The Supreme Court ruled that unregistered tenancy rights could not prevail over secured creditors’ claims under the SARFAESI Act.
The Supreme Court, in a three-judge bench comprising Justice N.V. Ramana, Justice Mohan M. Shantanagoudar, and Justice Indira Banerjee, reviewed an appeal and held that tenancy rights over a secured asset must be substantiated by a registered lease agreement in compliance with the Transfer of Property Act. The Court further ruled that Section 35 of the SARFAESI Act overrides inconsistent state tenancy laws, thereby invalidating unregistered or oral tenancy claims. Tenants without valid registration or evidence of tenancy cannot impede possession proceedings initiated by secured creditors under the SARFAESI Act.
The Supreme Court addressed a pivotal issue involving the rights of tenants under an unregistered lease in the context of secured asset enforcement under the SARFAESI Act. The appellant-tenant, claiming tenancy rights based on an oral agreement predating the mortgage, contested the respondent-bank's possession proceedings initiated under Section 14 of the SARFAESI Act. The appellant relied on the Maharashtra Rent Control Act, 1999, and earlier Supreme Court precedents to assert protection against eviction. However, the respondent-bank argued that the tenancy lacked bona fide status, emphasizing the SARFAESI Act's overriding authority under Section 35 and the absence of any registered lease agreement.
The Court observed that the SARFAESI Act prioritizes creditors' rights for the expeditious recovery of debts, restricting the creation of third-party interests under Section 13(13) post-demand notice. It held that a valid tenancy must be substantiated by a registered lease agreement under Section 65A of the Transfer of Property Act, failing which such claims cannot survive in proceedings under the SARFAESI Act. The appellant's reliance on the Maharashtra Rent Control Act and earlier rulings, including Harshad Govardhan Sondagar and Vishal N. Kalsaria, was distinguished. While those cases recognized tenants' rights under statutory protections, the present case involved an unregistered oral agreement and lacked corroborative evidence such as rent receipts.
The Court reaffirmed that the SARFAESI Act overrides inconsistent state laws, emphasizing that tenancy claims require compliance with procedural safeguards, including registration under Section 107 of the Transfer of Property Act. The Court held that an oral tenancy agreement or an unregistered lease confers possession rights only for a statutory period of one year and cannot obstruct the secured creditor's rights. Furthermore, any tenancy created without disclosure during the mortgage or post-dated to the mortgage, in violation of Section 13(13), was deemed invalid.
Distinguishing earlier rulings, the Court found the appellant’s claim to be an afterthought aimed at frustrating the SARFAESI proceedings. The lack of bona fide status and procedural compliance rendered the tenancy akin to trespass, disqualifying it from protection under the Maharashtra Rent Control Act. The judgment reinforced the principle that the rights of secured creditors under the SARFAESI Act take precedence, ensuring effective enforcement mechanisms against obstructions by tenants without valid, registered agreements.
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