Mortgage In Breach Of Lease Covenant Not Automatically Void If Consequences Are Provided In Lease Deed: Bombay High Court

The Bombay High Court stated that mortgage in breach of lease covenant not automatically void if consequences are provided in lease deed.

The Division Bench of Justices A.S. Chandurkar and M.M. Sathaye observed that “the action of BI of creating a mortgage of the leased plot in favour of UBI was without the prior consent of the Chief Executive Officer of the MIDC and thus in violation of Clause 2(t) of the lease deed. Though MIDC sought to invoke its right under Clause 4 of the lease deed by issuing a show cause notice, it did not take any further steps in that regard. Since the consequence of a breach of any covenant of the lease deed has been provided, the creation of the mortgage in breach thereof cannot be treated to be void.”

In this case, a Plot located in Marol Maharashtra Industrial Development Corporation Area was under control of the petitioner-Maharashtra Industrial Development Corporation-(MIDC). The MIDC alloted the said plot to the second respondent-M/s. Benelon Industries (BI).

BI had obtained financial assistance from the Maharashtra State Financial Corporation (MSFC). The MSFC issued a No Dues Certificate to BI on receiving its dues. Since BI sought further financial assistance from the respondent no.1- Union Bank of India (UBI) it approached the MIDC for grant of No Objection for creation of mortgage of the aforesaid plot in its favour. According to the MIDC, notwithstanding aforesaid, UBI granted financial assistance to BI.

According to the MIDC during inspection of the plot, its Officers noticed unauthorised use of the same by third parties without its permission. The MIDC issued a show cause notice to BI stating therein that various violations of the terms of the lease deed had been noticed.

In the meanwhile, the DRT issued an order of proclamation for the sale of the plot on 29/10/2007. According to the MIDC, it was informed about the attachment of the said plot on 06/11/2007 and hence on 01/02/2008 it filed an application before the Recovery Officer for raising the attachment. The MIDC thereafter filed Miscellaneous Application under Section 19(25) of the Act of 1993 for setting aside the recovery proceedings as being illegal.

The DRT dismissed Miscellaneous Application that was preferred by the MIDC under Section 19(25) of the Act of 1993. Being aggrieved, the MIDC challenged the said order by filing Miscellaneous Appeal before the Debts Recovery Appellate Tribunal. The Recovery Officer proceeded to confirm the sale in favour of KPPL with a direction to handover possession of the plot to it. Thereafter DRAT passed an interim order staying the recovery proceedings initiated by UBI and steps taken pursuant thereto till the adjudication of the Miscellaneous Appeal.

The petitioner-MIDC submitted that the DRAT committed an error in not accepting the contentions raised by the MIDC that the mortgage deed executed in favour of UBI being without consent of the MIDC was void in law. It was submitted that admittedly consent of the MIDC had not been obtained prior to executing the mortgage deed in favour of UBI. Despite recording this finding, the DRAT erred in holding that the mortgage deed was not void.

The respondent- KPPL submitted that the DRAT rightly found that the mortgage deed in favour of UBI could not be treated to be void. Though it was the stand of the MIDC that there was a breach of the terms of the lease deed by BI and especially Clause 2(t) thereof, no steps whatsoever were taken by the MIDC to exercise its right of re-entry or to terminate the lease. The DRAT rightly found that the MIDC was guilty of inaction without any justifiable reason. Pursuant to various orders passed by the DRT in the execution proceedings, a public auction was conducted in which KPPL participated and was successful. Having paid the entire consideration as per its bid, KPPL could not be deprived of its rights in that regard.

The bench observed that on the legality of the mortgage deed executed by BI in favour of UBI, the DRAT has held that the mortgage could not be held to be illegal, void and nonest. While recording this finding, it has been held that the mortgage of leasehold rights was not prohibited by law and that execution of such mortgage deed by BI could be treated to be in breach of the covenants of the lease deed. It has referred to Clause 2(t) of the lease in that regard.

The DRAT has rightly found that the creation of the mortgage by BI was without the prior permission of the MIDC and it was open for the MIDC to exercise its right of re-entry due to breach of a covenant which it failed to enforce, added the bench.

In view of the above, the bench dismissed the petition.

Case Title: Maharashtra Industrial Development Corporation v. Union Bank of India

Case Number: WRIT PETITION NO.1930 OF 2011

Counsel for Petitioner: Sahil Mahajan with Saurabh S. Godbole, Advocates for the applicant

Counsel for Respondent/ Department: A. I. Patel, Additional Government Pleader with S. P. Kamble, Assistant Government Pleader for the respondent-State

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