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Landlord-tenant disputes can be resolved through arbitration, except when they are covered by specific forum created by rent control laws, the Supreme Court has ruled. Delivering its landmark verdict in the Vidya Drolia and others versus Durga Trading Corporation case, which will pave the way for speedier dispute resolution, the top court has held that arbitral tribunals have the power to decide such cases under the Transfer of Property Act, 1882.
However, for these disputes to be resolved through arbitration, the rent agreement must have an arbitration clause—this means the decision to include a clause to this effect in a landlord-tenancy agreement lies with the parties concerned.
Elaborating on the scope, interpretation and evolution of Section 8 of the Arbitration Act, the top court ruled that a judicial authority can refer parties for arbitration unless there is no valid arbitration agreement.
For the uninitiated, arbitration is a process in which the contracting parties mutually opt for a private dispute resolution procedure, instead of going to court, in effecting saving precious time and resources. The decision of the arbitrators is binding on all parties. According to the latest SC order, the decision by the arbitrator can be executed and enforced like a decree of the civil court.
According to the December 14, 2020, order, which overrules a 2017 order of the apex court, rent agreements that are governed by state rent control laws would, however, not be arbitrable, and would be dealt by the designated courts or forums under the legislation.
While delivering its verdict in the Himangni Enterprises verusus Kamaljeet Singh Ahluwalia case, an SC bench in 2017 had ruled that where the Transfer of Property Act was applicable, landlord-tenant disputes would not be arbitrable.
“Landlord-tenant disputes do not relate to inalienable and sovereign functions of the state. The provisions of the Transfer of Property Act do not expressly or by necessary implication bar arbitration. The Act, like all other Acts, has a public purpose, that is, to regulate landlord-tenant relationships and the arbitrator would be bound by the provisions, including provisions which ensure and protect the tenants,” the three-judge SC bench said in its 243-page order.
The SC also listed insolvency or intra-company disputes, probate, testamentary matter, grant and issue of patents and registration of trademarks, criminal cases, matrimonial disputes, etc., as non-arbitrable.
“There is a difference between a non-arbitrable claim and non-arbitrable subject matter. Former may arise on account of scope of the arbitration agreement and also when the claim is not capable of being resolved through arbitration. Generally non-arbitrability of the subject matter would relate to non-arbitrability in law,” it said.
With inputs from Sunita Mishra
Arbitration clause in rental agreements and how it can help landlords and tenants
While it is common for disputes to arise between landlords and tenants, we look at how an arbitration clause in the agreement can help both parties to resolve the issues amicably, while also avoiding costly and time-consuming litigation
Leave and License Agreements are commonly used, for renting of properties. For example, most people who graduate from college and join work in a new city, are bound to take a house on rent. To rent a house, one must sign a ‘Leave and License Agreement’ with the landlord (or licensor). This agreement stipulates the rental amount, period and other essential conditions.
While legal parlance demands that the words ‘licensor’ and ‘licensee’ be used in place of ‘landlord’ and ‘tenant’, respectively, we will use the latter for reasons of convenience. Leave and License Agreements will also be referred to as ‘Rent Agreements‘, for the same reason. It may be noted that usually the words ‘landlord’ and ‘tenant’ would imply creation of tenancy rights, which are avoided in rent agreements. However, these terms will be used in this article, for reasons of simplicity.
Common disputes arising out of Rental Agreements
While many property brokers claim that Rent Agreements are an easy affair, this is not the case. Legal complications often arise at the end of the rental period, when the tenant has to vacate the premises. In such cases, landlords tend to adopt the unhealthy practice of forcing the tenant to forfeit the security deposit or making unreasonable deductions from the same. While this leaves the tenant short-changed, the winding nature of India’s civil litigation system, gives him zero incentive to sue.
Typically, disputes between landlords and tenants are observed in the following areas:
- Return or forfeiture of security deposit.
- Damage caused to the premises, fittings or misuse thereof.
- Premature termination of rent agreement.
- Delay in payment of rent.
- Unpaid dues and utility bills.
As landlords tend to keep a security deposit ranging from two to six months’ rent, parties do not see any incentive in taking the matter to court. As a consequence, several cases where landlords exploit tenants, do not see the light of the day, as tenants consider it easier to forfeit the security deposit and move on, rather than getting caught up in a prolonged legal battle.
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Arbitration as a means to resolve rental disputes
The rise of arbitration can however, offer a new avenue to settle disputes. An arbitrator is a person (usually a lawyer or retired judge), whom the parties can appoint by mutual consent, to hear and decide disputes among them. If the parties insert an arbitration clause in the contract and specifically name a person to act as the arbitrator, it will be valid and binding under the Arbitration and Conciliation Act, 1996 (also referred to as the Arbitration Act).
Fixed-fee arbitration to handle rental agreement issues
The security deposit in high-value rental deals, can amount to six months’ rent. In this case, appointing a fixed-fee arbitrator may seem feasible. Section 29B of the Arbitration Act provides for a fast-track procedure, wherein, the arbitrator decides the cases on the basis of written pleadings and submissions from the parties. Thereafter, he can call for further information, if necessary. Finally, an oral hearing may be held, only if the parties make a request, or if the arbitrator considers the same necessary. Thereafter, the case is closed for passing of the arbitral award or judgment. The entire procedure must be completed in a time-bound period of six months.
The fast-track arbitration procedure can be useful for resolving landlord-tenant disputes. Once the fee of the arbitrator is fixed at one months’ rent, he will be incentivised to hear and dispose of the matter on a timely basis. Further, the arbitral award will be valid and binding upon the parties, under Section 35 of the Arbitration Act and can be enforced, by filing an application for execution and enforcement before the local civil court, under Section 36 of the Act.
Alternative dispute resolution: The way forward
The recent amendments to the Arbitration Act in 2015, through which Section 29A and other provisions were inserted, have opened avenues for the people to avail of the benefits of arbitration, which was hitherto considered the preserve of large corporations with deep pockets for spending on sitting fees and legal batteries. Landlords, tenants and brokers can take the initiative, by including arbitration clauses in rental agreements. The government and the judiciary should also take the lead, by constituting panels of experienced lawyers and retired judges, who can take up alternative dispute resolution on a timely basis. Such measures will go a long way in alleviating the problems faced by landlords and tenants and fulfilling the constitutional mandate, which envisages justice for all and not for a select few.
(The writer is a practising lawyer in the Bombay High Court. He appears in diverse civil and criminal cases, as well as the Real Estate Regulatory Authority.)