if the Magistrate passes an order in favor of the financial institution directing it to take over the physical possession of the building to recover the outstanding loan amount, the tenants of the premises, who were oblivious to all the legal battles between the landlord and the financial institution, would suffer immeasurably. The only option left to the tenant/lessee would be to approach the higher courts to remedy the situation.
In the case of Harshad Govardhan Sondagar v. International Assets Reconstruction Company Ltd and Ors., (2014) 6 SCC 1, the Supreme Court observed that the Magistrate would have to give notice and an opportunity of hearing to the person claiming to be the lessee of a secured creditor thereby following the Principles of Natural Justice. The Supreme Court also observed that only after examining the legitimacy of the lease/tenancy must the Magistrate pass the order in such cases.
In Sanjivkumar Surajprakash Aggarwal v. State Bank of India and Ors., (2016) 14 SCC 532, the Supreme Court directed that the Magistrate was to conduct an enquiry under Section 14 of the Act involving the Appellant in that case, the tenants, and that it would be fit and fair to adjudicate based on the Principles of Natural Justice.
Some of the aggrieved tenants/lessees in Karnataka approached the High Court where a similar situation had arisen. In the case of M/s Remco Software Pvt Ltd and Ors. v. HDB Financial Services Ltd and Ors., WP No 35597-601/2017 and 35602-604/2017, decided by a Single Bench comprising of Vineet Kothari, J., the above-mentioned precedents were relied upon and a judgment was passed in favor of the tenant reiterating their rights.
The Court made interesting observations and laid down precedents which are of high significance for those practicing in the courts of Karnataka -
- Notice to a tenant is a must
While exercising power under Section 14 of the Act, the learned Magistrate has erred in saying that a ‘notice need not be issued to the tenants’ and that Section 14 does not exclude the compliance of principles of Natural Justice.
- Confirm the validity of lease/tenancy
The Court went on to also state a disclaimer of sorts, by saying that it also becomes apparent to examine if it is a valid lease/tenancy and if it was created before or after the creation of mortgage. Stating further, that the tenants cannot be evicted directly without DRT expressing its opinion about the bona fides of such tenancy.
- Tenants have the right to be heard
Justice Kothari had rightly relied upon the judicial precedents and stated that the Magistrate must refrain from acting only on the affidavit of the banks but has to consider the rights of the borrowers to controvert the affidavit and that of the tenants of the premises are to be heard.
- Transfer of tenancy
However, in that event the auction purchasers are the ones who would have to step into the shoes of the landlord and take this due process of law and that the tenant cannot object to such proceedings against the defaulting borrower. It was also opined that the attornment of tenancy in favor of auction purchaser would be automatic under the Act and DRT can direct payment of rental to the bank.
The ratio laid down by the Remco case was followed in a later decision by the same Court in the case of Mahadevaiah v. Karur Vysya Bank and Ors., WP no. 32864/2017, and in a recent decision of Smt. Aravindamma v. Smt. K.S. Jayalakshmammanni, 2018 SCC OnLine Kar 530, thereby reiterating the position of law that tenants have a right to approach DRT under Section 17 of the SARFAESI Act.
The situation which was ambiguous regarding the status of tenancy has been cleared due to the latest amendment and the clarification by the courts - no more do the tenant has to pay for the dues of the landlord. The clarification and check and balances introduced will be very helpful tenants who are stuck between the tiff of their landlord and the bank.