The Division Bench of the Andhra Pradesh High Court comprising Justices U. Durga Prasad Rao and B.V.L.N. Chakravarthi was hearing a petition filed by the tenant of the secured property. The HC Bench held that the petitioner, as a lawful tenant under a registered lease, cannot be dispossessed by the bank/secured creditor based on a subsequent mortgage, and the bank's action was deemed illegal and arbitrary.
The petitioner in the present case filed a writ petition seeking a writ of mandamus to prevent the bank from dispossessing and taking physical possession of their leasehold property. The petitioner argued that the bank's actions were illegal, arbitrary, and violated their constitutional rights. The petitioner claimed to be the lawful tenant of the property and had a registered lease agreement until November 2022.
In the present case, the bank had granted a loan to another party and had initiated proceedings to take possession of the property. The bank argued that the petitioner had violated the terms of the lease by conducting a different business on the property.
The High Court observed that if a valid tenancy exists before the creation of a mortgage, the tenant's possession cannot be disturbed by the secured creditor.
The HC Bench further noted that the bank must conduct due diligence regarding existing tenancies before accepting a property as a mortgage. If a tenancy arises after the mortgage but before the notice under the SARFAESI Act, it must satisfy the conditions of the Transfer of Property Act. If a tenant claims possession for more than a year, it must be supported by a registered instrument.
In this particular case, as a valid registered lease was in force when the possession notice was issued, the bank's attempt to take physical possession during the lease was deemed illegal.
However, since the lease period ended during the proceedings, the bank has the right to initiate fresh proceedings if the lease was renewed, subject to adjudication under applicable laws, the High Court noted.
The petition was allowed, setting aside the bank's proceedings.