It is often seen that property owners let out their residential or commercial property on rent and the tenant resides or carries on business from such property. The fact that the same property has been mortgaged by the property owner in security for some loan is usually not disclosed to tenants. When there happens a default in repayment of loan, then bank initiates recovery action under the provisions of SARFAESI Act, 2002 with respect to the same rented property, then the tenant gets to know about the existing unpaid loan of the property owner.
In this article we are going to discuss about the rights and remedies which are available to the tenants under the scheme of the SARFAESI Act, 2002 and Security Interest (Enforcement) Rules, 2002.
RIGHTS OF TENANTS WHEN MORTGAGED PROPERTY IS TAKEN OVER BY BANKS UNDER SARFAESI ACT
Section 17(1) of SARFAESI Act, 2002 allows any person who is aggrieved by the action taken by the bank under Section 13(4) to file Securitization Application before the Debts Recovery Tribunal (DRT), in simple words, a tenant of a rented property may file a case before the DRT if any notice for taking possession of the property is served upon him or is affixed on the outer part/wall/boundary of the house or shop and request the DRT to stop the bank from taking physical possession or ousting such tenant from occupation of such property.
KEY SUPREME COURT JUDGMENT: HARSHAD GOVARDHAN SONDAGAR VS. INTERNATIONAL ASSET RECONSTRUCTION COMPANY LTD.
The Supreme Court of India discussed about the rights of tenant in valid possession of mortgaged property in the case of Harshad Govardhan Sondagar vs. International Asset Reconstruction Company Ltd. [(2014) 6 SCC 1]. The Supreme Court in this case held that the right to continue using a rented property is a Constitutional Right guaranteed under Article 300A of the Constitution of India and it cannot be taken away unless the lease of the immovable property does not gets determined by a Court of law.
Some of the key points enunciated by the Supreme Court with respect to the right of tenants are enumerated here under:-
PROTECTION OF VALID TENANTS
- If a tenant is in lawful possession of a mortgaged property under a valid lease agreement then the bank cannot take possession of such property.
- All courts and tribunals are obligated to provide protection to valid tenants or lease holders since no power is given to bank to determine the lease at the time of taking possession of the mortgaged property.
- The bank may request a tenant to hand over physical possession to a bank but if a tenant refuses to delivery possession, then the bank cannot use force to evict such tenant.
ROLE OF DISTRICT MAGISTRATE (DM)/CHIEF METROPOLITAN MAGISTRATE (CMM)
- The bank may approach the District Magistrate or Chief Metropolitan Magistrate to take possession of mortgaged property which is in possession of a valid lease holder/ tenant.
- The District Magistrate or Chief Metropolitan Magistrate is bound to give a notice and opportunity of hearing to a tenant/ before passing any order for taking possession.
- The District Magistrate or Chief Metropolitan Magistrate cannot pass any order of taking physical possession if the lease agreement/rent agreement was created before the creation of mortgage.
LEASE EXECUTED AFTER MORTGAGE
- If the lease agreement/rent agreement was executed after creation of mortgage then the District Magistrate or Chief Metropolitan Magistrate has to see whether the same was created in accordance with Section 65A of Transfer of Property Act, 1882. If upon inquiry it is discovered by the District Magistrate or Chief Metropolitan Magistrate that the rent agreement/lease agreement was done as per Section 65A of Transfer of Property Act, 1882, then too an order for taking possession cannot be passed.
REGISTERED VS. UNREGISTERED LEASES
- The registered lease agreement/rent agreement will be treated as a valid lease deed, if such lease deed is for a period exceeding 11 months.
- In case of unregistered rent agreement of 11 months or lesser period, the tenant can retain possession of the mortgaged property only till the term of such rent agreement.
TENANT’S GOODS CANNOT BE SEIZED
- A tenant is neither a borrower nor a guarantor in a loan taken by the property owner, therefore the bank is not empowered to take possession of movable goods belonging to the tenant by taking action under the provisions of SARFAESI Act, 2002 [Priya vs. Indian Overseas Bank (2012) 4 BC 68 (Mad) (DB)]
RIGHTS & REMEDIES AVAILABLE TO TENANTS
- File Securitisation Application (SA) before the DRT under Section 17(1) of SARFAESI Act, 2002.
- Produce lease/rent agreement to prove valid possession.
- Seek stay orders against eviction till the validity of the tenancy.
- Challenge unlawful possession notices issued by banks without following due process.
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