The Bombay High Court (“High Court”), in Maharashtra Industrial Development Corporation v. Union Bank of India, Writ Petition No.1930 of 2011 (dated May 26, 2025), held that a mortgage created by a lessee over its leasehold rights in breach of a lease covenant (without the lessor’s prior consent) would not be void if the lease deed prescribes remedies for such breach and the lessor fails to exercise its remedy of termination and re-entry.

Factual Background:

Plot No. D-9 in Marol Maharashtra Industrial Development Corporation Area (the “Plot”) was under control of Maharashtra Industrial Development Corporation (“MIDC”). The Plot was leased to Benelon Industries (“BI”) for 95 (ninety-five) years vide a lease deed dated March 23, 1979 (“Deed”). Clause 2(t) of the Deed prohibited the assignment, letting or parting with possession of the Plot without prior consent of the MIDC. The Deed also contained a provision for determination of the lease with a further right of re-entry in case of breach of any covenant by the lessee.

BI obtained financial assistance from Union Bank of India (“UBI”) and created a mortgage over its leasehold rights in the Plot in favour of UBI, without obtaining MIDC’s consent. BI defaulted on the loan, after which UBI filed recovery proceedings and obtained an ex-parte decree against BI in 1996 from the High Court. Execution proceedings were transferred to the Debts Recovery Tribunal (“DRT”), and in 2004, a recovery certificate under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDDBFI Act”) was issued in favour of UBI.

On October 18, 2007, the MIDC issued a show-cause notice to BI stating therein that various violations of the terms of the Deed had been noticed. Meanwhile, the DRT issued an order of proclamation for the sale of the Plot on October 29, 2007. Subsequently, MIDC filed an application under Section 19(25) of the RDDBFI Act, seeking to set aside the recovery proceedings on the grounds that the mortgage created in favour of UBI was invalid, having been executed without MIDC’s prior consent. In the meanwhile, however, the DRT issued an order of sale proclamation based on UBI’s claim. The Plot was sold to Kalindi Properties Private Limited (“KPPL”) in an auction conducted by the DRT on October 10, 2008. Furthermore, the DRT dismissed MIDC’s application that was preferred under Section 19(25) of the RDDBFI Act and the MIDC challenged this in the Debts Recovery Appellate Tribunal, Mumbai (“DRAT”).

The DRAT on January 18, 2011, held that the mortgage by BI in favour of UBI was neither illegal nor void. BI had committed a breach of Clause 2(t) of the Deed by creating a charge over the Plot without taking prior consent from MIDC. However, the MIDC did not take any steps under Clause 4 of the Deed (which provides for consequences of breach of any covenant of the Deed) so as to determine the lease and re-enter the Plot.

The present writ petition was preferred against the abovementioned judgment of the DRAT in the High Court.

Contentions:

MIDC’s Contentions

MIDC contended that since the mortgage executed by BI in favour of UBI was in violation of Clause 2(t) of the Deed and was executed without MIDC’s prior consent, it was void in law. Consequently, it argued that no legal rights were created in favour of UBI under the same. Furthermore, MIDC argued that KPPL, as the auction purchaser, did not acquire a valid title to the Plot and merely stepped into the shoes of BI, the original allottee whose rights stood vitiated since the Deed had already been terminated by MIDC in July, 2007.

MIDC further referred to Sections 58 and 108(j) of the Transfer of Property Act, 1882, to emphasize that if the initial execution of the mortgage in favour of UBI was illegal, all actions/ transactions entered into by it thereafter would have no legal effect.

KPPL’s Contentions

KPPL argued that although MIDC claimed there was a breach of Clause 2(t) of the Deed, MIDC took no action to exercise its right of re-entry or to terminate the lease, and that DRAT rightly held that mortgage deed executed in favour of UBI could not be treated to be void. KPPL further argued that having paid full consideration as per the auction terms, it could not be deprived of its rights to the Plot. In fact, it was MIDC’s failure to protect the Plot that led to encroachments, and as a result, KPPL did not receive vacant possession of the property, despite fulfilling its financial obligations.

Decision:

The High Court noted that the creation of mortgage over its leasehold rights in the Plot by BI in favour of UBI was without prior consent of MIDC and thus in violation of Clause 2(t) of the Deed. The Deed clearly set out, under Clause 4, the consequences of such breaches, including the requirement for MIDC to issue notice and grant a 3 (three) months opportunity to cure the breach before exercising its right of re-entry in the Plot. While MIDC did issue show-cause notice to BI on October 16, 2007 after discovering the unauthorized use of the Plot, it failed to take any further action as required under Clause 4 to terminate the lease or re-enter the Plot. This unexplained inaction, the High Court observed, meant that although there was a breach, MIDC chose not to enforce its rights. Therefore, the High Court agreed with the DRAT's view that the mortgage executed by BI in favour of UBI, though in violation of Clause 2(t) of the Deed, could not be deemed void.

Accordingly, the High Court held that the DRAT’s judgment did not warrant interference and the mortgage and the subsequent sale of the Plot to KPPL was valid.

Please find attached a copy of the judgment.

This update has been contributed by Utkarsh Bandhu (Partner) and Mrunalini Vengurlekar (Associate).

Argus Knowledge Centre is now on WhatsApp! Send us a message on +91 8433523504 to receive updates from our Knowledge Centre.