Transfer of Leased Property Doesn't Automatically Extend Arbitration Agreement to Transferees: Allahabad High Court - 2024-05-21

Covering Law & Justice.

Allahabad High Court: Arbitration Clause in Lease Deed Not Automatically Transferable to Subsequent Property Buyers

Lucknow, [Date of Judgement - 21 May 2024] – The Allahabad High Court, in a recent judgment, has clarified that the arbitration clause within a lease agreement does not automatically extend to subsequent purchasers of the leased property, especially when the property transfer is contested and lacks lessee's consent. Justice Subhash Vidyarthi presiding over the case, dismissed a petition challenging orders that halted arbitration proceedings initiated by property purchasers against M/S Decathlon Sports India Private Ltd.

Background of the Dispute

The case originated from a lease deed executed between M/s Rohtas Projects Limited and Decathlon for commercial space in Lucknow. Subsequently, Chitra Misra and 13 others (the petitioners) purchased units within the leased property from Rohtas Projects Limited . When disputes arose regarding rent payments, the petitioners invoked the arbitration clause from the original lease deed to initiate proceedings against Decathlon .

Decathlon challenged the jurisdiction of the Arbitral Tribunal, citing the absence of an arbitration agreement with the petitioners and the ongoing insolvency proceedings against Rohtas Projects Ltd. The Sole Arbitrator, a retired Justice, upheld Decathlon ’s objection and dismissed the arbitration for lack of jurisdiction. This decision was further affirmed by the Commercial Court No. 1, Lucknow. The petitioners then approached the High Court under Article 227 of the Constitution, challenging both orders.

Arguments Presented

Petitioners' Counsel , Sri Pritish Kumar , argued that as transferees of the lessor's rights, the petitioners stepped into the shoes of the original lessor, Rohtas Projects Limited , according to Section 109 of the Transfer of Property Act. They relied on the Supreme Court’s judgment in Ambica Prasad Vs. Alam and others , asserting that attornment (tenant’s acknowledgment of a new landlord) is not mandatory for the transfer of landlord’s rights to be valid. They also contended that the initial order under Section 11 of the Arbitration Act by the High Court implied the court's satisfaction with the existence of an arbitration agreement.

Respondents' Counsel , Senior Advocate Sri S.C. Mishra , countered that the lease deed itself contained clauses restricting property transfer without the lessee’s consent and a tri-partite attornment agreement. He highlighted Clause 19 of the lease deed which mandated lessee’s consent for any third-party interest creation and execution of an attornment deed. Mishra argued that no such consent or attornment occurred. He emphasized that the arbitration clause was specific to the original parties of the lease deed – Rohtas Projects Limited and Decathlon – and did not extend to the petitioners. He also pointed out that Decathlon had already deposited the disputed rent with the National Company Law Tribunal (NCLT) and vacated the premises, effectively addressing the core grievances.

Court's Reasoning and Decision

Justice Vidyarthi , after considering arguments and legal precedents, sided with the respondents. The court distinguished the Ambica Prasad case, noting that it did not address the effect of a "contract to the contrary" within Section 109 of the Transfer of Property Act. In this case, the lease deed itself constituted such a "contract to the contrary," restricting unconsented transfers.

The High Court emphasized that Section 109, while generally transferring lessor’s rights, operates "in the absence of a contract to the contrary." Here, the lease deed explicitly limited transferability without lessee consent and attornment. The court noted pivotal clauses in the lease agreement:

> “In case the Lessor doesn’t comply with the above-said condition pertaining to the proposed sale or transfer of its rights of the Leased Premises, and does not intimate the Lessee then in such event the Lessee shall be entitled to hold the monthly rentals of the Lessor till proper legal documentation/Deed of Attornment is being executed between the Lessor, Lessee and such prospective buyer on the same terms and conditions of this Deed”

and

> “The Lessor agreed that in case of sale of any unit of the Leased Premises, the Lessor shall immediately inform the Lessee before making an endorsement on such sale or transfer and all such sale/transfer shall be subject to execution of Attornment Deed between the Lessor, Lessee and such prospective buyer”

The Court reasoned that these clauses clearly indicated that the transfer of lessor's rights to petitioners was conditional and did not automatically include the arbitration agreement. Therefore, no arbitration agreement existed between the petitioners and Decathlon .

Regarding the appointment of an arbitrator under Section 11, the court clarified, citing Vidya Drolia and Others Vs. Navrang Studios , that such appointment is often made even if the existence of an arbitration agreement is in doubt, leaving the final determination to the Arbitral Tribunal itself under Section 16 of the Arbitration Act.

Ultimately, the High Court upheld the orders of the Arbitrator and the Commercial Court, dismissing the petition. The Court concluded:

> “In view of the foregoing discussion, will not be in the interest of justice to interfere in the order dated 15.07.2022 passed by the sole Arbitrator dropping the arbitration proceedings for want of jurisdiction, although for different reasons.”

The court found that due to the absence of a direct arbitration agreement and Decathlon having already addressed the petitioners’ financial claims through NCLT and vacating the property, interfering with the lower court orders would not serve justice.

Implications of the Judgment

This judgment reinforces the principle that arbitration agreements are contractual and do not automatically transfer with property rights, particularly when the original contract specifies conditions for such transfer. It highlights the importance of 'contract to the contrary' clauses in Section 109 of the Transfer of Property Act and clarifies the limited scope of judicial intervention at the stage of arbitrator appointment under Section 11 of the Arbitration Act. The decision underscores the necessity for transferees to ensure proper legal documentation and attornment agreements are in place to inherit all contractual rights, including arbitration clauses, in property transactions involving existing leases.