extended to a ‘tenant-in-sufferance’ vis-à-vis the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

The landlord (owner)-respondent of a flat had mortgaged his flat to the Central Bank of India and failed to repay the amount. A statutory Demand Notice under Section 13 (2) of the SARFAESI Act was issued to the borrower/landlord demanding payment of Rs.10,72,10,106 (Rupees Ten Crores SeventyTwo Lacs Ten Thousand One Hundred Six). The bank made an application under Section 14 of the SARFAESI Act seeking directions to take physical possession of the secured asset. The application was allowed by the Chief Metropolitan Magistrate, Esplanade, Mumbai.

The disputed flat was let out to the appellant-tenant who was residing in the flat and paying the rent. The tenancy was however based on an oral agreement. The tenant received a legal notice from the landlord (borrower) directing him to vacate the premises within 15 days. Aggrieved by this, the tenant preferred a suit before the Small Causes Court against the landlord.

The Small Causes Court allowed the application for interim injunction of the appellant-tenant filed in the above suit and the landlord was restrained from disturbing the possession of the appellant-tenant.

The appellant-tenant preferred an application before the Chief Metropolitan Magistrate, Esplanade, Mumbai. The Chief Metropolitan Magistrate after hearing the appellant-tenant, rejected the application holding that the appellant-tenant being a tenant without any registered instrument is not entitled for the possession of the secured asset for more than one year from the date of execution of unregistered tenancy agreement in accordance with the law laid down in Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd. and Ors case.

The present appeal before the Supreme Court arose out of the impugned order of the Chief Metropolitan Magistrate, Esplanade, Mumbai rejecting the application of the appellant-tenant seeking to stay the execution of order passed under Section 14 of the SARFAESI Act.

The Supreme Court ruled that the SARFAESI Act was enacted in response to a scenario where slow paced recovery and staggering amounts of non-performing assets were looming over the banks. In order to overcome the practical reality, and keep in pace with the changing commercial world, Narasimham Committee I and II and the Andhyarujina Committee were constituted by the Central Government to provide solutions for the issues plaguing the banking system of the country. The SARFAESI Act is a culmination of the suggestions made by the aforesaid committees intended to enable the banks to resolve the issue of liquidity and aim for the reduction in the number of non-performing assets.

The Court ruled that Section 35 of the SARFAESI Act provides an overriding effect over “anything inconsistent contained in any other law”.

The Apex Court observed that even though Section 35 of the SARFAESI Act has a non-obstante clause, it will not override the statutory rights of the tenants under the Rent Control Act.

The Court stated the manner in which the objective of SARFAESI Act, coupled with the Transfer of Property Act, 1882 (T.P Act) and the Rent Act, 1977 are required to be reconciled with.

· If a valid tenancy under law is in existence even prior to the creation of the mortgage, the tenant’s possession cannot be disturbed by the secured creditor by taking possession of the property. Where the bank has proceeded to accept such a property as mortgage, it will be presumed that it has consented to the risk that comes as a consequence of the existing tenancy. In such a situation, the rights of a rightful tenant cannot be compromised under the SARFAESI Act proceedings.

· Secondly, if a tenancy under law comes into existence after the creation of a mortgage, but prior to the issuance of notice under Section 13(2) of the SARFAESI Act, it has to satisfy the conditions of Section 65A of the T.P Act.

· In any case, if any of the tenants claim that he is entitled to possession of a secured asset for a term of more than a year, it has to be supported by the execution of a registered instrument.

In the present case, the Supreme Court doubted the bona fides of the tenant because it involves a tenant who allegedly entered into an oral agreement of tenancy before the mortgage deed was entered into between the borrower and Bank/Creditor. Additionally, it must be noted that tenancy created under such an oral agreement, results in a fresh tenancy after the expiry of statutory period fixed under the T.P Act. The claim of tenancy made by the appellant-tenant was not supported by a registered instrument.

The Court held that it is pertinent to note that at the time when the SARFAESI Act proceedings were pending, the factum of tenancy was never revealed by the parties. The order passed by the Chief Metropolitan Magistrate, Esplanade, Mumbai directing the Assistant Registrar to take over the possession of the secured asset, was also silent about any existing encumbrance over the secured asset.

The appellant-tenant also failed to produce any evidence to substantiate his claim over the secured asset. In such a situation, the appellant-tenant could not claim protection under the garb of the interim protection granted to him, by solely relying upon the photo-copies of the rent receipts.

The Court held that in such an event, wherein the claim of the appellant-tenant is not supported by any conclusive evidence, the rejection of the stay application by the Chief Metropolitan Magistrate could not be held to be erroneous. It is clear that the borrower/landlord never intimated the respondent-bank about the alleged tenancy.

Further the Court observed that as the notice under Section 13 (2) SARFAESI Act was issued subsequent reckoning of the tenancy is barred. Such person occupying the premises, when the tenancy has been determined, can only be treated as a ‘tenant-in-sufferance’. The Court also noted that such tenants do not have any legal rights and are akin to trespassers.

Finally, the Apex court observed that “the operation of the Rent Act cannot be extended to a ‘tenant-in-sufferance’ vis-à-vis the SARFAESI Act, due to the operation of Section 13(2) read with Section 13(13) of the SARFAESI Act. A contrary interpretation would violate the intention of the legislature to provide for Section 13(13), which has a valuable role in making the SARFAESI Act a self executor instrument for debt recovery. Moreover, such an interpretation would also violate the mandate of Section 35, SARFAESI Act which is couched in broad terms”.

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