Tenants cannot be evicted for landlord’s failure to repay Banks

In an important judgement, the Supreme Court of India has held that a tenant can’t be evicted from the property when the landlord fails to repay the lender banks.

SARFAESI Act

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court.

Rent Control Act

Rent Control Act was an attempt by the Government of India to eliminate the exploitation of tenants by landlords. Rent legislation tends to providing payment of fair rent to landlords and protection of tenants against eviction.

The property was a mortgaged by the landlord (one of the Respondents) for securing a loan from Bank of India. When the landlord failed to pay the dues, the 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 Tenant, asking him to vacate the premises.

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

This matter later escalated to the Supreme Court and Hon’ble Supreme Court made following observations:

In case of default of the loan, the maximum brunt will be borne by the unsuspecting tenant, who would be evicted from the possession of the tenanted property by the Bank under the provisions of the SARFAESI Act.

As far as granting leasehold rights being created after the property has been mortgaged to the bank, the consent of the creditor needs to be taken. Further, once tenancy is created, a tenant can be evicted only after following the due process of law, as prescribed under the provisions of the Rent Control Act. A tenant cannot be arbitrarily evicted by using the provisions of the SARFAESI Act as that would amount to stultifying the statutory rights of protection given to the tenant. A non-obstante clause (Section 35 of the SARFAESI Act) cannot be used to bulldoze the statutory rights vested on the tenants under the Rent Control Act.

Copy of the order: VISHAL N. KALSARIA vs Bank of India

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