Termination of leases : How to Terminate a Lease under Section 106 of Transfer of Property Act, 1882: A Case Study

Introduction

Lease is a contract by which one party transfers the right to enjoy an immovable property to another party for a certain period of time in exchange for a rent. Section 106 of Transfer of Property Act, 1882 (TP Act) lays down the rules for determining the duration and termination of leases in absence of a written contract or local usage. According to this section, a lease of immovable property for agricultural or manufacturing purposes shall be deemed to be a lease from year to year, terminable by six months’ notice; and a lease of immovable property for any other purpose shall be deemed to be a lease from month to month, terminable by fifteen days’ notice.

The application or non-application of Section 106 of TP Act has significant implications for both lessors and lessees. If Section 106 applies, then the lessee enjoys a longer period of tenancy and a greater protection from eviction; but if Section 106 does not apply, then the lessee has a shorter period of tenancy and a lesser protection from eviction. Similarly, if Section 106 applies, then the lessor has a lower right to terminate the lease and recover possession; but if Section 106 does not apply, then the lessor has a higher right to terminate the lease and recover possession.

In this article, we will discuss a recent case decided by the Supreme Court of India on this issue: Nand Ram & Ors. v Jagdish Prasad & Ors . In this case, the court had to decide whether Section 106 of TP Act applied to an unregistered tenancy agreement that provided a term of five years; and whether the tenant had to prove that he was carrying on manufacturing activity in the leased premises in order to attract Section 106.

Facts about Termination of leases

The facts of the case are as follows:

• In 2003, a landlady and a tenant entered into an unregistered tenancy agreement in respect of a property (“Premises”) for a period of five years.
• The tenancy agreement was not renewed after five years but the tenant continued in possession without payment of rent.
• In 2008, the landlady sent a notice to the tenant (addressing him as monthly tenant) directing him to vacate the premises within 15 days, which the latter did not comply with.
• The tenancy agreement contained the following clauses:
  “7. Before the expiry of said lease it shall not be within the rights of the lessor i.e., party of the First Part to seek ejectment of party of the second part from the leased Premises.”
  “9. The party of Second Part shall have no right whatsoever to sublet or assign or part with possession or create any third party interest in respect of demised Premises or any part thereof.”
• When the premises was not vacated, the landlady filed a civil suit seeking recovery of possession and decree for mesne profits.
• The tenant contended that:
  • The premises was let out for manufacturing purpose and hence as per Section 106 of TP Act it could only be terminated by giving a six months’ notice.
  • It was a lease agreement for a period exceeding one year under which he was inducted as a tenant, which requires compulsory registration. The same being unregistered, was not admissible as evidence in court and the suit was accordingly not maintainable.

Issues with Lease

The issues before the court were:

• Whether the tenancy agreement was compulsorily registrable under Section 17 of Registration Act, 1908 and whether it was admissible as evidence in court under Section 49 of Registration Act .
• Whether Section 106 of TP Act applied to the tenancy agreement and whether it required six months’ notice or fifteen days’ notice for termination of leases .
• Whether the tenant had to prove that he was carrying on manufacturing activity in the leased premises in order to attract Section 106 of TP Act.

Findings Termination of leases

The court found that:

• The tenancy agreement was a compulsorily registrable document under Section 17 of Registration Act, since it provided a term of five years.
• The tenancy agreement was not admissible as evidence in court under Section 49 of Registration Act, since it was not registered.
• The court was not precluded from determining the factum and purpose of tenancy from other evidence on record, such as oral testimony or rent receipts.
• The tenant failed to prove that he was carrying on manufacturing activity in the leased premises by explaining the nature of work being done in the factory shed.
• The tenant merely stated that he was doing business of rubber, which was not sufficient to demonstrate that he was making or fabricating articles or materials by physical labour, skill, or mechanical power.
• The tenant relied on Allenbury Engineers Pvt. Ltd. v Ramkrishna Dalmia and Ors , where the expression ‘manufacturing purpose’ was interpreted to mean:
  “purposes for making or fabricating articles or materials by physical labour, or skill, or by mechanical power, vendible and useful as such. Such making or fabricating does not mean merely a change in an already existing article or material, but transforming it into a different article or material having a distinctive name, character or use or fabricating a previously known article by a noval process.”
• The court distinguished this case from Park Street Properties Private Limited v Dipak Kumar Singh and Anr , where it was held that:
  “in absence of a registered instrument evidencing lease deed executed between parties for any term exceeding one year reserving yearly rent as contemplated under Section 107 of TP Act read with Section 17(1)(d) of Registration Act which is compulsorily registrable document under law but not registered as required under law cannot be admitted as evidence in court but such unregistered termination of leases deed is admissible for collateral purpose i.e., to show nature and character of possession.”

Conclusion

The court concluded that Section 106 of TP Act did not apply to the tenancy agreement, since it was not registered and the tenant did not prove that he was carrying on manufacturing activity in the leased premises. Hence, the lease was deemed to be from month to month, terminable by fifteen days’ notice. The court upheld the validity of the notice given by the landlady and dismissed the appeal of the tenant.

Commentary termination of leases

This case is an important one as it clarifies the scope and application of Section 106 of TP Act in relation to unregistered tenancy agreements. It also highlights the burden of proof on the tenant to establish that he was carrying on manufacturing activity in the leased premises. The court’s decision is based on a strict interpretation of the statutory provisions and a careful examination of the evidence on record. The court’s decision is also consistent with the principle of protecting the rights and interests of the lessors who have given their properties on lease for a fixed term. The court’s decision may have implications for future cases involving similar disputes over the duration and termination of leases.

Provisions of Law

• Section 106 of Transfer of Property Act, 1882 :
  “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, terminable, on the part of either lessor or lessee, by six months’ notice; and a lease of immovable property for any other purpose shall be deemed to be a lease from month to month, terminable, on the part of either lessor or lessee, by fifteen days’ notice.”
• Section 17 of Registration Act, 1908 :
  “(1) The following documents shall be registered, if the property to which they relate is situate in a district in which, and if they have been executed on or after the date on which, Act No. XVI of 1864, or the Indian Registration Act, 1866 (20 of 1866), or the Indian Registration Act, 1871 (8 of 1871), or the Indian Registration Act, 1877 (3 of 1877), or this Act came or comes into force, namely:-
  …
  (d) leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent;”
• Section 49 of Registration Act, 1908 :
  “No document required by section 17 [or by any provision of the Transfer of Property Act, 1882 (4 of 1882)], to be registered shall-
  (a) affect any immovable property comprised therein,
  …
  unless it has been registered:
  Provided that an unregistered document affecting immovable property and required by this Act or the Transfer of Property Act, 1882 (4 of 1882), to be registered may be received as evidence of a contract in a suit for specific performance under Chapter II of the Specific Relief Act, 1877 (3 of 1877), [or as evidence of any collateral transaction not required to be effected by registered instrument].”