Case BriefsSupreme Court

Supreme Court: The Division Bench of Dinesh Maheshwari* and Aniruddha Bose, JJ., held that in cases disclosing deliberate defiance and elective non-performance on the part of the tenant, the consequence of law remains inevitable, that the defence of such a defendant would be struck off.

Reversing the impugned order of the Allahabad High Court, the Court expressed,

“In the context of the proposition of denial of relationship of landlord and tenant between the plaintiff and defendant, such a denial simpliciter does not and cannot absolve the tenant of liability to deposit the due rent/damages for use and occupation, unless he could show having made such payment in a lawful and bonafide manner.”

Background

The instant appeal deals with procedural technicalities of Order XV Rule 5 CPC which arose in a suit for eviction and recovery of arrears of rent as also damages for use and occupation.

The plaintiff-appellant contended that she is the owner of the suit shop as she had purchased it from its erstwhile owner by sale deed dated 10-05-2010 and that the defendant-respondent is a tenant since the time of its erstwhile owner. She alleged that the respondent is a chronic defaulter in payment of rent and taxes; and despite information of the sale deed and despite demand made by her, the rent along with taxes had not been paid to her since the month of May 2010.

On the contrary, the respondent denied the relationship of landlord and tenant between the plaintiff and himself. Though he did not deny his status as tenant in
the suit shop, the defendant asserted that the alleged sale deed dated is illegal and void.

In Issue

The plaintiff-appellant had filed an application under Order XV Rule 5 CPC, praying that the defence of the defendant-respondent be struck off, since he had not deposited any rent and no evidence was adduced by him to establish any payment of rent. Contesting the application, the defendant-respondent contended that the provisions of Order XV Rule 5 CPC are applicable only to a case where there is admission as to landlord-tenant relationship; however, in the present case, he had clearly averred that there was no relationship of landlord and tenant between the plaintiff and defendant.

Contrary Findings of the Courts Below

The Trial Court stroke off the defence of the defendant-respondent for failure to pay or deposit the due rent, holding that even if the tenant denied the relationship of landlord and tenant, the application under Order XV Rule 5 CPC was maintainable. The order of the Trial Court was affirmed by the Revisional Court.

However, in appeal, the High Court reversed the order of the Trial Court by holding that even though the defendant-respondent did not pay his dues, he was entitled to some indulgence.

Observations and Analysis

Order XV Rule 5: Legislative Intent and Judicial Pronouncements

As Order XV Rule 5 CPC, the consequence of default in making deposits is that the Court may strike off the tenant’s defence. However, before making an order striking off defence, the Court is to consider the representation of the defendant, if made within 10 days of the first hearing or within 10 days of the expiry of one week from the date of accrual of monthly amount.

The Court, after considering various judicial pronouncements in this regard, including Santosh Mehta v. Om Prakash, (1980) 3 SCC 610 and Kamla Devi v. Vasdev, (1995) 1 SCC 356, held that the sum and substance of the matter is that the power to strike off defence is discretionary, which is to be exercised with circumspection but, relaxation is reserved for a bonafide tenant and not as a matter of course. The Court expressed,

“The common thread running through the aforesaid decisions of this Court is that the power to strike off the defence is held to be a matter of discretion where, despite default, defence may not be struck off, for some good and adequate reason.”

Elaborating on the question of good and adequate reason, the Court stated that that would directly relate with such facts, factors and circumstances where full and punctual compliance had not been made for any bonafide cause, as contradistinguished from an approach of defiance or volitional/elective non-performance.

Factual Analysis

The Court noted that the first part of sub-rule (1) of Rule 5 of Order XV CPC requires deposit of the admitted due amount of rent together with interest, the second part thereof mandates that whether or not the tenant admits the amount to be due, he has to, throughout the continuation of the suit, regularly deposit monthly amount due within a week from the date of its accrual. Hence, the Court remarked,

“We are not inclined to accept that in every case of denial of relationship of landlord and tenant, the defendant in suit for eviction and recovery of rent/damages could enjoy holidays as regards payment of rent.”

The Court opined that by merely denying the title of plaintiff or relationship of landlord-tenant/lessor-lessee, a defendant of the suit of the present nature cannot enjoy the property during the pendency of the suit without depositing the rent/damages.

Observing that the defendant-respondent, by his assertions and conduct, has left nothing to doubt that he has been steadfast in not making payment of rent/damages, despite being lessee of the suit shop, the Court held that his conduct amounted to volitional non-performance and defiance.

Hence, the Court held that there was no reason for the High Court to have interfered in the concurrent findings of lower Courts. The Court remarked,

“We find it rather intriguing that, despite having not found any cogent reason for which discretion under Rule 5 of Order XV CPC could have been exercised in favour of the defendant-respondent, the High Court, in the last line of paragraph 45 of the order impugned, abruptly stated its conclusion that: ‘yet the defendant/tenant deserves some indulgence’.”

Effects of Subsequent Deposits Pursuant to Impugned Order

Regarding the submissions of the defendant-respondent that he had deposited the due rent from 10-05-2010 to 10-11-2018 and he had been further making regular deposits, the Court held that such deposits made only pursuant to the order of the High Court cannot wipe out the default already committed by him.

The Court said that the deposits belatedly made, pursuant only to the unsustainable order of the High Court, do not ensure to the benefit of the defendant-respondent.

Conclusion

In the light of the above, the impugned order of the High Court was set aside and the order of the Trial Court was restored. The Trial Court was directed to take note of the fact that the suit filed way back in the year 2011 is still pending therefore, the same should be assigned reasonable priority for expeditious disposal.

[Asha Rani Gupta v. Vineet Kumar, 2022 SCC OnLine SC 829, decided on 11-07-2022]


*Judgment by: Justice Dinesh Maheshwari

Kamini Sharma, Editorial Assistant has put this report together.

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

   

National Company Law Tribunal, New Delhi: The Bench of Ashok Bhushan J., Chairperson, Rakesh Kumar Jain and Rakesh Kumar, JJ, Judicial Members, and Barun Mitra and Naresh Salecha, Technical Members, have held that lease rentals for business purposes fall under the definition of ‘Operational Debt' as per Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC).

Background of the case

The Appellant, corporate creditor entered into a license agreement with the Respondent, corporate debtor for five years. As per the agreement the appellant granted a license to the respondent to use a building for business purposes with a total super area measuring 31000 sq. ft. The license fee was agreed to be Rs 4,00,000/- plus government taxes on monthly basis.

The respondent made payment to the appellant through two cheques of amount Rs 20,00,000/- each dated 07-05-2018 and 08-10-2018 respectively. Both the cheques were dishonored. On 03-05-2019, the Appellant sent a demand notice under Section 8 of IBC, to which no reply was given by the respondent. Hence, on 09-05-2019, the appellant filed an application for initiation of the Corporate Insolvency Resolution Process against the respondent under Section 9 of IBC.

The Adjudicating Authority dismissed the application under Section 9 of IBC stating that the claim arising out of a grant of license to use the immovable property does not fall in the category of goods or services, thus, the amount claimed in Section 9 Application is not an unpaid operational debt. Therefore, the appellant filed a company appeal before a larger bench.

The issue before the bench

  • Whether the claim of the Licensor for payment of License Fee for use and occupation of immovable premises for commercial purposes is a claim of ‘Operational Debt' within the meaning of Section 5(21) of the Code.”?

Observation and Analysis

The coram made the following observations: –

  • The definition of ‘operational debt' as contained in Section 5 (21) IBC, the definition clause provides that ‘operational debt' means a claim in respect of the provision of goods or services.

  • Definition under Section 5(21) IBC uses the expression ‘services' which is not defined under the IBC. When an expression used in the statute is not defined, the Court has to explain the meaning of the undefined expression under the well-established rules of statutory interpretation.

  • The term operation is derived from “operate” and “operating cost” is an expense incurred in the conduct of the principal activities of the enterprise therefore, operational debt is also a debt that is incurred in the conduct of the principal activities of the enterprise.

  • Further, Coram stated that Bankruptcy Law Reforms Committee Report can be treated as an aid for interpretation for IBC which explicitly provides that a lessor can be treated as an operational creditor.

  • As the ‘operational debt' as defined in Section 5(21) IBC has a meaning much wider than the essential goods and services. Essential goods and services are entirely different concepts and the protection under Section 14(2) IBC as provided for is an entirely different context.

  • The observations made in the case of M. Ravindranath Reddy v. Mr. G. Kishan, 2020 SCC OnLine NCLAT 84 that there has to be nexus to the direct input or output produced or supplied by the Corporate Debtor, is a much wider observation not supported by the scheme of the IBC. Therefore, the case does not consider the extent and expanse of the expression ‘service' used in Section 5(21) of the IBC and does not lay down the correct law.

  • The observation made in the case of Promila Taneja v. Surendri Design Pvt. Ltd. – 2020 SCC OnLine NCLAT 1105 in respect definition of “service” as mentioned under the Consumer Protection Act, 2019 and the Goods and Services Act, 2017 (CGST Act) cannot be referred to for interpretation of the term “Operational Debt” as these acts are not mentioned under Section 3(37) of the IBC. It reiterated the law laid down in the M. Ravindranath Reddy case and hence, the judgment cannot be followed.

In the light of the above observations made, the Bench opined that in the present case, where the agreement itself contemplates payment of GST for the services under the agreement, the definition of ‘service' under the CGST Act can be referred. Hence, the expression ‘service' in Section 5(21) of the IBC includes license payments. Therefore, the claim of the Licensor for payment of license fee for use of Demised Premises for business purposes is an ‘operational debt' within the meaning of Section 5(21) of the IBC.

[Jaipur Trade Expocentre Pvt Ltd versus Metro Jet Airways Pvt Ltd, Company Appeal (AT) (Insolvency) No. 423 of 2021, decided on- 05-07-2022]


Advocates who appeared in this case :

Ms. Sanjana Saddy, Mr. Sanyat Lodha & Ms. Harshita Singhal, Advocate, for the Appellant;

Mr. Vikrant Arora & Mr. Manish Verma, Advocates, for the Respondent.

Legislation UpdatesNotifications

On 16th June, 2022, the Central Board of Direct Taxes (CBDT) has exempted TDS on lease rentals under Section 194-I of Income Tax Act, 1961 paid to Aircraft Leasing Units vide notification no. 65/2022/F. No. 275/30/2019-IT(B). This will come into force on July 1, 2022.Exemption is applicable on following conditions:

The Lessor must

  • furnish a statement-cum-declaration in Form No. 1 to the lessee giving details of previous years relevant to the ten consecutive assessment years for which the lessor opts for claiming deduction under sub-section (IA) read with section (2) of the section 80LA of the Income-tax Act; and
  • such statement-cum-declaration shall be furnished and verified in the manner specified in Form No.1, for each previous year relevant to the ten consecutive assessment years for which the lessor opts for claiming deduction under sub-section (IA) read with section (2) of the section 80LA of the Income-tax Act.

The Lessee must

  • not deduct tax on payment made or credited to lessor after the date of receipt of copy of statement-cum-declaration in Form No. 1 from the lessor; and
  • furnish the particulars of all the payments made to lessor on which tax has not been deducted in view of this notification in the statement of deduction of tax referred to in sub-section (3) of section 200 of the Income-tax Act read with rule 31A of the Income-tax Rules, 1962.

The above relaxation shall be available to the lessor during the said previous years relevant to the ten consecutive assessment years as declared by the lessor in form 1 which specifies “To be furnished by a unit engaged in the business of leasing of aircraft located in International Financial Services Centre to the Lessee”


*Shubhi Srivastava, Editorial Assistant has reported this brief.

Income Tax Appellate Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Bangalore Benches (ITAT): The Bench of Chandra Poojari, AM and George George K, JM while partly allowing an appeal held that the lessee not being the exclusive owner of a property is eligible to claim actual rental expenses in the return of income.

Factual Matrix

The assessee in the present matter was stated to be registered as a 100% Export Oriented Unit and also registered under the Software Technology Park of India (STPI).

After the scrutiny and assessment under Section 143(3) read with Section 92CA of the Income Tax Act, the total income was determined at Rs 35,44,70,726. One of the additions made by the A.O. was Rs 79,27,497 on account of foreign exchange loss.

The A.O. held that the restatement of Export Earners Foreign Currency (EEFC) account is in the nature of capital item and hence cannot be allowed. He further held that the amount of Rs.79,27,497 is a notional loss.

On being aggrieved with the above, the assessee filed an appeal before the first appellate authority, which confirmed the additions made by the A.O. and held that the loss on account of fluctuation in foreign exchange can be adjusted at the time of making payment but not on notional basis.

Aggrieved with the order of CIT(A), the assessee approached this tribunal.

Analysis, Discussion and Decision

Tribunal expressed that, as per the mercantile system of accounting followed by the assessee, the foreign exchange loss arising on account of restatement of EEFC account cannot by any stretch of imagination be termed as notional or contingent in nature.

It was noted that the EEFC account was maintained by the assessee to facilitate regular business operation and not for acquiring any asset.

Noting that, the transaction in EEFC account undertaken during the year were trading nature in order to facilitate the regular business operation of the assessee-company, Tribunal held that the AO erred in making an addition of Rs 79,27,497 to the income returned and the CIT(A) was not justified in sustaining the same.

In view of the above reasoning, the addition by A.O. was deleted.

Ground 2

Background

The assessee had paid a sum of Rs 2,36,70,370 to First Lease Company India Limited towards equipment leasing. Out of Rs 2,36,70,317, the principal repayment of Rs 1,77,95,992, the interest and VAT aggregated to Rs 58,74,325. The assessee had claimed Rs 2,36,70,317 as a deduction. The A.O. in the impugned order held that the sum of Rs 1,77,95,992 (i.e. Rs 2,36,70,317 – Rs 58,74,325), which was paid towards principal as an expenditure of capital in nature and accordingly added back to the returned income.

The above was preferred for an appeal before CIT(A), and it was directed to the A.O. to verify whether there was a violation of TDS provisions under Section 194-I of the I.T. Act and to make necessary disallowance under Section 40(a)(ia) of the I.T. Act. Further, the CIT(A) directed the A.O. to verify whether the assessee had claimed depreciation on the leased asset and if so, add back the same to the total income.

Aggrieved with the above, the present appeal was filed.

It was noted that as per clause 4 of the agreement between the assessee and the First Leasing (lessor) the asset shall remain the exclusive property of the lessor at all times and the lessee during the lease time cannot capitalize the assets in its books of account since the ownership of the asset was with the lessor.

As per clause 19 of the said agreement, the assessee company (lessee) shall surrender the leased assets to First Leasing in good condition and working order on the expiration of the agreement.

It was clear that the actual owner of the leased asset was the lessor and was entitled to claim depreciation.

The assessee-company has merely taken the assets on lease from the owner, and it is accordingly eligible to claim actual rental expenses in the return of income.

Tribunal upheld the direction of CIT(A) on verifying whether there was TDS made by the assessee while making payment for lease rentals and adding back the depreciation claim.

In view of the above discussion, the appeal was partly allowed. [ThoughtWorks Technologies (India)(P) Ltd. v. Deputy Commr. Of Income Tax, 2022 SCC OnLine ITAT 33, decided on 4-1-2022]

Case BriefsSupreme Court

Supreme Court: The Division Bench of Hemant Gupta* and V. Ramasubramanian, JJ., held that revenue record is not a document of title. The Bench expressed,

“Even if the name of the lessee finds mention in the revenue record but such entry without any supporting documents of creation of lease contemplated under the Forest Act is inconsequential and does not create any right, title or interest over 12 bighas of land claimed to be in possession of the lessee as a lessee of the Gaon Sabha.”

A notification dated 11-10-1952 was issued under Section 4 of the U.P. Zamindari Abolition and Land Reforms Act, 1950 by Uttar Pradesh government to the effect that an area of 162 acres in Village Kasmandi Khurd shall not vest with the Gaon Samaj and, accordingly all rights, title and interest of all intermediaries including the forest had vested in the State of Uttar Pradesh by that notification. Subsequently, on 23-11-1955, by a notification, the said land was declared as Protected Forest under Section 4 Indian Forest Act, 1927.

However, the local management committee (Gaon Sabha) had put the lessees into possession of land in question which was challenged by the Forest Department. Though, the Additional Commissioner, Lucknow decided the issue in favour of Forest Department, that order was set aside by the High Court of Allahabad.

Can a land be declared Protected Forest without mentioning its details in the notification?

The respondent-lessee argued that the details of land in respect of which notification under Section 4 of the Forest Act was issued were not mentioned, except providing the total area measuring 162 acres, hence the notification was vague and did not comply with the conditions specified in Section 4 of the Forest Act and it was only in the proclamation published under Section 6 of the Forest Act that the details of land (Khasra No. 1576) was mentioned.

Rejecting the contentions raised by the lessee, the Bench opined that it would be sufficient to describe the limits of the forest by roads, rivers, ridges or other well-known or readily intelligible boundaries, as done by the notification dated 23-11-1955, by mentioning that the land measuring 162 acres would constitute forest land. The Bench observed,

The notification dated 23.11.1955 has the boundaries on all four sides mentioned therein. There is no other requirement under Section 4 of the Forest Act. It is only Section 6 of the Forest Act which needs to specify the situation and limits of the proposed forest.”

Noticeably, in terms of clause (a) of Section 6 of the Forest Act, the details of khasra numbers which were part of 162 acres found mention in the proclamation so published. Therefore, the Bench held that statutory procedural requirements were satisfied.

Is final notification under S. 20 necessary for acquisition of land declared as Protected Forest?

Disagreeing with the argument of the respondent that the final notification under Section 20 of the Forest Act was necessary, the Bench observed that Section 20 of the Forest Act does show that for a reserved forest, there is a requirement of publication of notification but no time limit is prescribed for publication of such notification under Section 20. Therefore, even if notification under Section 20 of the Forest Act had not been issued, by virtue of Section 5 of the Forest Act, there is a prohibition against acquisition of any right over the land comprised in such notification except by way of a contract executed in writing by or on behalf of the Government. Since no such written contract was executed by or on behalf of the State or on behalf of the person in whom such right was vested, therefore, the Bench held that the Gaon Sabha was not competent to grant lease in favour of the appellant.

Calling the findings of the High Court that since no objections were filed by the Forest Department earlier, the objections would be barred by Section 49 of the Consolidation Act, clearly erroneous, the Bench clarified,

“The land vests in the Forest Department by virtue of notification published under a statute. It was the lessee who had to assert the title on the forest land by virtue of an agreement in writing by a competent authority but no such agreement in writing has been produced.”

Therefore, the Bench held that the lessee would not be entitled to any right only on the basis of an entry in the revenue record. Accordingly, the order of the High Court was held to be not sustainable in law and the same was set aside.

[Prabhagiya Van Adhikari Awadh Van Prabhag v. Arun Kumar Bhardwaj, 2021 SCC OnLine SC 868, decided on 05-10-2021]


Kamini Sharma, Editorial Assistant has put this report together 


Appearance by:

For Department of Forest: Advocate Kamlendra Mishra

For the Respondent: Advocate Aftab Ali Khan

For Gaon Sabha: Advocate Mr. Hooda

*Judgment by: Justice Hemant Gupta

NGT
Case BriefsTribunals/Commissions/Regulatory Bodies

National Green Tribunal (NGT): The Bench of Justice Adarsh Kumar Goel (Chairperson) and Justice Sheo Kumar Singh (Judicial Member) and Dr Satyawan Singh Garbyal and Dr Nagin Nanda (Experts Member) addressed an issue with regard to illegal sand mining and permitting the same by authorities concerned.

Issue for Consideration?

Remedial action against illegal mechanical sand mining on the river bed of River Yamuna and construction of a temporary bridge with hume pipes at Shamli, Uttar Pradesh.

Tribunal had earlier considered the above-stated issue in light of the joint committee report to the effect that illegal mining was being done. Remedial action was also directed against which the entity carrying on mining approached the Supreme Court by way of appeal but the same was dismissed on 13-11-2019.

Tribunal in its Order dated 28-11-2019 noted the remedial action taken by way of levy of compensation and revocation of Environmental Clearance (EC) had been taken.

State of U.P.

On 05-03-2020, a statement was made on behalf of the State of U.P that mining had been permitted by subsequent orders as the entity had adopted safeguards like installing CCTV Cameras etc.

District Magistrate had filed a report wherein it was found that as per inspection conducted, the lessee was found doing illegal mining beyond the mining lease area and as per the mining regulations compensation was assessed with reference to the rate of royalty. Thereafter, the lessee has still been allowed to continue even though compensation has still not been paid on the ground that an appeal is pending even though there is no stay.

Decision

Tribunal was surprised that even after finding illegal mining the lessee was allowed to continue without any coercive measure and even without recovering the assessed compensation which is against the rule of law and arbitrary.

Bench held that the Collusion of authorities allowing such action is not ruled out which needs to be looked into by higher authority concerned. 

Calculation for illegal mining is not based on settled principles which require compensation to be assessed not merely to recover loss of royalty but also for the loss to the environment. The compensation must be thus revised. The lessee may be required to bear the cost of restoration of the area where mining was done illegally.

Further, authorities may consider revoking of Environment Clearance in favour of a violator but no case of mining should be allowed without prior payment of the entire assessed compensation.

The above-stated aspects shall be looked into by a joint committee of the State PCB and the District Magistrate.

Matter to be listed on 24-02-2021. [Sandeep Kharb v. Ministry of Environment Forests & Climate Change, 2020 SCC OnLine NGT 857, decided on 29-10-2020]

Op EdsOP. ED.

1. Chapter V (Sections 105 to 117) of the Transfer of Property Act, 1882[1] (for short ‘TPA’) embodies the provisions relating to the leases of immoveable property. Section 105 of TPA defines a lease as:

105. Lease defined.—  A lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.

Lessor, lessee, premium and rent defined.— The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent.”

2. The above definition of the lease under TPA postulates that besides other essential elements of a lease i.e. the parties being the lessor and the lessee; the subject-matter being an immoveable property; demise being a transfer of a right to enjoy; and the consideration being a price paid or promised being the premium or the rent, the time or the term or period of the said lease is an essential requisite of a valid lease. A valid lease may be granted for a certain time, express or implied, or in perpetuity. A lease which is silent as to the duration of its term will not be lease within the meaning of Section 105 of TPA.

3. The commencement of a lease must be certain or capable of being ascertained with certainty afterwards, so that both the time when it begins and the time when it ends, is fixed. A provision in the lease relating to duration thereof may be implied by law or usage. Even Section 106 of TPA, inter alia provides that in absence of a contract or local law or usage to the contrary, a lease of immoveable property for agricultural or manufacturing purposes shall be deemed to be lease from year to year and that a lease of immoveable property for any other purpose shall be deemed to be lease from month to month.

4. Section 107 of TPA provides as to how the leases of immoveable property shall be made in law. The said section reads as under:

107. Leases how made.— A lease of immoveable property from year to year, or for any term exceeding one year or reserving a yearly rent, can be made only by a registered instrument.

All other leases of immoveable property may be made either by a registered instrument or by oral agreement accompanied by delivery of possession.

Where a lease of immoveable property is made by a registered instrument, such instrument or, where there are more instruments than one, each such instrument shall be executed by both the lessor and the lessee:

Provided that the State Government may from time to time, by notification in the Official Gazette, direct that leases of immoveable property, other than leases from year to year, or for any term exceeding one year, or reserving a yearly rent, or any class of such leases, may be made by unregistered instrument or by oral agreement without delivery of possession.”

5. This section prescribing the procedure for making of a lease between the parties classifies them into two”

One, a lease of immoveable property from year to year, or for a term exceeding a year, or lease reserving a yearly rent, can only be made by a registered document; and

Second, all other leases other than the above, can either be made by registered instrument, or the said lease to be made by an oral agreement accompanied by delivery of possession.

6. Therefore, it is manifest that all the leases of immoveable property not covered in the second classification shall have to be necessarily made by a registered document only. Needless to state that all the leases not covered by the first above have to be made either by registered document or by an oral agreement accompanied by delivery of possession.

 Effect of non-registration

7. Section 17(1)(d) of the Registration Act, 1908[2] provides that leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent have to be necessarily registered.

8. Section 49 of the same Act, inter alia provides that no instrument which is compulsorily required to be registered shall affect any immovable property comprised therein, or confer any power to adopt, or be received as evidence of any transaction affecting such property or conferring such power, unless it has been registered. However, an unregistered document affecting immovable property and required by the Registration Act or the TPA to be registered, may be received as evidence of any collateral transaction not required to be effected by registered instrument.

9. As already noted, period of tenancy is an essential requisite of a valid lease. Therefore, an unregistered lease deed cannot be looked into for purposes of period of tenancy. It thus follows that in respect of the leases classified in One under Section 106 TPA which require compulsory registration for making of a lease in law under Section 107 of TPA and is not so registered, the said instrument cannot be used for the purpose of establishing that it created, declared, assigned, limited or extinguished any right to the property comprised in the said document, and the said document will only create a month to month tenancy or year to year depending upon the purpose thereof. Therefore, if Sections 106 and 107 TPA are read accordingly, there shall be no conflict between the two.

10. The Calcutta High Court in the decision reported as Debendra Nath Bhowmick v. Syama Prosanna Bhowmick[3],  laid down the following dicta:

 “Then assuming that this case is governed by the Transfer of Property Act, I should like to notice the argument that because an annual rent was mentioned, the tenancy must be taken to be a yearly one. The lease was not for agricultural or manufacturing purposes and therefore must, in the absence of a contract to the contrary, be deemed to be a tenancy from month to month. It is said here that there was such a contract, for a yearly tenancy is to be implied from the mention of an annual rent. But when Section 106 speaks of a contract I think it means a valid contract. But in the present case there is no such contract and under Section 107 a lease such as is argued, for in this appeal can only be created by a registered instrument and there is none here. The notice was therefore sufficient so far as the tenancy is concerned.”

 11. Whether tenancy of immovable property for any purpose other than agricultural or manufacturing created by an unregistered instrument would be deemed to be ‘month to month’ tenancy even where the tenant has paid annual/yearly rent to the landlord has been answered in a three-Judge Bench decision of the Supreme Court reported as Ram Kumar Das v. Jagdish Chandra Deo[4]. The facts of said case were that the landlord had not executed a registered instrument for lease of land in favour of tenant. The tenancy created was neither for agricultural or manufacturing purpose. On two occasions, the tenant had tendered annual rent to the landlord. The landlord had terminated the tenancy by giving 15 days’ notice in terms of the second paragraph of Section 106 of TPA by treating the tenancy as from month to month. The question which had arisen before the Supreme Court was whether the tenancy was a monthly tenancy as treated by the landlord or a yearly tenancy since the tenant had paid annual rent to the landlord. It was argued on behalf of the tenant that in view of the fact that rent paid by the tenant was annual rent, it can be inferred that the intention of the parties was certainly not to create monthly tenancy but yearly tenancy, which argument was negatived by the Court in the following terms:

“….It is conceded that in the case before us the tenancy was not for manufacturing or agricultural purposes. The object was to enable the lessee to build structures upon the land. In these circumstances, it could be regarded as a tenancy from month to month, unless there was a contract to the contrary. The question now is, whether there was a contract to the contrary in the present case? Mr. Setalvad relies very strongly upon the fact that the rent paid here was an annual rent and he argues that from this fact it can fairly be inferred that the agreement between that parties was certainly not to create a monthly tenancy. It is not disputed that the contract to the contrary, as contemplated by Section 106 of the Transfer of Property Act, need not be an express contract; it maybe implied, but it certainly should be a valid contract. If it is no contract in law, the section will be operative and regulate the duration of the lease. It has no doubt been recognised in several cases that the mode in which a rent is expressed to be payable affords a presumption that the tenancy is of a character corresponding thereto. Consequently, when the rent reserved is an annual rent, the presumption would arise that the tenancy was an annual tenancy unless there is something to rebut the presumption. But the difficulty in applying this rule to the present case arises from the fact that a tenancy from year to year or reserving a yearly rent can be made only by registered instrument, as laid down in Section 107 of the Transfer of Property Act (vide Debendra Nath v. Syama Prosanna[5]. The Kabuliyat in the case before us is undoubtedly a registered instrument but ex concessis it is not an operative document at all and cannot consequently fulfil the requirements of Section 107 of the Transfer of Property Act.

  1. This position in fact is not seriously controverted by Mr. Setalvad; but what he argues is that a lease for one year certain might fairly be inferred from the payment of annual rent, and a stipulation like that would not come within the mischief of Section 107 of the Transfer of Property Act. His contention is that the payment of an annual rent, as was made in the present case, is totally inconsistent with a monthly lease. We are not unmindful of the fact that in certain reported cases, such inference has been drawn. One such case has been referred to by Reuben, J. in his judgment [Aziz Ahmad v. Alaudd in Ahmad[6] , where reliance was placed upon an earlier decision of the Calcutta High Court (Md. Moosa v. Jaganund[7])]. A similar view seems to have been taken also in Matilal v. Darjeeling Municipality[8].
  2. But one serious objection to this view seems to be that this would amount to making a new contract for the parties. The parties here certainly did not intend to create a lease for one year. The lease was intended to create a lease for one year, but as the intention was not expressed in the proper legal form, it could not be given effect to. It is one thing to say that in the absence of a valid agreement, the rights of the parties would be regulated by law in the same manner as if no agreement existed at all; it is quite another thing to substitute a new agreement for the parties which is palpably contradicted by the admitted facts of the case.
  3. It would be pertinent to point out in this connection that in the second appeal preferred by the plaintiff against the dismissal of his earlier suit by the lower appellate court, the High Court definitely held that the defendant’s tenancy was one from month to month under Section 106, Transfer of Property Act, and the only question left was whether payment to the Receiver amounted to payment to the plaintiff himself. In this suit the defendant admitted in his written statement that payment to the Receiver had the same effect as payment to the plaintiff, and the trial Judge took the same view as was taken by the High Court on the previous occasion, that by payment too and acceptance of rent by the Receiver, the defendant become a monthly tenant under Section 106, Transfer of Property Act. In his appeal before the District Judge which was the last court of facts, the only ground upon which the defendant sought to challenge this finding of the trial Judge was that the Receiver was an unauthorised person because of the decision of the Judicial Committee which set aside his appointment and consequently acceptance of rent by such person could not create a monthly tenancy. This shows that it was not the case of the defendant at any stage of this suit that because one year’s rent was paid a tenancy for one year was brought into existence. We think, therefore, that on the facts of this case it would be quite proper to hold that the tenancy of the defendant was one from month to month since its inception in 1924. This view finds support from a number of reported cases (vide Debendra Nath v. Syama Prasanna[9] ; Sheikh Akloo v. Emaman[10]), and in all these cases the rent payable was a yearly rental. On this finding no other question would arise and as the validity of the notice has not been questioned before us, the plaintiff would be entitled to a decree in his favour. The appeal thus fails and is dismissed with costs.”

 12. The effect of a compulsorily registrable lease, if not registered, was also explained by the e Delhi High Court in Deluxe Dentelles Pvt. Ltd. v. Ishpinder Kochhar[11] as under:

“21. A lease granted for any purpose, be it residential, commercial, manufacturing or agricultural, can be made only by a registered instrument if duration of the lease is for the period stated in the first paragraph of Section 107 of the Transfer of Property Act, 1882. But, a lease for the same purpose(s) of a lesser duration can be made, under the second paragraph, either by a registered instrument or by an oral agreement accompanied by delivery of possession.

  1. If one looks to Section 106 of the Transfer of Property Act it becomes evident that the classification of leases is according to their purpose. Section 106 classifies leases of immovable property for agricultural and manufacturing purposes in one class and all other leases in different class.
  2. Sub-section (1) of Section 106 is a deeming provision as per which, in the absence of a contract or local law or usage to the contrary, a lease of immovable property for agricultural or manufacturing purposes shall be deemed to be a lease from year to year. Thus, where the parties have themselves indicated the duration of the lease relatable to agricultural or manufacturing purposes, sub-section (1) of Section 106 o f the Transfer of Property Act would be redundant. This is evident from the fact that sub-section (1) of Section 106 operates only “in the absence of a contract…..to the contrary”.
  3. Pertaining to leases, excluding leases for agricultural or manufacturing purposes, the legal fiction created in the second paragraph of sub-section (1) of Section 106 is to deem the leases to be from month to month. Of course, this deeming provision would also be ‘in the absence of a contract….to the contrary’.
  4. In the present case, the defendants have admitted the jural relationship of landlord and tenant between the plaintiff and Defendant 1. As per both plaintiff and defendants, Defendant 1 was inducted as a tenant in the suit premises by virtue of unregistered lease-deed dated November 21, 1999 for a period of eleven years and eleven months.
  5. The case (defence) set up by the defendants is that notwithstanding the fact that the lease-deed dated November 21, 1999 executed between the parties is an unregistered document, the tenancy of Defendant 1was not from month to month but for a period of eleven years and eleven months with an option to Defendant 1 to renew the lease by another period of eleven years inasmuch as Defendant. 1 had paid rent in advance to Ms. Neeta Mehra, erstwhile owner of the suit premises for a period of fourteen years approximately at the time when it was inducted in the suit premises.

                *                           *                      *

  1. In view of afore-noted authoritative pronouncement of law laid down by Supreme Court in Ram Kumar’s case (supra), the answer to the question posed above is: tenancy of immovable property for any purpose other than agricultural or manufacturing created by an unregistered instrument would be deemed to be ‘month to month’ tenancy even where the tenant has paid annual/yearly rent to the landlord.

  2. As a necessary corollary thereof, the tenancy of Defendant 1 in suit premises is deemed to be ‘month to month’ tenancy which could be terminated by giving 15 days’ notice. (We again note here that Defendant 1 has admitted the receipt of legal notice dated May 03, 2010 issued by the plaintiff terminating the tenancy of Defendant 1).” 

13. The Supreme Court in Park Street Properties (Pvt.) Ltd. v. Dipak Kumar Singh[12], held as under:

“9. A perusal of Section 106 of the Act makes it clear that it creates a deemed monthly tenancy in those cases where there is no express contract to the contrary, which is terminable at a notice period of 15 days. The section also lays down the requirements of a valid notice to terminate the tenancy, such as that it must be in writing, signed by the person sending it and be duly delivered.

11. It is also a well-settled position of law that in the absence of a registered instrument, the courts are not precluded from determining the factum of tenancy from the other evidence on record as well as the conduct of the parties…” 

14. The High Court of Delhi in  Sanjay Gupta v. Krishna Hospitality[13] , observed as under:

“11. Per Section 107 of the Transfer of Property Act, 1882, a lease of immovable property for any term exceeding one year can be made only by a registered instrument and all other leases may be made either by registered instrument executed by the lessor and lessee or by oral agreement accompanied with delivery of possession. The defendants in their written statement have pleaded lease agreement dated 23rd November, 2015, for a period of three years, executed by plaintiff and defendants and where under claim to be entitled to occupy premises till 31st October, 2018. The same is not registered and is admitted to be not registered. The same thus, under Section 49 of Registration Act, 1908, cannot be received in evidence of any transaction effecting such property. Per Section 106 of Transfer of Property Act, in the absence of registered lease deed, a lease of immovable property for any purpose other than agricultural or marketing, is deemed to be a lease from month to month, terminable by a fifteen days’ notice…”

15. The principle was reiterated by the Supreme Court in Sevoke Properties Ltd. v. West Bengal State Electricity Distribution Company Ltd.[14],  when it observed as under:

“13. In terms of the provisions of Section 107, a lease of immovable property for a term exceeding one year can only be made by a registered instrument.  Admittedly, in the present case, the indenture of lease has not been registered. In consequence, the contents of the indenture would be inadmissible in evidence for the purpose of determining the terms of the contract between the parties. This is the plain consequence of the provisions of Sections 17 and 49 of the Registration Act, 1908. The only purpose for which the lease can be looked at is for assessing the nature and character of the possession of the respondent.”

 Renewal v. Extension of lease

16. An instrument of lease may contain a provision to the effect that on the expiry of the term of the lease, it is to be renewed or extended. Such a provision may not ipso facto renew or extend the term of the lease but it entitles the lessee to obtain a new lease in his favour after the expiry of the original term. The Supreme Court in its judgment in Hindustan Petroleum Corporation Ltd.   Dolly Das[15], observed as under:

“12…Covenant for renewal is not treated as part of terms prescribing the period of lease but only entitles a lessee to obtain a fresh lease…”

 17. Renewal and extension of lease are two different concepts. They are not defined in TPA. As per Webster dictionary, ‘to renew’ means ‘to make like new’or ‘to restore to existence’; and ‘to extend’ means ‘to stretch out to fullest length’.

18. The distinction between these two concepts has often been a subject of discussion and has been considered by the Supreme Court in its judgment titled as Provash Chandra Dalui. v. Biswanath Banerjee[16] , while observing as under:

“14. It is pertinent to note that the word used is ‘extension’ and not ‘renewal’. To extend means to enlarge, expand, lengthen, prolong, to carry out further than its original limit. Extension, according to Black’s Law Dictionary, means enlargement of the main body; addition to something smaller than that to which it is attached; to lengthen or prolong. Thus extension ordinarily implies the continued existence of something to be extended. The distinction between ‘extension’ and ‘renewal’ is chiefly that in the case of renewal, a new lease is required, while in the case of extension the same lease continues in force during additional period by the performance of the stipulated act.”

19. The distinction between the said two concepts was reiterated by the Supreme Court in the judgment of State of U.P.   Lalji Tandon[17], in the following words:

“13….There is a difference between an extension of lease in accordance with the covenant in that regard contained in the principal lease and renewal of lease, again in accordance with the covenant for renewal contained in the original lease. In the case of extension it is not necessary to have a fresh deed of lease executed; as the extension of lease for the term agreed upon shall be a necessary consequence of the clause for extension..”

 20. This distinction was reiterated by the High Court of Delhi in  Aggarwal and Modi Enterprises (Cinema Project) Pvt. Ltd.   New Delhi Municipal Council[18].

21. Reiterating the distinction between the two concepts, as enunciated in Provash Chandra Dalui and Lalji Tandon (supra), the Supreme Court in its judgment titled as Hardesh Ores Pvt. Ltd. v. Hede and Company[19],  observed as under:

“25. Having regard to these decisions we must hold that in order to give effect to the renewal of a lease, a document has to be executed evidencing the renewal of the agreement or lease, as the case may be, and there is no concept of automatic renewal of lease by mere exercise of option by the lessee. It is, therefore, not possible to accept the submission urged on behalf of the appellants-plaintiffs that by mere exercise of option claiming renewal, the lease stood renewed automatically and there was no need for executing a document evidencing renewal of the lease.”

 22. The High Court of Calcutta in the judgment of Renuka Seal  Sabitri Dey[20]  has made distinction between the concepts of renewal and extension of lease in the following words:

 “24…”To extend” means to enlarge, expand, lengthen, prolong to carry out further than its original limit. In other words, “extension” means enlargement of the main body; addition of something smaller than that to which it is attached; to lengthen or prolong. Thus, extension ordinarily implies the continued existence of something to be extended. But “renewal of lease” means creation of a new lease which creates a fresh right and obligation between the contracting parties. Thus, once a renewed lease comes within the scope of Section 107 of the Transfer of Property Act, such a lease can be made only by registered instrument…

32…when renewal is effected by a bilateral process on fresh terms and conditions to be settled between the parties after the expiry of the original lease period, it creates a new lease creating fresh relationship between the parties and under such circumstances it requires registration of a deed for renewal of lease.

33. The extension of lease, however, can be made through an unilateral process,inasmuch as, such extension is made on the option of one of the parties to the lease, as the party on the other part had and/or has no option but to accept the option for renewal exercised by the said party and to extend the said lease as per the provisions contained in the original registered lease deed.”

 23. It is thus clear that a clause in the instrument of lease either for renewal or for extension of lease is its important term and therefore, it has to be clear and specific, so as to enable the Court to ascertain the same. In case of uncertainty or ambiguity in the terms and conditions of the lease, whether there is an option clause for renewal or extension of lease, has to be determined reading all other covenants of lease as also the other evidence on record, so as to determine the intention of the parties.

Procedure of Renewal

24. The renewal of a lease is a privilege and the same is required to be done within the time limited and in the stipulated manner as provided in the lease for the said purpose. In the celebrity case of Caltex (India) Ltd. v. Bhagwan Devi Marodia[21], the Supreme Court held as under:

“4. At common law stipulations as to time in a contract giving an option for renewal of a lease of land were considered to be of the essence of the contract even if they were not expressed to be so and were construed as conditions precedent. Equity followed the common law rule in respect of such contracts and did not regard the stipulation as to time as not of the essence of the bargain. As stated in Halsbury’s Laws of England, 3rd Edn., Vol. 3, Art. 281, p. 165 : “An option for the renewal of a lease, or for the purchase or re-purchase of property, must in all cases be exercised strictly within the time limited for the purpose, otherwise it will lapse.” This passage was quoted with approval by Danckwerts L. J. in Hare v. Nicoll[22]. A similar statement of law is to be found in Foa’s General Law of Landlord and Tenant, 8th Edn., Article 453, p. 310, and in Hill and Redman’s Law of Landlord and Tenant, 14th Edn., p. 54. The reason is that a renewal of a lease is a privilege and if the tenant wishes to claim the privilege he must do so strictly within the time limited for the purpose.

  1. With regard to equitable relief against the failure of the tenant to give notice of renewal within the stipulated time, the law is accurately stated in Halsbury’s Laws of England, 3rd Edn., Vol. 23, p. 626, Article 1329, footnote (u) thus :”Relief will not be given in equity against failure to give notice in time, save under special circumstances. The decided cases show that in such cases relief is not given in equity save upon the ground of unavoidable accident, fraud, surprise, ignorance not wilful or inequitable conduct on the part of the lessor precluding him from refusing to give the renewal. The limits of the equitable interference in such cases were clearly stated by the Master of the Rolls (Sir R. P. Arden) in Eaton v. Lyon[23] . He observed:

“At law a covenant must be strictly and literally performed; in equity it must be really and substantially performed according to the true intent and meaning of the parties so far as circumstances will admit; but if unavoidable accident, if by fraud, by surprise or ignorance not wilful, parties may have been prevented from executing it literally, a Court of Equity, will interfere; and upon compensation being made, the party having done everything in his power, and being prevented by means, I have alluded to, will give relief … I decide this case upon the principles on which, Lord Thurlow decided (Bayley v. The Corporation of Leominster 1792, 1 Ves. 476), and I hope now, it will be known, that it is expected, these covenants shall be literally performed where it can be done; and that equity will interpose, and go beyond the stipulations of the covenant at law, only where a literal performance has been prevented by the means, 1 have mentioned, and no injury is done to the lessor.”

6. We are of the opinion that the stipulation as to time in Clause 3(c) of the indenture of lease dated February 17, 1954 should be regarded as of the essence of the contract. The appellant not having exercised the option of renewal within the time limited by the clause is not entitled to a renewal.”

25. This principle was reiterated by the Delhi High Court in its judgments titled as Frankfinn Aviation Services Pvt. Ltd. v. B.C. Gupta[24]; Punchip Associates P. Ltd. S. Rajdev Singh[25]; Jagdish Gupta v. The State Trading Corporation of India Ltd.[26]; and MGR Holding (P) Ltd. v Loil Overseas Foods Ltd.[27].

26. It, therefore, follows that if the original registered lease deed contained an option clause for renewal, it has to be exercised strictly in accordance with the terms thereof, to be followed by execution and registration of a fresh lease deed in accordance with Section 107 of TPA, failing which the lessee cannot claim renewal of the lease or to continue in possession of the premises as a lawful lessee. The lessee continuing in possession without actual renewal only becomes a tenant holding over under a month to month tenancy, determinable by a notice in accordance with Section 106 of TPA.


*Advocate and a qualified Chartered Accountant. Author is currently a Senior Associate in Dispute Resolution Practice at L&L Partners Law Offices, New Delhi. Author’s views are personal.

[1] Transfer of Property Act, 1882

[2] Registration Act, 1908

[3] 1906 SCC OnLine Cal 83

[4] 1952 SCR 269

[5] 1906 SCC OnLine Cal 83

[6] 1933 SCC OnLine Pat 55

[7] 20 IC 715

[8] 17 CLJ 167

[9] 1906 SCC OnLine Cal 83

[10] 1916 SCC OnLine Cal 39

[11] 2015 SCC OnLine Del 14507 

[12] (2016) 9 SCC 268

[13] 2018 SCC OnLine Del 8942

[14] 2019 SCC OnLine SC 592

[15] (1999) 4 SCC 450

[16] 1989 Supp (1) SCC 487

[17] (2004) 1 SCC 1

[18] 2005 SCC OnLine Del 898

[19] (2007) 5 SCC 614 

[20] 2007 SCC OnLine Cal 501

[21] (1969) 2 SCR 238

[22] [1966] 2 QB 130 

[23] 3 Ves. Jun. 690:30 E.R. 122

[24] 2007 (9) AD (Delhi) 449

[25] 2011 SCC OnLine Del 131 

[26] 2012 SCC OnLine Del 3315 

[27] 2015 SCC OnLine Del 11953

Case BriefsHigh Courts

Karnataka High Court: A Division Bench comprising of B.V. Nagarathna and Jyoti Mulimani, JJ. reversed a 1993 order, holding that all titles, rights and interests of the Koladamatt over the land in question had been extinguished by a government notification which vested the land in the State Government following the Mutt’s failure to make an application to get registered as an applicant.

The land had been leased to the appellant in 1967 to run an automobile industry, with permission to put up structures on the land. The land in question is a part of a larger extant of land which was granted as a minor inam to the Mutt in 1897. However, a government notification dated 04.04.1970 notified 01.07.1970 as the date for vesting all inam lands in the State Government, following which the appellant made an application for registration of occupancy rights that was granted in an order dated 1.9.1984. The Mutt challenged this before a single judge of the High Court who allowed its writ petition and set aside the Land Tribunal’s 1984 order, and that decision had been challenged in the instant writ appeal.

The appellant contended that the Mutt lost all rights, interests and title in the land since it did not make an application for getting itself registered as an occupant as required by the Act. Therefore, they claimed that since the Mutt is not aggrieved by the Land Tribunal’s order, it does not have the locus standi to file the writ petition.

The Court observed that upon the vesting of all inam lands in the State Government, certain rights were reserved in the inamdars and tenants, but since the Inamdar did not make an application under the Act, it did not seek to claim any right or privilege under the Act since the former is sine qua non for the latter. Since the Mutt failed to file an application, all its rights under the Act stand extinguished. The Mutt had the right to raise contentions against the appellant’s application before the Tribunal and to that narrow extent, it could file a writ petition, but it otherwise had no locus standi to file the writ petition since it was not an aggrieved party and would derive no benefit from itself. The Bench also stated that the single judge erred in holding that the Act is applicable only to agricultural lands, since it could apply to non-agricultural lands such as uncultivated lands as well.

Since there was a subsisting lease of the land in question on the date of vesting and its possession was with the tenant i.e., the appellant, the holder would be the appellant and not the Mutt. Possession of inam land in the hands of the tenants despite the vesting of the land in the State Government is to confer certain rights and benefits upon them under the Act, and “the Government shall not dispossess any person of any land in respect of which he is considered prima facie entitled to be registered as an occupant.” It found that the Mutt cannot be the occupant of the private building/structures constructed on the land, and it would vest in the person who owned it immediately before the date of vesting i.e., in the appellant.

Court, therefore, stated that the lessee/appellant is entitled to registration of occupancy rights and the Mutt couldn’t claim any benefit under the Act. It set aside the order by the single judge and allowed the writ appeals.[S. M. Kannappa Automobiles v. Koladamatt Mahasamsthana, 2020 SCC OnLine Kar 964, decided on 29-07-2020]

COVID 19Op EdsOP. ED.

The financial stability of the aviation industry has been severely crippled due to COVID-19 pandemic. As the “big bird” is an expensive affair, most of the aviation industries resort to take aircrafts on lease rather than purchasing them. Across the globe, nearly 70% of the air fleets are grounded, which has hampered their ability to satisfy their obligations[1] and fulfil the requisites stipulated under aircraft lease agreements. Further, the decline in passenger revenue and demand which is also expected to mitigate by USD 8.8 billion and 36% respectively[2], together with various other taxes, levies and aeronautical charges, have created a burden on the lessee forcing them to file for bankruptcy. For escaping this liquidity crunch one may argue to bring in the “Force Majeure” or “Doctrine of Frustration” or “illegality clause”. But as far as the aviation industry is concerned, the above-mentioned tenets have a very little say. It is due to the general practice of incorporating “hell and high water clause” (herein referred to as ‘HOHW’) in aircraft lease agreements. The HOWH clause will play a pivotal role for understanding the implications of COVID-19 on the aviation industry as this clause renders the lessee unconditionally and entirely responsible for payment of the rent, irrespective of the unforeseen circumstances which have affected the airline’s operations. The authors in this article will ponder upon various facets of HOWH clause in tandem with other provisions of contract. Further, emphasis will be laid upon the extent to which the clause is enforceable. Lastly, suggestions and futuristic approach for the lessee will be dealt with.

 INTERPLAY BETWEEN VARIOUS TENETS OF CONTRACT LAW AND   HOWH CLAUSE

In India, most of the aircraft lease agreements are governed by common law. It is pretty evident to apply common law, especially, English Law, for regulating the lease agreement. The only thing worth noting is that the rights arising out of the lease, which the parties are trying to enforce through English Law should not be in derogation with the public policy or any other law of India[3]. As per the current standards, the lease agreements are characterised by two principal features. The first principle feature is the delivery of the aircraft in ‘as is, where is’ basis whereas the second feature relates to the ‘HOWH’. Both the features when clubbed together leave the lessee helpless in situations such as Covid-19, where the fulfilment of obligations is severely curtailed. However, there are certain tenets of contract which may act as a safe haven for the contracting parties.

Under the contract law, force majeure is a provision which makes the performance of a contract impossible and absolves the party from non-performance of contractual obligations which is caused by circumstances or events out of the parties’ control. If an aircraft lease has incorporated force majeure—which in itself would be rare—then the corona virus pandemic could eventually qualify as a force majeure event. It is important to note that the relevancy of this tenet is dependent upon its express mention in a lease agreement; no automatic or implied assumption of force majeure is permissible. Therefore, it is highly unlikely that a court would impliedly infer force majeure in an aircraft lease where the parties had not expressly provided for one. The aircraft leases are typically  HOWH agreements which further overshadow the invocation of force majeure making its imposition even less likely.

Alternatively the lessee can invoke the Doctrine of Frustration emphasising upon the fact that grounding of aircraft fleet due to the orders of the government has made the performance of the contract impossible. As per the doctrine, if some unforeseen circumstance occurs during the performance of a contract which makes it impossible to perform, in the way that the fundamental basis of the contract requires, it need not be further performed, as insisting upon such performance would be unjust [4].

The bar or the threshold for claiming Doctrine of Frustration has been kept very high which could be a problematic contention to make for the airlines, therefore the fact that COVID-19 has made a dent upon the stability of many business entities would not, by itself, frustrate a contract[5] to which that entity was a party.

Another potential alternative for the airline companies can be “price negotiation” clause or the “illegality event” clause. The former clause is not much in practice under the English Law governed contracts due to the general principle[6] that an agreement to agree is not enforceable. However, if the parties have included the price negotiation clause in their contract, then it can certainly be a relief for the airlines as a mishap of COVID-19 will definitely fall under it.

Under the latter clause, the illegality is occurred due to change in law or any scenario for that matter by the government intervention, which makes the performance of the contract impossible for the lessee. In the current scenario, the standard operation of flying aircraft has been changed due to the pandemic; the obligation of the lessee towards the lessor of paying rent has not been affected. Accordingly, this pandemic is, therefore, unlikely to fall under the definition of an “illegality event” or constitute a “change in law”.[7]

It is now pretty evident that the  HOWH is rigid, in comparison to other tenets of contract, leaving the lessee helpless.

ENFORCEABILITY OF THE HIGH AND HELL WATER CLAUSE

It is a well-confirmed postulation of common law that HOWH place an absolute, irrevocable and unconditional obligation on the lessee to make the necessary lease payments, notwithstanding the happening of any circumstance of any nature whatsoever[8]. In Olympic Airlines v. ACG[9], the rigidity of the clause was further strengthened by the court after stating that the risks which are inherent in the aircraft lease have to be borne by the lessee and the clause will forbid him to claim force majeure or frustration of contract.

The flexibility of the clause is not apparent prima facie, due to the rigid meaning to the clause. However, flexibility in the clause can be inferred from different views of courts wherein some have restricted the application of the clause whereas, some have sustained it. In Equitex, Inc. v. Ungar[10], the Court disregarded the HOWH and held that permitting the hindering party to benefit from its intentional or wilful wrongful act would violate public policy and thereby will be unenforceable.

On the other hand, the HOWH clause was enforced against a lessor of copiers whose equipment was damaged when Hurricane Sandy flooded FPL’s Long Island offices. The Court, in this case, rejected the argument that the lessee could not have assumed the risk of loss because Hurricane Sandy was not reasonably foreseeable, concluded that “the contract explicitly assigns to the assessed risk of loss from ‘any cause whatsoever’ and requires FPL to make monthly payments regardless of whether the copiers get damage.”[11]

SOLUTIONS TO THE PRESENT STATE OF AFFAIRS

It is well within the fundamental principle of contract to have an entitlement of being paid. However, if the liquidity of the lessee (airline) is crippled it will not be in the interest or favour of the lessor to drive them against the wall. It must be kept in mind that many other industries depend upon the aviation[12] industry for their survival like travel and tourism; the stubbornness of the  HOWH clause can lead to the liquidation of many airlines causing a ripple effect. There are two options left for the contracting parties, the first one is to allow the lessee to commit default where the lessor will assume the possession of the aircraft in ‘as is, where is’ basis, whereas the second option is to renegotiate the payment obligations disregarding the clause and deferring the entire payment including inter alia a standstill for an agreed period along with an agreed repayment plan.

THE WAY FORWARD

The risk allocation of the aircraft operating leases is asymmetric in nature due to the fact that the obligations of lessors are limited in comparison to lessee. The extensive obligations of lessee to meet the payment under any circumstance further refute the scope of “rental holiday” by virtue of “HOWH” clause. Post-pandemic crisis, the parties (especially the lessee) should bear in mind to have some mechanisms in place which can be of assistance during such unforeseen events. The operating lease should be drafted in such a manner which can allow the airline to implement a consensual restructuring at times of distress. It should involve the rescheduling the debt which will have the potential of alleviating the liquidity pressure at times such as COVID-19 through Scheme of Arrangement or Company Voluntary Arrangement[13]. Further, price negotiation clauses can also act as potential option which will allow the contractual parties to competently set some temporary standards of transactions. At last the aviation industry have to learn aftermath the pandemic, that whether championing an airline at times of perturbation will improve their financial stability post the crisis or whether the benevolence of giving room for the lessee to survive was futile and accordingly should revamp their future as well as present leases.


*4th Year Student, Institute of Law, Nirma University, Ahmedabad

**4th Year Student, Dr. Ram Manohar Lohiya National Law University, Lucknow

[1] Global COVID-19 Airport Status  

[2] Livemint , “Over 20 lakh jobs at risk in Indian aviation, dependent sectors: IATA”

[3]Chambers and Partners, “Aviation Finance & Leasing 2019”, Nitin Sarin, Syed Tamjeed Ahmad, Ritesh Agarwal https://practiceguides.chambers.com/practice-guides/aviation-finance-leasing-2019/india

[4] Taylor v. Caldwell, [1863] EWHC QB J1

[5] Dentons, “Dentons Aircraft Finance Briefing on COVID-19 related frustration and force majeure issues

[6] Lexology, “Force Majeure in Aviation Contracts”, Winston & Strawn LLP – Ben Bruton, Daniel R. Meagher, Mark Moody and Alison Weal

[7] Lexology, “Navigating the terms of an Aircraft lease agreement amidst the COVID-19 pandemic”, Tay & Partners – Yip Jia Hui and Michelle Pauline Lim

[8] Rhythm Hues, Inc. v. Terminal Marketing Company, Inc., 01 Civ 4697 (DAB) (GWG) (SDNY May 4, 2004).

[9] Olympic Airlines v. ACG, [2013] EWCA Civ 369.

[10] P.3d 746, 750 (Colo. App. 2002

[11] In General Electric Capital Corp. v. F.P.L. Services Corp., 986 F Supp 2d 1029, 1036 (ND Iowa, 2013).

[12] The Hindu,“Will the aviation industry recover from the pandemic?”, Murali N. Krishnaswamy 

[13] CMS Law-Now, “COVID-19 Challenges for the Aircraft Leasing Industry