This article has been written by Khan Saba, pursuing a Certificate course in Real Estate Laws from LawSikho. It has been edited by Prashant Baviskar (Associate, LawSikho) and Smriti Katiyar (Associate, LawSikho).
Every contract includes a system for dispute resolution as an important element of it. The contract or agreement presents a means of resolving a problem that may reasonably be expected. Arbitration, mediation, and conciliation are just a few of the well-known dispute resolution procedures.
Additionally, a lease agreement could include these Dispute Resolution Mechanisms, which are now legally binding, and if no such method is specifically named in the agreement, the dispute can be addressed through adjudication.
The question arises is there any dispute mechanism resolution available for lease or not? According to the Arbitration and Conciliation Act, 1996, there is no demarcation between as to what matters are arbitrable and which are non – arbitrable. But the apex court in many cases cleared, interpreted, and laid down certain tests and points to clear the confusion of it, for e.g. Four-Fold test laid down by the apex court.
What is Lease?
As described in section 105 of Transfer of Property Act, 1882 An agreement to lease property is a handover of the claim to use and benefit from the land for a stated amount of time, expressly or by implication, or in indefinite period, in exchange for a premium paid or vowed, or in concern of money, a percentage of crop production, facility, and every other valuable items, to be deemed at regular intervals or on defined periods to the lessee by the lessor, who acknowledges the handover on the terms agreed to by the lessor.
The terms lessee, lesser charge, and lease are defined. — The transferor is referred to as the lessor, the transferee is referred to as the lessee, the valuation is referred to as the premium, and the amount, portion, service, or other object to be supplied in exchange for the transfer is referred to as the rent. So, to brief it up, For the purposes of this definition, a lease is an agreement in which one party promises other side for right to use property or land in exchange for a fee and for a determined period, that is termed as both parties enter into a lease agreement, which outlines the terms and circumstances of the agreement between the two parties. The lessor is the person or entity that owns the leased premises or property. The lessee is the party who agrees to accept the subject premises.
- Unlike a leave and license arrangement, a lease establishes a stake in the property.
- Leases provide tenants complete ownership, whereas leave and license agreements merely allow them to use part of the premises.
- Leases aren’t revocable, but licenses are.
- The lessor does not have control over leases, whereas it does with licenses.
- Leases can be transferred, but not licenses.
- In contrast to licenses, a lease creates rights that can be passed down through generations.
- The selling of property to a third party does not impact a lease. Unlike with a license that terminates immediately upon transfer of ownership, it remains in effect while the property changes hands, and the buyer must wait until the amount of time specified in the lease agreement has expired before he can take possession.
- A lessee has the legal right to safeguard the property he or she is leasing. A licensee, on the other hand, has no legal standing to justify his or her ownership because he or she has no ownership interest in the land.
- Unlike a licensee, a lessee in respect of the land has the right to any changes or additions that are made to the property.
What are the possible disputes that may happen?
To understand what disputes may arise, we need to first understand the concept of Right in personam and Right in rem.
It implies that the right is available against the entire world, and that nobody has the authority to interfere with it. For example, say A owns a residence in which he has entire control over the property. He has a Right in Rem in regards to the residence, and no one has the authority to interfere with his ownership rights.
It indicates that the right that is accessible against the individual who is performing the task that is enforced upon only that one specific individual. Those who enter into an agreement are granted Rights in Persona under the Indian Contract Act. Consequently, the parties involved in the contract are only able to enforce their contractual rights against one another. As an illustration, C received a loan from A. The right to reclaim the money belongs alone to A, and not to the rest of the world collectively.
The most frequent and possible disputes that arise from it is Tenancy – Landlord dispute which is resolved through the medium mostly of arbitration the SC has given its view in many cases regarding the same for e.g.,
In Navrang Studios case, the Supreme Court of India remarked that the dispute between landlord and tenant is the matter of Right in Rem, and it concerns the general public, and as a result, the tenancy issues are not arbitrable and still the issue being that whether the disputes regarding the same are arbitral or not which will be further discussed by help of the Supreme court cases.
Why do we need a dispute mechanism?
The need for a dispute mechanism in lease started from the “Booz – Allen case” where it was stated that the disputes concerning removal and tenancy were not arbitrable. Generally speaking, leases are regulated by the Transfer of property Act, 1882 (often known as the “TOPA”). According to Section 8 of the Arbitration and Conciliation Act (“Act”), “even though there is a dispute settlement agreement between the two parties, and even though the conflict is encased by the arbitration clause, wherever the civil suit is subject to review will be reluctant for a provision of Section 8 of the Act, to pertain the arbitration proceedings if the source material of the suit is competent of being resolved through negotiation or mediation.”
Non-arbitrable disputes were classified into the following categories by the Judge:
i) rights and responsibility problems emerging out of felonious violations;
(ii) marital conflicts involving divorce, legal dissociation, compensatory damages of conjugal protections, and custody of children;
(iii) insolvency and closing down issues; and
(iv) eviction or eviction-related issues;
The court further interpreted and discussed the principle of Right in Rem and Right in persona which is discussed in aforementioned subheading. Explaining it further the court held that historically, all issues involving rights in personam have been arbitrable, but all disputes involving rights in rem must be decided by judicial and public forums because they are unsuitable to private arbitration. This isn’t, however, a hard and fast rule that can’t be bent. All challenges pertaining to inferior personal rights originating from superior real property interests have often been regarded as arbitrable.”
When it comes to lease agreements it is governed by special statutes like the Rent Control Act which differs state to state. However, there are contradictory rulings from various High Courts on the topic about whether lease agreements controlled by the TOPA can be subjected to arbitral proceedings, which is a tricky concern in the eye of law.
Landmark Judgement & key observation
The issue that emerged before the Apex Court in this case was that whether a conflict involving a mortgage should be resolved through arbitration or litigation. Specifically, an application was submitted under Section 8 of the Arbitration and Conciliation Act, which dealt with the redemption of the mortgage in this particular instance. While commenting on the issue, the apex Court went into greater detail on the idea of “arbitrability of conflicts,” including the breadth and essence of such a concept. The apex court went over three components of arbitrability that are related to the competence of the Adjudicating Authority in this instance. The court found that the fundamental concept is that every civil or business issue that can be resolved by a judiciary is in principle, accessible to arbitration, excluding those cases in which the authority of an arbitral tribunal is limited by legislation. In addition, it included a number of suggestions of non-arbitral problems, which included the relevant studies:
The following types of cases are heard in court:
- basic rights and responsibility issues arising from or relating to felonious offences;
- marital conflicts involving relationship breakdown, legal separation, compensatory damages of conjugal protections, custody of the children;
- guardianship conflicts;
- insolvency and winding-up disputes;
- intestate succession disputes; and
- eviction or tenancy landlord matters, which are controlled by special statutes of states in which the tenant is protected from forced removal and only the defined courts are granted jurisdiction to hear the matters.
The Apex Court has clarified that conflicts involving tenancy and eviction are not subject to arbitration. Moreover, according to the Highest Court, while tenancy issues are arbitrable under the Transfer of Property Act, some lease disputes that are governed by specialized tribunals have been granted authority to determine the particular rights of both the parties involved.
The ultimate word play regarding the dispute mechanism system was completed in this case ruling. Earlier decisions made it plain that landlord-tenant conflicts are not arbitrable under the law, as previously stated. Nevertheless, in this case, following a thorough discourse and a thorough recognition of all arguments, the Supreme Court examined the appropriateness of the margin established under the Himangini Enterprises as well as the verdicts on which it relied, namely, Nataraj Studio and Booz Allen, before reaching a decision. The Court established a four-fold test for determining whether the relevance of a dispute in an arbitration clause is arbitrable or not in order to resolve the issue. Non-arbitrable disputes are those in which the parties cannot come to a mutually agreeable resolution through arbitration. The four-fold test were as follows: –
- The issue at hand is around right in rem, which is distinct from inferior right in persona, which is derived from right in rem.
- The dispute’s issue area affects a third party’s right, demanding decisive adjudication
- The state’s sovereign and interests of society functions are at issue in this case
- Binding legislation prohibits arbitration of the dispute’s subject matters.
In light of the above rulings, we can deduce that the highest Court has explicitly said that a quarrel between a tenant and a landlord is arbitrable only if the issue is not addressed by a rent control legislation. As a result, the approaches adopted for a matter to be exempt from arbitration:
- A specific legislation governs the subject matter
- Specialized legislation provides procedural safeguards to renters. These specific legislations give certain tribunals special authority to handle disputes.
- Even when the rights of third parties aren’t directly involved, the right in rem is affected by any dispute.
- Binding legislation has explicitly forbidden any mention of adjudication in an issue area that has any connection to a state’s autonomous or interests of society. Since there is no rent control legislation covering the grounds, a disagreement between an owner and a tenancy over the same could be referred to as non-arbitrary. However, in order for an arbitration court to hear these issues, a language requiring arbitration must be included in the lease agreement.
Landlord and tenant disagreements are widespread, and they usually result in a lengthy legal struggle that costs a lot of money and wastes both parties’ important time. It’s a joy to both landlords and tenants alike that the Apex Court recently handed down its decision in Vidya Drolia case. Well now they can quickly and easily go through all the arbitration proceeding. However, it’s important to proceed with caution when interpreting this ruling because it only applies to certain articles of the TOPA and not to all lease disputes. Because of this ruling, not all disputes will be resolved through arbitration. There is still no way to arbitrate disputes involving Right in Rem or any of the other requirements specified above
- Transfer of Property Act, 1882, No. 04, Act of Parliament, 1882
- Natraj Studios (P) Ltd v. Navrang Studios & Ors. (1981 AIR 537)
- Booz Allen & Hamilton. Inc v. SBI Home Finance Ltd & Ors., Civil Appeal No. 5440 of 2002.
- Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706 (India).
- Vidya Drolia & Ors. v. Durga Trading Corporation Civil Appeal No. 2402 of 2019
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