Tenant Rights vs. Bank Recovery: Supreme Court Rules on SARFAESI Act and Rent Control Act

The Supreme Court of India, in the case of Bajarang Shyamsunder Agarwal vs. Central Bank of India & Another, ruled on the rights of tenants in properties mortgaged to banks and the applicability of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. The case dealt with whether tenants could claim protection under rent control laws when a bank seeks possession of a mortgaged property due to loan defaults.

Background of the Case

The dispute arose when the Central Bank of India classified a property in Andheri (West), Mumbai, as a Non-Performing Asset (NPA) after the borrower (landlord) defaulted on loan repayments. The property, a residential flat, was mortgaged to the bank in 2000. Since the borrower failed to repay the outstanding amount of Rs. 10.72 crores, the bank issued a statutory demand notice under Section 13(2) of the SARFAESI Act on April 30, 2011.

Subsequently, the bank sought possession of the secured asset through an application under Section 14 of the SARFAESI Act. The Chief Metropolitan Magistrate (CMM), Mumbai, granted an order in favor of the bank, directing that possession be handed over. The appellant, Bajarang Shyamsunder Agarwal, who claimed to be a tenant, challenged this order, arguing that he had a valid tenancy agreement with the borrower.

Key Legal Issues Considered

Whether a tenant without a registered lease agreement can claim protection against eviction under rent control laws.
Whether the SARFAESI Act overrides the rights of tenants under the Maharashtra Rent Control Act, 1999.
Whether the tenancy was bona fide or a fraudulent arrangement made to defeat the bank’s recovery proceedings.

Arguments by the Petitioner (Bajarang Shyamsunder Agarwal)

The appellant contended:

He was a tenant in the property since January 2000 and had been paying rent regularly.
Although there was no registered lease agreement, his tenancy was valid based on rent receipts.
He had obtained an injunction from the Small Causes Court, Mumbai, restraining the landlord from evicting him.
The SARFAESI Act cannot override the protective provisions of the Maharashtra Rent Control Act, which safeguards tenants from eviction.

Arguments by the Respondent (Central Bank of India)

The bank countered:

The alleged tenancy was fraudulent, created after the loan default to obstruct recovery proceedings.
At the time of mortgage creation, the borrower provided a non-encumbrance certificate, stating no tenancy existed.
The bank’s inquiries with the Housing Society in 2016 confirmed that no tenancy was recorded.
Under Section 13(13) of the SARFAESI Act, once a bank issues a notice to the borrower, any subsequent lease without the bank’s consent is void.

Supreme Court’s Observations

The Supreme Court examined the interplay between the SARFAESI Act and the Maharashtra Rent Control Act and made the following key observations:

Tenancy Without a Registered Lease Deed: Under Section 107 of the Transfer of Property Act, a lease exceeding one year must be registered. Since the appellant had no registered agreement, he could not claim tenancy rights beyond a year.
Fraudulent Tenancy: The Court noted discrepancies in the appellant’s claims. While he stated in earlier proceedings that his tenancy began in January 2000, he later claimed tenancy from October 2005. The rent receipts were xerox copies without independent verification.
Bank’s Right to Possession: Once a property is mortgaged, the borrower cannot lease it to another party without the bank’s consent. Any such tenancy is deemed void after a notice under Section 13(2) of the SARFAESI Act.
Override of Rent Control Act: The Maharashtra Rent Control Act protects tenants from arbitrary eviction, but it does not apply when tenancy is created to frustrate bank recovery proceedings. The SARFAESI Act has an overriding effect under Section 35.

Final Judgment

The Supreme Court dismissed the appeal and upheld the bank’s right to take possession, ruling:

“The appellant has failed to produce a valid registered lease agreement and has not substantiated his tenancy claims. The tenancy, if any, was created to obstruct SARFAESI Act proceedings. The Rent Control Act does not shield tenants under such circumstances.”

The Court further directed the appellant to vacate the premises within 12 weeks.

Implications of the Judgment

For Tenants: Tenants must ensure their lease agreements are registered to claim legal protection.
For Banks: Banks can invoke the SARFAESI Act to recover mortgaged properties without being obstructed by unverified tenancy claims.
For Landlords: Borrowers must disclose tenancy details to banks when mortgaging properties.
For Future Litigation: The ruling reinforces that fraudulent tenancies cannot be used to defeat bank recovery proceedings.

Conclusion

The Supreme Court’s ruling strengthens the SARFAESI Act by ensuring that banks can recover secured assets without undue interference from unregistered or fraudulent tenancy claims. The judgment serves as a cautionary precedent for tenants and landlords, emphasizing the importance of legal compliance in rental agreements and mortgage disclosures.

Petitioner Name: Bajarang Shyamsunder Agarwal.
Respondent Name: Central Bank of India & Another.
Judgment By: Justice N.V. Ramana, Justice Mohan M. Shantanagoudar, Justice Indira Banerjee.
Place Of Incident: Mumbai, Maharashtra.
Judgment Date: 11-09-2019.

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