Section 106 of Transfer of Property Act and Unregistered Lease Deeds

A recent decision of the Supreme Court in Siri Chand v. Surinder Singh proposes an unusual (and, with respect, flawed) application of Section 106 of the Transfer of Property Act, 1882 (“Act”). Section 106 prescribes the duration of a lease where the lease deed is silent on it. If the lease is not for an agricultural or an industrial purpose, it is deemed to be from month to month and may be terminated by either party with 15 days’ notice. The limited purpose of Section 106 is to ascertain the duration and terminable nature of a lease. However, the Court in Siri Chand has expanded the deeming fiction under Section 106 and employed it to determine whether a lease deed is compulsorily registrable as per Section 17(1)(d) of the Registration Act, 1908.

The relevant facts of Siri Chand are these. The respondent was the tenant of a shop owned by the appellant. The respondent executed an agreement on 27th July 1993 wherein he undertook to pay Rs. 2,000/- per month as rent along with house tax and electricity charges. The respondent was liable to be evicted from the shop in the event of his failure to pay rent by the 5th day of every month. Clause 9 of the agreement stipulated that the rent was to increase by 10% every year.

In 2006, the appellant instituted proceedings before the Rent Controller under the East Punjab Urban Rent Restriction Act, 1949 seeking eviction of the respondent and payment of arrears of rent from 28th January 2004 to 28th February 2005 as well as house tax. The Rent Controller held in favour of the appellant, but the Appellate Court and the High Court ruled in favour of the respondent. In appeal before the Supreme Court, the Court held that as per the terms of the agreement, the respondent could be evicted on grounds of failure to pay the rent and house tax. However, the Court had to preliminarily rule on whether the agreement between the parties could be enforced given that it was not registered.

According to Section 107 of the Transfer of Property Act and Section 17(1)(d) of the Registration Act, an agreement creating a lease is compulsorily registrable if the lease isfrom year to year, or if the term of the lease exceeds one year, or if the lease reserves a yearly rent. The agreement in Siri Chand did not create a lease from year to year, nor did it reserve yearly rent. The Supreme Court was, therefore, required to ascertain if the term of the lease as per the agreement exceeded one year. For this purpose, the Court relied upon Section 106 of the Act and held that since the agreement did not stipulate the duration of the lease, the lease was deemed to be from month to month. It then concluded that an agreement creating a lease from month to month did not require registration under Section 17(1)(d) of the Registration Act and therefore, the unregistered nature of the agreement did not render it unenforceable. This is despite the fact that the landlord-tenant relationship subsisted between the appellant and the respondent for a period far exceeding one year. In essence, therefore, according to the Court in Siri Chand, an agreement creating a month to month tenancy does not require registration irrespective of the total duration of the tenancy.

It is submitted that this conclusion is incorrect and stems from a flawed notion of a month to month tenancy. As the Bombay High Court has held in Utility Articles Manufacturing Co. v. Raja Bahadur Motilal Bombay Mills, Ltd., a tenancy from month to month does not mean that a new tenancy is created upon the expiry of each month. It is simply that the period of the original tenancy continues to increase by a month till the time the tenancy subsists. Therefore, if an agreement creates a month to month tenancy, it cannot constitute the basis of a lease for more than a year unless it is registered.

The legal foundation of a tenancy created by an unregistered agreement which does not prescribe the duration of the tenancy can be assessed with the help the Supreme Court’s decision in Biswabani Pvt. Ltd. v. Santosh Kumar Dutta, where it opined on the nature of a tenancy created by an oral agreement accompanied by delivery of possession for more than a year. The Court held that “an oral agreement accompanied by delivery of possession, if for more than one year is valid, by delivery of possession, for the first year, and thereafter the lessee continuing in possession with the assent of the lessor becomes a tenant by holding over under Section 116 of the Transfer of Property Act.” Similarly, where possession is transferred pursuant to an unregistered lease deed which does not specify the duration of the lease, the tenancy can be founded on the unregistered lease deed at the most for a year. Beyond that period, the tenancy has a statutory basis, viz. Section 116 of the Act. Consequently, the terms of the unregistered lease cannot be relied upon to claim arrears of rent for the period beyond one year (except, as discussed below, if they can be admitted in evidence under Section 49 of the Registration Act) and the Court in Siri Chand erred in ruling to the contrary.

The fallacy of Siri Chand can be examined from another perspective. The Court’s approach leads to a situation where an agreement creating a month to month tenancy as per the deeming fiction under Section 106 does not require registration, irrespective of the total duration of the tenancy. This is plainly contrary to Section 107 of the Act, which makes it unequivocally clear that any agreement creating a lease of more than a year requires registration. In effect, therefore, the Court has ruled that Section 106 overrides the mandatory registration requirement under Section 107, which constitutes a departure from the settled position of law that Section 106 ought to be read subject to Section 107, laid down by the Supreme Court in Samir Mukherjee v. Davinder K. Bajaj.

In view of the above, the agreement in Siri Chand was enforceable only for a period of one year from the date of its execution, i.e. till 27th July 1994. Does this imply that its terms could not be adduced in evidence to establish the sum recoverable as arrears of rent for the period after 27th July 1994? This depends upon whether determining the rent of the tenancy constitutes a ‘collateral purpose’ within the meaning of Section 49 of the Registration Act.

In Biswabani (supra) and Satish Chand Makhan v. Govardhan Das Byas, the Supreme Court has held that if a lease deed is invalid for want of registration, neither party can rely on any of its terms insofar as the tenancy is concerned. However, the Calcutta High Court and Bombay High Court have held that the rate of rent stipulated in the unregistered agreement constitutes a collateral purpose and it can be relied upon even for the period beyond one year. It is submitted that the High Courts’ view is not in consonance with the meaning of ‘collateral purpose’ as laid down by the Supreme Court. In K.B. Saha & Sons Pvt. Ltd. v. Development Consultant Ltd., the Court held that “a collateral transaction must be independent of, or divisible from, the transaction to effect which the law required registration” and to use an inadmissible document “for the purpose of proving an important Clause would not be using it as a collateral purpose”. The tenancy which subsists beyond the one-year period cannot possibly be considered to be independent of the transaction which the unregistered lease agreement was meant to create. The landlord-tenant relationship, which exceeded a year, is precisely what the agreement was supposed to govern and which required registration under Section 107 of the Act and Section 17 of the Registration Act. Therefore, the terms of an unregistered agreement governing the tenancy beyond the one-year period cannot constitute collateral purpose within the meaning of Section 49 of the Registration Act and could not have been relied upon by the landlord in Siri Chand to establish the sum recoverable as arrears of rent.

Published by Sharad Bansal

Advocate, Bombay High Court

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