Disputes arising from lease agreements containing commercial elements like revenue sharing are prima facie arbitrable. Under statutory provisions, judicial review at the referral stage is restricted to the existence of the arbitration agreement; questions regarding non-arbitrability and procedural validity are to be determined by the arbitral tribunal.

Headnote:(A) Arbitration and Conciliation Act, 1996 - Section 11 - Appointment of arbitrator - Arbitrability of dispute - When a lease agreement stipulates terms regarding revenue share along with fixed payments, it assumes a commercial character and deviates from a simple landlord-tenant relationship - Arbitral Tribunal is the preferred first authority to decide questions of non-arbitrability - Judicial scrutiny at the referral stage should be limited to the existence of an arbitration agreement and prima facie arbitrability. (Paras 11, 25, 26)

(B) Dispute Resolution - Commercial Agreements - In instances where the parties have entered into a long-term lease with specific clauses excluding non-arbitral forums and including revenue-sharing elements, the agreement is deemed commercial - Courts should not usurp the role of the tribunal unless the dispute is manifestly and ex facie non-arbitrable. (Paras 9, 23, 29)

Facts of the case:
The applicant filed an application for the appointment of a sole arbitrator after the respondent failed to comply with the dispute resolution clause contained in a lease agreement. The respondent contested the application, contending that the relationship between the parties was governed by regional rent control legislation, rendering the dispute non-arbitrable. Additionally, the respondent challenged the maintainability of the application on grounds of non-joinder of necessary parties and the absence of the original agreement.

Findings of Court:
The court determined that the lease agreement involved elements of profit sharing, transcending a standard landlord-tenant relationship. It concluded that where the nature of the transaction is commercial, such disputes are arbitrable. The court underscored that the determination of arbitrability should primarily be adjudicated by the arbitral tribunal rather than during the referral stage.

Issues: The central issues addressed were whether a dispute arising from a lease agreement is non-arbitrable due to statutory protection under local rent laws, whether the absence of other co-owners prevents the filing of the application, and whether the lack of the original agreement bars the institution of proceedings.

Ratio Decidendi: The court maintained that when lease terms extend beyond standard rental arrangements, such as including revenue-sharing clauses, the agreement is characterized as commercial and is therefore arbitrable. At the initial referral stage, judicial intervention is circumscribed to a prima facie examination of the existence of the arbitration agreement, leaving complex questions regarding joint ownership and non-arbitrability for the arbitral tribunal to resolve.

Result: Application allowed.

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The present application has been filed under Section 11 of the Arbitration and Conciliation Act, for appointment of sole arbitrator.

2. Short facts of the case are that the applicant is owner and title holder of the immovable property namely shop No.GF.1 situated on the ground floor of the premises commonly known as "The One" located at Plot No.5, RNT Marg, Indore M.P. The same was purchased by the applicant vide registered sale deed dated 29.03.2019.

2.1 The respondent No.1 is a Pvt. Ltd. Company, which is engaged in the business of quick service restaurants, food outlets for dining serving vegetarian and non-vegetarian food under the name and style of KFC. The leased premises i.e., the property referred herein above was offered by the applicant to the respondent No.1 pursuant to which agreement / lease deed dated 06.02.2020 was executed in which respondents No.2 and 3 were also parties as they are the owners of GF.2 and GF.3 in the same building complex. The duration of the lease was 20 years, commencing from the date of handover of the possession of the leased premises. The handover date was decided to be 20^th January, 2020. The respondent no. 1 thus taken over possession of the leased premises and commenced its activities as described above.

2.2 As there were some disputes between the parties, the applicant issued notice dated 30.07.2024 thereby terminating the lease with immediate effect and asking respondent No.1 to vacate the premises within a period of 15 days from the date of receipt of the notice. However, the respondent No.1 did not flinch. Rather a reply was sent to the fact that in view of the terms of lease agreement the termination notice is without any merits and a request was made for withdrawal of the same.

3. The applicant responded to the said reply by sending a notice invoking arbitration clause i.e. Clause No.26 of the lease agreement vide its notice dated 30.08.2024. Again the respondent by replying to the same on 12.09.2024 informed the applicant that notice should be withdrawn in view of the fact that abrupt closure of restaurant on 06.06.2024 triggered by the applicant caused significant operational disruption and financial losses to respondent and thus by reserving its right to claim compensation it was asked that notice invoking arbitration be withdrawn.

3.1 The applicant when faced with this situation sent notice dated 11.10.2024 thereby again invoking the arbitration clause and proposing appointment of sole arbitrator. The respondent again denied the same by repeating its earlier contentions. Ultimately the final notice was sent for invoking arbitration on 07.11.2024 and for demand of outstanding lease rent/dues a separate notice was sent on 07.01.2025. When the respondent did not consent for arbitration in terms of Clause 26 nor paid the dues, the present application for appointment of sole arbitrator has been filed.

3.2 Learned counsel for the applicant submits that in view of the above facts and Clause No.26 of the agreement there is a clear existence of dispute and arbitration agreement. He further submits that in view of the reply given by the respondents there is no possibility of appointment of arbitrator by mutual consent, hence he prayed for appointment of arbitrator.

4. Opposing the prayer of the applicant, the respondent No.1 has filed its reply and stated that the property in question has been rented to the respondent No.1 by the applicant, non-applicant No.2 and non-applicant No.3 jointly by executing rent agreement (Annexure A/1) on 20.01.2020 for a period of 20 years on a rent of Rs.2,00,000/- per month. This rented property is situated within the limits of Indore Municipal Corporation since the rented property is a part of non-residential building and is let out to respondent No.1 within municipal limits of Indore Municipal Corporation therefore, the said tenancy betwee

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2026 Supreme(Online)(MP) 3185

Cases Referred (6)