Considering the possibility of dispute in long-term and high-value tenancy agreements, most parties insert an arbitration clause in the lease deed to create a secure contract. Once the landlord and the tenant agree to this, they appoint an arbitrator who would help them resolve any issues and get the lease deed registered.
If the parties insert an arbitration clause in the contract and name a person as the arbitrator, this clause becomes binding under the Arbitration and Conciliation Act, 1996.
However, what happens in case a landlord refuses to renew the lease? Can disputes arising out of non-renewal be arbitrated? A recent Supreme Court order ruled that they remain arbitrable.
According to a judgement passed by a two-judge bench of justice Indira Banerjee and justice CT Ravikumar, the arbitration clause in a lease agreement does not become functionless, because the landlord has refused to renew the lease deed. In that sense, any dispute arising regarding the renewal has to be resolved through the arbitration process.
Case study
The state of Sikkim had leased its hotel to an appellant through a registered lease deed, which was to expire in 2021. In 2020, the appellant proposed a lease renewal for another 30 years. Rejecting the offer, the state started to look for a new tenant through a selection process, following which the appellant moved a commercial court. The court directed that the appellant’s property possession must not be disturbed and arbitration proceedings must start.
When the matter reached a division bench of the High Court, it ruled in favour of the State of Sikkim, stating that the arbitration clause would have been valid if the state had accepted the appellant’s request.
When the matter reached the apex court, it said that the arbitration clause could not be read in isolation but as part of the registered lease deed.
“In our considered opinion, the division bench fell in error, in arriving at the finding that the arbitration clause could only be invoked if the proposal for renewal was accepted by the lessor but there was a dispute with regard to the period of renewal or there was a dispute with regard to the quantum of rent proposed to be paid by the lessee to the lessor,” the SC said, in its order in August 2022.
“If the lessee offered its terms for renewal or extension within the time stipulated in the lease, prima facie the same would have to be accepted. However, if the quantum of rent or the period of the lease could not be mutually agreed upon, the same would necessarily have to be referred to arbitration by an arbitrator to be appointed by the chief justice of the Sikkim High Court,” it added.
FAQs
What is an arbitration clause in a lease deed?
An arbitration clause in a lease deed lays down that disputes between the tenant and the landlord should be settled by arbitration.
What is arbitration?
Arbitration is the official process of settling an argument or a disagreement through the assistance of somebody who is not involved in the dispute.
