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AJain_India (Law Student)     06 October 2012

Sarfraesi act- tenancy to family member

Bank has decalred a company's account as a NPA and want to sell collateral assets of the directors.

One of the house of the director is leased out to their daughter (unmarried, aged 26 yrs) with a proper registered lease deed for 10 years and rent is paid through cheque.

The lease was executed 2 months before the account was declared a NPA


1) In this case, can the bank take possession of the property

2) can bank contest this lease deed



 11 Replies

c.p.s. ramachary (1500)     06 October 2012

Abonafide tenant cannot be evicted by the bank under sarfaesi act. See Judjment of Karnataka High Court  (AIR 2008 KARNATAKA 14). Bank or purchaser in auction can take only symbolic possession of the secured asset  at present and actual possession (following due process of law) only after efflux of the period of lease. Mortgagor's right to lease the secured asset is recognised by Sec.65-A of Transfer of property Act. Tenant can only challenge action against dispossession and not the process of sale of secured asset initiated by the bank.

LAXMINARAYAN - Sr Advocate. ( solve problems in criminal cases. lawproblems@gmail.com)     06 October 2012

Legality of lease deed can only be challanged.


Yes Mr RAMACHARY is right the tenant can be dispossesed., other than by an eviction order by a competant civil court.

LAXMINARAYAN - Sr Advocate. ( solve problems in criminal cases. lawproblems@gmail.com)     06 October 2012


RAJU O.F., (Advocate)     08 October 2012

If the property is mortgaged to the bank, can proceed under SARFAESI Act. If the property was not mortgaged to the bank but the director had given personal guarantee, then bank can bring the assets of the guarantor for sales through court. In the case of lease of property, if the said property was mortgaged to the bank and later a lease deed was created to prevent the action of the bank, then the prior mortgage will prevail and hence bank can proceed for sale of the property. If the lease deed was registered with proper stamp duty for the said lease period, then bank or the purchaser has to get the person vacated through civil court.

Raja (XYZ)     09 October 2012

1. no.

2. deeed has to be observed minutely.

feel free to consult me if required. good luck.

Uday (Lawyer)     22 October 2012

I'm submitting this question to my most respected friend Mr.Ramachary. Sir, after creating a mortgage over the property and if the borrower commits defaults in payment of the EMI, if the financial institution is proceeding under the SARFAESI Act, and the borrower to defeat the attempt of the Financial Institution, creates a tenancy, what is the remedy available to the financial institution? Of course the financial institution can sell the property through SARFAESI Act. But, will the property fetch a better price with tenants residing in the secured property?

c.p.s. ramachary (1500)     23 October 2012

Mr. Uday,

In the opening sentence of my answer to the query itself, I stated that a bona fide tenant cannot be evicted as precaution. This is settled law.But did not certify that the tenant is bona fide.

It is settled law that a 'bona fide' tenant cannot be dispossessed from the leased out mortgaged property under Sec. 13 and or 14 of SARFAESI Act. If lease is created prior to serving 13(2) notice to the mortgagor no prior written consent of the mortgagee is required as contemplated under Sec. 13(13) of the Act. But in the present case the tenant was inducted prior to serving 13(2) notice.  

Sec. 65 A of Transfer of Property Act is not inconsistent to the provisions of SARFAESI Act. Hence there is no bar to lease out the mortgaged property.

65A. Mortgagor's power to lease

(1) Subject to the provisions of sub-section (2), a mortgagor, while lawfully in possession of the mortgaged property, shall have power to make leases thereof which shall be binding on the mortgagee.

(2) (a) Every such lease shall be such as would be made in the ordinary course of management of the property concerned, and in accordance with any local law, custom or usage.

(b) Every such lease shall reserve the best rent that can reasonably be obtained, and no premium shall be paid or promised and no rent shall be payable in advance.

(c) No such lease shall contain a covenant for renewal.

(d) Every such lease shall take effect from a date not later than six months from the date on which it is made.

(e) In the case of a lease of buildings, whether leased with or without the land on which they stand, the duration of the lease shall in no case exceed three years, and the lease shall contain a covenant for payment of the rent and a condition of re-entry on the rent not being paid with a time therein specified.

(3) The provisions of sub-section (1) apply only if and as far as a contrary intention is not expressed in the mortgage-deed; and the provisions of sub-section (2) may be varied or extended by the mortgage-deed and, as so varied and extended, shall, as far as may be, operate in like manner and with all like incidents, effects and consequences, as if such variations or extensions were contained in that sub-section.

Is there any law that, after creating mortgage the mortgagor cannot transfer his mortgaged property by way of lease, mortgage, sale or gift (except postponement of priority of rights of the transferee). It is settled law that, SARFAESI Act is not alternative to Rent Control Act or T.P. Act to forcibly dispossess a bona fide tenant. If this analogy that SARFAESI Act can be invoked for forcibly removing a bona fide tenant, is acceptable in the eye of law, then all the landlords to avoid eviction proceedings may borrow money mortgaging the premises under occupation of a tenant and commit default allowing bank to dispossess the tenant without undertaking the pain of obtaining eviction orders. That’s why the banker or FI has to examine if the tenant inducted is bona fide or not. How much price the tenant occupied mortgaged property would fetch if sold under SARFAESI Act depends upon how much efforts the bank / FI makes to find out if the tenancy is bona fide or mala fide.

In the present query the tenant inducted is unmarried 26 years old daughter staying separately from her father in the same place for no reasons. The lease is executed for 10 years (i.e.exceeding 3 years) which is contrary to Sec.65-A of TP Act. Hence the tenant in this particular query is not bona fide.


1) Symbolic possession by bank is possible.

2) A legal lease deed cannot be challenged by bank. A question of eviction can arise only after expiry of lease deed.

narendra.s.p (Chief Manager(Law))     25 October 2012

  Please find attached a judgment dated 06/03/2012 of the Jaipur Bench of Rajasthan High Court, reported in AIR 2012 Rajasthan 93. The learned single judge has held that section 35 of SARFAESI Act overrides the state Rent Act.

Please let me know whether State Rent Act is in List II [State List] or List III [concurrent list] of the 7th Schedule to the Constitution. TP Act is in list III [ concurent list] Hence, tenant or lesee under a Lease deed does not have protection against eviction by Authorised Officer.

Attached File : 1023786191 jaipur hc.pdf downloaded: 120 times

Raja (XYZ)     26 October 2012

This particular State Rent Act no such provision, providing protection to the tenant, like available in West Bengal Rent Control Act.

Rahul D (Executive )     13 November 2012

It would be good if some details can be provided as to what provisions are there in the West Bengal Rent Control Act which protects the tenants from such scrupulous acts like SARFAESI Act?

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