Effects of an Unregistered Lease Deed: a Settled Position in Law
Updated: Jun 2, 2020
Utkarsha Nikam, Government Law College, Mumbai (presently working with the Real Estate Team of Kanga & Company, Mumbai)
Definition: Lease under Transfer of Property Act, 1882
Section 105 of the Transfer of Property Act, 1882 states the definition of a lease which states that it is a transfer of immovable property for a particular time period for a consideration of which the transferee has accepted the terms surrounding the agreement. A transfer of a right to enjoy a property in consideration of a price paid or promised to be rendered periodically or on specified occasions is the basic fabric for a valid lease. The provision says that such a transfer can be made expressly or by implication. Once there is such a transfer of right to enjoy the property a lease stands created.
According to section 107 of the transfer of property act, a lease for the period of more than one year or of year to year or reserving of yearly rent must be registered. An unregistered lease may cause a severe effect on the enforcement of the right. Such deed shall not be admitted in evidence. You cannot ask for specific performance of the contract from unregistered lease deed. An unregistered lease deed renders the lease into a month to month.
Requirement for Compulsory Registration
Expanding the scope of the requirement for compulsory registration, the Apex Court in Raghunath v. Kedarnath[AIR 1969 SC 1316], held-
“by the enactment of Act 21 of 1922 which by inserting in Section 49 of the Registration Act the words “or by any provision of the Transfer of Property Act, 1882” has made it clear that the documents in the supplemental list i.e. the documents of which registration is necessary under the Transfer of Property Act but not under the Registration Act fall within the scope of Section 49 of the Registration Act and if not registered are not admissible as evidence of any transaction affecting any Immovable property comprised therein, and do not affect any such immovable property.”
Accordingly, it was held that the document in question was not admissible as evidence of any transaction affecting the immovable property.
Obligation for payment of Stamp Duty
If it has not been specifically agreed to in the lease agreement between the parties executing it, it is the responsibility of the lessee to pay the applicable stamp duty.
Implications on payment of insufficient stamp duty
If proper stamp duty is not paid on lease instruments, any government authority competent to take evidence on oath can impound it and send it to the jurisdictional Collector of Stamps for adjudication and payment of proper stamp duty, along with a penalty which may extend up to ten times of the deficient stamp duty amount. Further, if in court proceedings, the court comes to the conclusion that the instrument is not properly stamped with applicable duty, it would not be admissible as evidence until the stamp duty (with penalties) as adjudicated by the Collector of Stamps is fully paid.
Effect of an unregistered lease agreement for a year or term exceeding one year
If a lease agreement which requires mandatory registration is not registered by the parties, it cannot be received as evidence of any of the agreed terms and conditions affecting the leased property contained therein, whatsoever, except for certain limited purposes including, inter alia in suits for specific performance or merely as evidence of a collateral or correlated transaction.
The provisions of the Registration Act, 1908 (“Registration Act”) and the Transfer of Property Act, 1882 (“TOPA”) set out the law governing registration of lease deeds. Section 17 of the Registration Act states that leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent must be registered compulsorily. Further, section 107 of the TOPA states that a lease of immoveable property from year to year or for any term exceeding one year or reserving a yearly rent can only be made by a registered instrument. All other leases of immoveable property may be made either by a registered instrument or by oral agreement accompanied by delivery of possession.
The position of law with respect to registration as provided in the Registration Act and the TOPA has been reiterated by the Supreme Court of India (“Supreme Court”) in various cases. In Anthony v. KC Ittoop and Sons and Others ((2000) 6 SCC 394; AIR 2000 SC 3523), the Supreme Court had considered whether an unregistered lease deed can create a lease. The Court held that an unregistered instrument cannot create a contractual lease due to the three-pronged statutory restrictions under law but that the existence of a lease can be presumed from the conduct of the parties. The Supreme Court held:
“A transfer of right in the building for enjoyment, of which the consideration of payment of monthly rent has been fixed, can reasonably be presumed.”
In Burmah Shell Oil Distributing now known as Bharat Petroleum Corporation Ltd. v. Khaja Midhat Noor & Ors (AIR 1988 SC 1470), the Supreme Court held that a lease for a period exceeding one year can only be created by a registered instrument. In the absence of a registered instrument, the lease shall be a month to month lease. The Supreme Court held:
“…since the lease was for a period exceeding one year, it could only have been extended by a registered instrument executed by both the lessor and the lessee. In the absence of registered instrument, the lease shall be deemed to be “lease from month to month”.
It is clear from the very language of section 107 of the Act which postulates that a lease of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent, can be made only by a registered instrument. In the absence of registered instrument, it must be a monthly lease.
This has also been reiterated in the more recent case of Park Street Properties (Pvt.) Ltd. v. Dipak Kumar Singh and Ors. (AIR 2016 SC 4038) where it was held that in the absence of registration, a month-to-month lease is created which is governed by section 106 of TOPA.
Validity of an Arbitration Clause in an unregistered Lease Deed
M/s Dharmaratnakara Rai Bahadur v. M/s Bhaskar Raju & Brothers [Judgment dated February 14, 2020 in Civil Appeal No. 1599/2020]
This case involved two parties who disputed whether a document executed between them was a lease deed or an “agreement to lease”, and whether arbitration could be invoked under the said document. The Court held that when a lease deed or any other instrument is relied upon as containing the arbitration agreement, the Court is required to consider at the outset, whether the document is properly stamped or not.
The contractual terms stated in an unregistered lease deed for a term exceeding one year cannot be relied on by the parties as the lease deed will be void. However, there is one exception – an arbitration clause. In SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited ((2011) 14 SCC 66), the Supreme Court had held that
An arbitration agreement does not require registration under the Registration Act. Even if it is found as one of the clauses in a contract or instrument, it is an independent agreement to refer the disputes to arbitration, which is independent of the main contract or instrument. Therefore having regard to the proviso to Section 49 of Registration Act read with Section 16(1)(a) of the Act, an arbitration agreement in an unregistered but compulsorily registrable document can be acted upon and enforced for the purpose of dispute resolution by arbitration.
An arbitration agreement in the lease deed is a collateral term relating to the resolution of disputes and independent of the other terms of the contract. It further held that the arbitration clause is unrelated to the transaction affecting the immovable property contained therein and therefore even if the deed is challenged as not valid or unenforceable, the arbitration agreement would remain unaffected for the purposes of resolution of disputes arising with reference to the deed.
Taking into account this non-payment of stamp duty, and relying on its landmark judgment in SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited, (2011) 14 SCC 66, the Supreme Court reiterated that when an arbitration agreement was contained in a document which was not duly stamped, it should be impounded and the court could not act upon such a document nor the arbitration clause therein.
The parties usually in order to avoid payment of stamp duty and registration costs, decide not to register the lease deeds. However, if a dispute arises the parties do not have any legal recourse from the court of law as the unregistered lease deeds are void. However, in the case wherein there is a delivery of property and rent is received (referred to as monthly lease) can be terminated by giving 15 (fifteen) days notice. However, it is in the best interest of the parties that they should register the Lease Deeds if the arrangement for the lease is for a year or exceeding a year.