Are tenancy-related disputes arbitrable?

The Transfer of Property Act, 1882 (act), provided a general legislation regarding the transfer of immovable properties and interests. Subsequently, with the view of specifically regulating tenancy relationships, primarily to control inflated rentals and illegal dispossession of tenants, rent control legislations were passed in several countries, including in India, especially after the Second World War.

Tenancy-related disputes have seen a huge increase in in India and these notorious of being long drawn and slows down the courts significantly. Rent control legislations also resulted in a decrease in the quality of leasing in general. Several states, therefore, amended the scope of rent control legislations, limiting them to certain well-defined parameters. Tenancy disputes not falling within the ambit of the rent control legislations were usually filed under general provisions of applicable laws.

After liberalization, India has seen the emergence of large commercial projects. Given the commercial nature of these leasing transactions and the huge financial implications involved, parties usually concurred to resolution by arbitration.

But as the Arbitration and Conciliation Act, 1996, does not have specific provisions excluding any category of disputes as non-arbitrable, the Supreme Court and various high courts have held tenancy and eviction matters to be non-arbitrable.

In 1981, the Supreme Court, in the case of Natraj Studios (P) Ltd v Navrang Studios and Anr, held that tenancy matters with respect to The Bombay Rents, Hotel and Lodging House Rates Control Act, 1947, by reason of broader consideration of public policy, are under the jurisdiction of the small cause courts and are not arbitrable.

In the Booz Allen & Hamilton Inc v SBI Home Finance Ltd case, the Supreme Court ruled on broad grounds that eviction or tenancy matters governed by special statutes are non-arbitrable. The court observed that since eviction or tenancy matters relate to rights exercisable against the world at large, they are to be adjudicated by courts or public tribunals, and arbitration, which is a private forum, stood excluded.

To lay to rest certain ambiguities, the Supreme Court, in the Himangni Enterprises v Kamaljeet Singh Ahluwalia case, ruled that in respect of premises to which the application of the special rent act is exempted, and to which the act applies, the parties cannot enforce arbitration and it would have to be tried in a civil court.

Despite the prodigious growth in the realty sector in India, the courts have constantly curtailed the power of arbitration. In one instance, Bombay High Court in Eros International Media Limited v Telemax Links India Pvt Ltd and Ors said: “The Arbitration Act is not one that we should constantly try to short-circuit in matter after matter. Unless specifically barred, what a civil court can do, an arbitrator can do.”

In February 2019, the division bench of the Supreme Court, in the case of Vidya Drolia and Ors v Durga Trading Corporation, considered an appeal pertaining to a tenancy agreement that had an arbitration clause and was thus referred to arbitration by Calcutta High Court. The Supreme Court appreciated the fact that a lease is a transfer of interest in property and a conveyance, but there is nothing in the act to show that a dispute concerning determination of the lease cannot be decided by arbitration. It observed that act is silent on arbitrability and does not negate arbitrability since it does not by necessary implication exclude arbitration.

The Supreme Court did not agree with the reasoning supplied in the Himangi Enterprises case and opined that the judgment will require a relook. Therefore, the case and the issue of arbitrability of landlord tenancy disputes has been referred to a three-judge bench of the Supreme Court.

Commercial leases often involve long-term relationships. Preservation of business relationships in commercial leasing is essential since the commitments of the landlord and tenant stands for a long time. Getting entangled in litigation would result in a cascading effect of loss of business relationships, revenues, resources, and time.

These factors will certainly curtail the growth of the real estate sector. Arbitration, being a powerful tool of dispute resolution, can certainly ease the situation and improve the outcome. It is high time that lacunae are filled by the Supreme Court or by making suitable legislative changes, failing which the disputing parties would be forced to take counterproductive steps.

Gerald Manoharan is a partner and Vishnu Vinayak is a junior associate in the Bengaluru office of J. Sagar Associates. Their views are personal.

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