Karnataka High Court
K.S. Srinivas vs V. Ramkumar And Ors. on 30 January, 2004
Equivalent citations: 2004(3)KARLJ372
Author: Tirath S. Thakur
Bench: Tirath S. Thakur
JUDGMENT Tirath S. Thakur, J.
1. This is a defendant's appeal arising out of a suit for possession upon redemption of a mortgage. The short but interesting question that arises for consideration is whether the tenancy rights held by the Mortgagee who was occupying the mortgaged property as a tenant would extinguish on the principle of merger upon creation of the mortgage and if they did not whether the tenant-mortgagee had surrendered the tenancy rights so that the Mortgagor was entitled to claim possession of the mortgaged property upon redemption. The question arises in the following backdrop:
The suit property which happens to be a single storeyed shop situate within the City Municipal Corporation limits of Bangalore was in the occupation of M/s. K.R. Suryanarayana Setty and Sons, a partnership firm as a lessee on payment of monthly rent of Rs. 225/- only. The property was owned by M/s. Venkatachalaiah and Sons, another partnership concern who mortgaged the same with the lessee in terms of a mortgage deed dated 28-8-1982. The Mortgage was to run for a period of ten years. During the currency of the mortgage, M/s. Venkatachalaiah and Sons, the owner was dissolved and the property allotted to the share of the plaintiff. O.S. No. 5818 of 1992 for redemption of the mortgage and for possession of the property was filed by the plaintiff before the XIV Additional City Civil Judge at Bangalore. Apart from other reliefs, the plaint also sought damages from the defendant at the rate of Rs. 200/- per day from 28-8-1992 till the date of full satisfaction of the decree.
2. In the written statement filed by the defendant, several defenses were raised. It was inter alia pointed, out that M/s. K.R. Suryanarayana Setty and Sons was carrying on business in the suit premises in the name and style of 'Srinivas Stores'. Upon dissolution of the said partnership, the second defendant succeeded to the tenancy and other rights in the schedule property and that he was in exclusive possession and enjoyment of the same. It was also alleged that upon redemption of the mortgage, the tenancy rights would stand revived as the parties never intended to put an end to the tenancy that existed on the date of creation of the mortgage. It was alleged that the parties had with the intention of continuing the tenancy even after redemption of the mortgage entered into an agreement on the same date by which the Mortgagor had agreed to continue the lease of the schedule property in favour of the Mortgagee on a monthly rent of Rs. 500/- for a period of eleven months with an option to the lessee to extend the lease period for a period of four years thereafter. The claim for delivery of possession made by the plaintiff was according to the defendants misconceived in the light of the contents of the mortgage deed and the clear understanding between them regarding the continuance of the tenancy even after the mortgage was redeemed.
3. On the above pleadings, the Trial Court framed the following six issues:
"1. Does the plaintiff prove that he has the right to seek redemption of mortgagee?
2. Does the Plaintiff prove that he has a right to get possession of the suit property?
3. Whether the suit is bad for misjoinder of necessary parties?
4. Whether defendant 2 proves his tenancy rights over the suit premises are held in abeyance during the period of subsistence of the mortgage?
5. Is the plaintiff entitled to the reliefs as prayed for?
6. What decree or order?"
By its judgment and decree impugned in this appeal, the Trial Court answered issues 1 and 2 in the affirmative, while issues 3 and 4 were held in the negative and against the defendants. The suit filed by the plaintiff was accordingly decreed with the direction that an enquiry under Order 20, Rule 12 of the CPC shall follow for determination of the damages payable to the defendants from the date of the suit till delivery of actual possession. The Trial Court concluded that the recitals in the deed of Mortgage clearly suggested that the tenancy rights held by the Mortgagee before creation of the mortgage had merged in the rights of the Mortgagees. It further held that there was an implied surrender of the leasehold rights by the tenant. The present appeal calls in question the correctness of the said finding as already noticed above.
4. I have heard learned Counsels for the parties and perused the record.
5. The primary question that arises for consideration is whether there is an automatic merger of the interest of the lessee with that of the mortgagee when the lease and the mortgage rights vest in one and the same person. That question is no longer res integra in the light of catena of decisions rendered by the Supreme Court. The leading decision on the subject was rendered in Gambangi Appalaswamy Naidu and Ors. v. Behara Venkataramanayya Patro, . In that case the owner of the suit property had executed two usufructory Mortgage deeds in favour of the tenant of the property. The deed inter alia stipulated that the rental of the land payable by the tenant was to be adjusted to the interest payable by the Mortgagor under the deed and that when the principal and interest are repaid, such payments was to be endorsed on the deed and the land delivered to the possession of the Mortgagor. The Mortgagor filed a suit for redemption and obtained a decree. One of the questions that arose for consideration was whether delivery of actual or physical possession of the property could be directed upon redemption. Upon a reading of the Mortgage deeds, the High Court held that the landlord-tenant relationship ceased to exist after the relationship of Mortgagor and Mortgagee came into existence and that since the mortgage bonds did not specifically provide that the landlord-tenant relationship would be restored after the redemption of mortgage deeds, the question of revival of the tenancy did not arise. In an appeal to the Supreme Court, their Lordships declared that there was no merger of a lease and a mortgage even where the two transactions were in respect of the same property. For a merger to arise, it was necessary that the lesser estate and higher estate should merge in one person at the same time and in the same right and no interest in the property should remain outstanding. This did not happen in the case of a lease and a mortgage since neither of them was a higher or lesser estate than the other. The following passage from the decision is in this regard apposite:
"In our view there can be no merger of a lease and a mortgage, even where the two transactions are in respect of the same property. It is well-settled that for a merger to arise, it is necessary that lesser estate and a higher estate should merge in one person at one and the same time and in the same right and no interest in the property should remain outstanding. In the case of a lease, the estate that is outstanding in the lessor is the reversion; in the case of a mortgage, the estate that is outstanding is the equity of redemption of the mortgagor. Accordingly, there cannot be a merger of a lease and a mortgage in respect of the same property since neither of them is a higher or lesser estate than the other. Even if the rights of the lessee and the rights of the mortgagee in respect of a property were to be united in one person the reversion in regard to the lease and the equity of redemption in regard to the mortgage, would be outstanding in the owner of the property and accordingly, there would not be a complete fusion of all the rights of ownership in one person. This position in law as explained by the Bombay High Court in Narayana Dogra Shetty v. Ramachandra Shivaram Hingne, (1963)65 Bomb. L.R 449 : 1963 Mah. L.J. 686 has been fully approved by this Court in Shah Mathuradas Maganlal and Company v. Nagappa Shankarappa Malaga and Ors., ".
(emphasis supplied)
6. In Nand Lal and Ors. v. Sukh Dev and Anr., 1987 Supp. SCC 87 a similar question fell for consideration. The High Court in that case construed the terms of the Mortgage deed as showing the intention of the parties to terminate the relationship of landlord and tenant and to be governed by the relationship of the Mortgagee and Mortgagor. Relying upon the decision of the Supreme Court in Gambangi Appalaswamy Naidu's case, supra, their Lordships held that there was no automatic merger of the lease rights in the mortgage created by the parties and that the revival of the tenancy rights would depend upon whether the parties intended to continue the tenancy even after the mortgage was redeemed.
7. In Gopalan Krishnankutty v. Kunjamma Pillai Sarojini Amma and Ors., the law laid down in Appalaswamy Naidu's case, supra, was reiterated. The Court held that there was no automatic merger of interest of the lessee with that of a Mortgagee even when the lessee and the Mortgagee was one and the same person. To the same effect are the decisions of the Apex Court in Narayan Vishnu Hendre and Ors. v. Baburao Savalaram Kothawale (deceased) by his heir Anant Baburao Kothawale, Cheriyan Sosamma and Ors. v. Sundaressan Pillai Saraswathy Amma and Ors. and Nirmal Chandra v. Vimal Chand.
8. The legal position is in the light of the above pronouncements fairly well-settled that there can be no automatic merger of the lease rights with rights under a mortgage even when the two rights vest in one and the same person. The decision of the Supreme Court in Shah Mathuradas Maganlal and Company's case, supra, reliance whereupon has been placed by the Trial Court does not in my view state the law differently. The Supreme Court has noticed the said decision in Nand Lal's case, supra, and held the same to be clearly distinguishable on facts. Even in the subsequent decisions rendered by their Lordships, the decision in Shah Mathuradas Maganlal's case, supra, has been noticed and explained. I have therefore no difficulty in holding that there could be no automatic merger of the rights held by the lessee with those acquired by him under a mortgage in respect of the same property.
9. That however is not the end of the matter. The question whether or not the Mortgagor would be entitled to a decree for possession upon redemption even in the absence of the merger of the rights would depend upon whether an implied surrender of the lessee's rights had taken place when the usufructory mortgage was executed in favour of the lessee by the lessor-Mortgagor. The surrender of the rights held by the lessee however is a question of fact which would obviously depend upon the intention of the parties to be gathered from the terms of the Mortgage deed and the surrounding circumstances, The terms of the Mortgage deed executed in the instant case do not in my opinion suggest any intention on the part of the lessee to surrender his lease rights. The terms may at this stage be extracted:
"1. That in pursuance of the above said agreement and in consideration of the sum of Rs. 20,000/- (Rupees twenty thousand only) already paid by the mortgagees through the cheque bearing No. VB 77/CB/B/098191, dated 12-7-1982 drawn on Vijaya Bank, City Market Branch, Bangalore and the sum of Rs. 10,000/-(Rupees ten thousand only) paid by the mortgagees to the mortgagors this day through the cheque bearing No. VB 77/CB/B/098192, drawn on M/s. Vijaya Bank, City Market Branch, Bangalore, dated 28-8-1982, drawn in favour of the mortgagors herein in the presence of the Sub-Registrar, at the time of registration of these presents, the receipt of the entire consideration of Rs. 30,000/- (Rupees thirty thousand only) the mortgagors hereby acknowledge. The mortgagors hereby mortgage with possession the schedule shop in favour of the mortgagees.
2. The mortgagees are already in possession and enjoyment of the schedule shop and they are hereafter entitled to be in possession and enjoyment of the schedule shop as the mortgagees with possession.
3. The period of this mortgage is for 10 (ten) years from this day and the mortgagors will not be entitled to redeem the mortgage before the said period and the mortgagors bind themselves to repay the mortgage debt on the expiry of the period of 10 (ten) years and on such payment the mortgagees shall retransfer the schedule shop to the mortgagors, discharged from the mortgage debt and all claims and demands of the mortgagees in respect thereof.
4. That during the period of the mortgage until the redemption, the mortgagors shall pay all taxes etc., regularly.
5. That till the redemption of the above mortgage, the mortgagees are not liable to pay any rent in respect of the schedule shop.
6. That till the redemption of the above said mortgage, the mortgagors are not liable to pay any interest on the mortgage amount.
7. In matters not expressly provided for herein the parties, hereto shall have such rights and be subjected to such liabilities or mortgagors and mortgagees as provided for in the transfer of property Act insofar as they apply to this mortgage.
8. The mortgagors may construct building above the schedule shop without causing major obstruction to the business of the mortgagees.
9. After the expiry of the period stipulated under this mortgage, the mortgagors shall repay the sum due under this deed, failing which, the mortgagees shall be entitled to proceed against the schedule shop in case the sale proceeds are insufficient, to discharge the debt under this deed, the mortgagees shall be entitled to proceed against the mortgagors personally and recover the balance of amount due, if any.
10. The mortgagees are entitled to enjoy the schedule shop as the absolute owners thereof subject to the proviso to redemption".
10. A careful reading of the above would show that there is no specific stipulation to the effect that the mortgagee surrenders his lease rights over the mortgaged property in favour of the Mortgagor. There is also no clear or unconditional stipulation requiring the Mortgagee to deliver the possession of the mortgaged property back to the Mortgagor upon redemption of the mortgage. Clause 3 supra, no doubt refers to retransfer of the schedule shop to the Mortgagors on payment of the mortgage debt, but the expression "retransfer" does not imply that the same is accompanied by delivery of possession of the mortgaged property. On the contrary, Clauses 5 and 6 extracted above show that the parties had agreed not to pay or receive rent in respect of the schedule property "till the redemption of the mortgage". The expression "till the redemption of the above said mortgage" used in Clauses 5 and 6 clearly suggest that the non-payment of rent for the schedule property in lieu of the interest payable by the Mortgagor for the mortgage debt was an arrangement that was effective only till such time the mortgage was redeemed. In other words, the liability to pay the rent would surface no sooner the mortgage was redeemed by the Mortgagor. It is also noteworthy that the Mortgage deed does not authorise the Mortgagee to sublet the property, a circumstance which has in certain decided cases been taken as indicative of the intention to surrender the tenancy rights. Suffice it to say that the terms of the Mortgage Deed do not indicate any clear intention on the part of the lessee to surrender his lease rights over the property. The creation and the continuance of the mortgage in favour of the lessee was therefore perfectly compatible with the tenancy rights remaining in abeyance during the period the mortgage continued only to revive again upon the redemption of the mortgage.
11. Mr. Radhesh Prabhu, learned Counsel for the respondent however drew my attention to the written statement filed on behalf of the defendant-Mortgagee in which the defendant had placed reliance upon an agreement executed between the parties on the date of creation of the mortgage, by which the parties had agreed to continue the lease of the schedule property in favour of the Mortgagee on a monthly rent of Rs. 500/- for a period of eleven months with an option to extend the lease period for four years and one month thereafter. It was argued by him that the document referred to in the written statement although not formally proved clearly indicated that the lease rights in the suit property had been surrendered by the lessee who had in turn secured in lieu of such a surrender an agreement by which a fresh lease was to be created in favour of the Mortgagee on payment of a higher rate of rent and subject to conditions which were different from those originally settled. The argument no doubt sounds attractive but is equally sound. The case of the defendant-Mortgagee is that the lessee never intended to give up his lease rights over the suit property and that in order to ensure that the said rights revived after the redemption of the mortgage, the agreement was executed between the parties under which such revival was to take place no matter on a slightly higher rate of rent stipulated in the agreement. That appears to me to be the true position. The agreement marked Exhibit D. 8 has been executed between the two partnerships on the date of creation of mortgage itself. The agreement inter alia states that the lessee had opted to continue as tenant in respect of the schedule shop after discharge of the mortgage and that the lessor had no objection to the same. The following paragraph from the agreement is in this regard relevant:
"xxx xxx whereas the lessees herein have opted to continue as the tenants in respect of the schedule shop after the discharge of the said mortgage and whereas the terms of the lease have already been finalised, this agreement to lease is entered into between the parties on the following terms and conditions".
The above suggests that the lessee did not really intend to surrender its lease rights over the mortgaged property, for if there was any such intention, the question of exercising the option of continuing as a lessee even after redemption did not arise. The fact that the parties had agreed to allow the lessee to remain in occupation no matter on payment of a higher rate of rent than before clearly indicates that surrender of lease rights is not what was intended as argued by Counsel for the respondents. The execution of the agreement whether the same be treated to be an "Agreement to Lease" or an agreement under which the lease rights were to stand revived, only shows that the lessee was to continue in occupation of the property held by him even after the mortgage was redeemed. Far from establishing the intention to surrender the lease rights, the parties have by executing the Mortgage deed and the agreement referred to above expressed their intention to continue the lease even after redemption. That being so, the Mortgagor would not be entitled to claim a decree for possession upon redemption. The Trial Court was in that view in error in holding that the plaintiff was entitled to a decree for possession and in passing one in his favour.
12. In the result, this appeal succeeds and is hereby allowed, but only in part and to the extent that the decree for actual physical possession of the suit property passed by the Trial Court in favour of the plaintiff shall stand set aside and the suit of the plaintiff dismissed to that extent only. The parties shall bear their own costs.