Introduction

With the advent of globalization, inter-state migration has increased due to which there has been a growth in the demand for rental properties. This in turn promotes the use of lease agreements between the landlord and the tenant, ultimately resulting in various disputes arising from this genus.  Arbitration, an expeditious remedy, was considered the most sought-after alternative to litigation. However, the Indian judiciary was still perplexed about its arbitrability. Therefore, there are numerous landmark judgments, both in support and against the proposition.^[1] Whereas, other countries like the United States of America which follows a federal system of government, has given autonomy to the states for deciding the arbitrability of the landlord-tenant disputes. The UK as well as Singapore, the pioneer of many laws in South-Asia, have fully and explicitly accepted it. Due to the perplexity of the issue in India, the Indian judiciary deliberated on one major issue, “Is there an arbitration clause in the lease agreement?”

The article analyses the evolution of the changing stance of the Supreme Court of India, on the issue of the arbitrability of landlord-tenancy agreements in India.  Further, it would also look at what other modern jurisdictions have dealt with the same.

India

The argument against arbitration:

The entire issue of tenant and landlord disputes find its root in the case of Natraj Studios (P) Ltd v. Navrang Studios & Anr^[2]. In this case, the lease agreement contained an arbitration clause, however, the petitioners claimed that the case should be adjudicated by a court of small causes. Whereas the respondents filed a counter proceeding and argued for the invocation of the arbitration clause. Interestingly, both of the pleas were granted by separate benches of the same Bombay High Court, because of which the matter was sent to the Supreme Court of India. The Supreme Court held that since the tenants have a weaker bargaining power and the matter pertains to public interest, it could not be sent to arbitration. Hence, it was shifted to the court of small causes.

Then, in 2011, came the landmark case of Booz Allen & Hamilton v. SBI Home Finance Ltd^[3]. The State Bank of India agreed to enter into a loan agreement with two enterprises for two different houses, both of which were given to the appellant under a license and lease agreement, with a security deposit of Rs 6.25 Crore. According to the agreement, the rent was supposed to be paid to SBI and in turn it would provide a combined loan of Rs 6.25 Crore, to both the enterprises for purchasing the house. However, during the time of expiry, the appellant denied the extension of the license agreement as one of the enterprises declared insolvency and went into liquidation. The other company was the guarantor in case of default. But when the time came for returning the security deposit, the guarantor company denied the same, responding to which the appellant wrote a detailed reply to SBI that it will continue the possession but would not pay the rent until it receives back its security deposit. The change; judgment lies in the fact that the appellant demanded invocation of the arbitration clause.

The Apex Court held that if the subject matter of the case dealt with a right in rem, then the issue cannot be termed as arbitrable, on the other hand, if the issue involves a right in personam, then the dispute could fall into the category of arbitrability. Further, it laid down the three major conditions that the courts should consider before adjudication of the arbitrability of a suit, these were, whether, “Firstly, the dispute must be mentioned under the arbitration agreement signed by the parties. Secondly both the parties must have referred the dispute to arbitration. Third, the dispute should fall into the category of being arbitrable, which is laid down by the courts.”

Lastly, for a better understanding of the third clause, the Apex Court explicitly mentioned six different types of subject which do not fall under arbitration:

• disputes which give rise to or arise out of criminal offences;
• matrimonial disputes,
• guardianship matters;
• insolvency and winding up matters;
• testamentary matters; and
• eviction or tenancy matters”.^[4]

After 2011, there was a spree of judgements from different High Courts which supported and contradicted the judgment of Booz Allen. For instance, in the case of, Ambuja Neotia Holdings Pvt. Ltd. v. M/S Planet M Retial Ltd.^[5], the Supreme Court held that the Transfer of Property Act (hereinafter TPA) is not a special statute and is a general Act, because of which it is arbitrable. On the other hand, in the case of Penumalli Sulochana v. Harish Rawtani^[6], it was concluded that disputes of lease deed are not arbitrable, the reason for which was derived from the tests of ‘Right in rem’ and ‘Right in Personam’ (mentioned in the above paragraph). This perplexity between different High Courts created a grey area on the arbitrability of landlord-tenant agreements.

Following the precedent of Booz Allen, the Apex Court passed another landmark judgment in 2017, the Himangni Enterprises v. Kamaljeet Singh Ahluwalia,^[7] in which the appellant took a shop on rent from the respondent for a period of three years. After expiry of the same, it still continued its possession and did not pay the rent for the same. It was argued that the suit is not maintainable because of its subject matter and expiry of the agreement. On the contrary, the respondents demanded litigation, to which the Court agreed and litigation was allowed. As the judgement was passed on the same lines of tests from the Booz Allen judgement, which were ‘Right in Rem’ and ‘Right in Personam”; it was considered as a landmark precedent which could not have been negated by the subordinate courts. Thus, leaving no-room for arbitration in landlord tenant agreements.

The pro-arbitration era:

Now, in 2019 came the most important judgement of all, which overturned all the past judgments and wrote a pro-arbitration judgement- Vidya Drolia and Ors. v. Durga Trading Corporation^[8]. A Division Bench of the Supreme Court adjudicated that a landlord-tenant judgment agreement under TPA will be arbitrable. However, as both the judgements were passed by divisional benches; Booz Allen and Vidya Drolia had equal precedential values   but were not in consonance with each other. To resolve the issue and set a stronger precedent, the Court decided to form a three-judge bench.

The case at hand was filed by the respondent (landlord) as he had leased godowns to the appellant (tenant) for a period of 10 years. However, after the expiry of the agreement the tenant denied vacating the place and stopped paying the rent. Aggrieved by the same, the landlord filed a suit for invoking the arbitration clause in the agreement.  Both the trial and the High Court ruled in favour of the landlord. The tenant appealed the apex court, and argued the non-admissibility of the arbitration suit based on the case of Himangni Enterprises v. Kamaljeet Singh Ahluwalia.^[9]

Clearing the looming grey area, the Court passed three firm orders in its judgment:

1. Can the cases based on fraud between landlord and tenant come under the arbitration, provided that they are concern public policy?

To which the court opined that, the issue arose because of the erroneous interpretation of Section 34(2)(b) of the Arbitration Act and question of subject-matter and public policy are two different aspects and should be read separately. Hence, the issue is arbitrable as it does not affect public policy. 

1. Why should courts introduce arbitration in matters, which are denied arbitration by the legislature?

The apex court upheld that a thorough interpretation mentioned above, leads to the conclusion that the legislature has intentionally introduced the landlord-tenant disputes under arbitration and a denial of it would contradict the intent of the legislature of creating a robust arbitration mechanism in the country. Further, the denial of arbitration in landlord-tenant disputes fails to acknowledge that the process of arbitration is unbiased and fair, which is why it should be trusted.

1. How to judge that, whether a case falls within the subject-matter of arbitration?

 The Court laid down a four-pointer test, to judge the arbitrability of an issue. According to the test, if an issue comes under the subject matter of arbitration then it should:

“(a) relate to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem,

(b) affects third party rights, have erga omnes effect, require centralized adjudication, and mutual adjudication would not be appropriate,

(c) relates to inalienable sovereign and public interest functions of the State and

(d) is expressly or by necessary implication non-arbitrable under a specific statute”.^[10]

However, the Court has created a margin of correction by stating that these tests are not to be read in water-tight compartments and each case has different circumstances. Thus, the validity of the arbitration in landlord and tenant agreements was upheld.

United States Of America

The American stance regarding the arbitrability of land-lord tenancy issues is interesting as in the earlier times, the landlord tenancy disputes were based on the common law, which eventually inclined towards the landlord. In order to resolve it, courts introduced the doctrine of constructive eviction, which was not as effective. Courts have raised various issues regarding the same, such as the issue of public policy, because naturally tenants have less bargaining power, leading to unfair results.^[11]

Each federal state in the USA has power to make their landlord-tenancy laws. For instance, Alaska and Arizona explicitly allows arbitration in land-lord tenancy.^[12] However, the California State Court of Appeal has adjudicated against arbitration in MCB Valley Properties v. Etter.^[13] In this case, there was a dispute between two clauses, one which favoured arbitration and other against it. The Court opted the clause which was against it, stating that, “     no dispute whatsoever would fall within the ambit of [the Remedies section]. Such an interpretation would completely foreclose the Etters from seeking any remedy for any violation through a judicial proceeding. This cannot have been the parties’ intent.”  Thereby allowing the courts to adjudicate such cases.^[14]

United Kingdom

Section 81(1)(a) of the English Arbitration Act,1996 provides a conservative approach to the arbitrability of the landlord-tenant dispute and reserves the common law approach. However, despite this, it has allowed arbitration in landlord tenant disputes.^[15] Further, in Mustill & Boyd on Commercial Arbitration,^[16] the author states that there is no general theory in English Laws to distinguish which disputes are arbitrable and which are not; however a close analysis would reveal that, “any dispute or claim concerning legal rights which can be the subject of an enforceable award, is capable of being settled by arbitration”. There are certain limitations to it, like public policy. In addition, the author in the book, “Born on International Commercial Arbitration^[17] states that, “The non-arbitrability doctrine rests on the notion that some matters so pervasively involve public rights, or interests of third parties, which are the subjects of uniquely governmental authority, that agreements to resolve such disputes by “private” arbitration should not be given effect.”

However, in the case of Pittalis v Sherefettin,^[18], the tenant was denied access to arbitration owing to a clause in the agreement which stipulated that only the landlord could approach the arbitrator. The Courts opined that as there was meeting of mind in the contract, it is completely valid, and the landlord was only allowed to refer to the arbitration panel. Hence, denying the tenant the right of arbitration. As a result, the landlord-tenant disputes in England are accepted under Arbitration but are often subjected to the agreement.

Singapore

Singapore is one of the world’s most arbitration friendly country. Singapore International Arbitration Centre has been resolving disputes through Arbitration for the past 30 years and has settled claims worth USD  6.4 billion in 2021.^[19] Landlord-tenant or lease agreement issues are arbitrable here. Although the Singaporean government provides the facility of a small claims tribunal, a majority of cases are solved through different ADR mechanisms like the Singapore Mediation Centre.^[20]

The Central Court of Singapore has addressed the issue of arbitrability in the case of Batshita International (Pte) Ltd v Lim Eng Hock Peter,^[21] where a tenant stopped paying rent because the landlord orally stated that he would repair certain defects in the flat. The tenant argued that the dispute pertained to the tenancy agreement and is arbitrable but the landlord stated that it pertains to non-payment of rent and is non-arbitrable despite a clause of arbitration in the agreement. The Supreme Court opined that the arbitrability of the issue is valid as they found no reason why it could not be arbitrated and hence the landlord and tenant agreements are valid in Singapore. Hence, giving an opportunity to the ADR mechanism to bloom in the country.

Conclusion

The arbitrability of landlord-tenant disputes would give a boost to the commercial section disputes, as time is of major essence in them. However, in tenancy disputes, certain issues germinate from the tenants. Owing to the dominant position of the landlord, most agreements are prepared with extensive conditions laid down by them. This raises the issue of public policy, as it created an unfair bargain in favour of the landlord and against the tenant. Secondly, since the decisions of arbitration proceedings do not have precedential value for other cases and the nature of arbitration does not allow the presiding officers to interpret laws, the legal system loses its dynamic character of interpretation. This in turn can make the law stagnant and would also stop interpretation by the Higher Judiciary. A solution to the above problem could be that the arbitrators, using their own good conscience, could refer cases to the courts, which involves a legal question to be answered. This legal question could pertain to interpretation etc.

A full forced enforcement of the judgement by the three-judge bench would reduce the burden of the courts, especially considering that as many as  4.70 crore cases are still pending before Indian Courts and awaiting adjudication.^[22] To reduce this, courts need to emphasize other dispute resolution mechanisms. The courts should deliberate and allot the case to arbitration, even in the cases where there is no mention of the arbitration related clause in the lease agreement.

References 

[1] Dr Anirban Chakraborty and Prakhar Agarwal, Himangni Enterprises v. Kamaljeet Singh Ahluwalia: A Critical Review, SCC Online (September 28, 2022, 3:00 PM), https://www.scconline.com/blog/post/2019/10/14/himangni-enterprises-v-kamaljeet-singh-ahluwalia-a-critical-review/

[2] Natraj Studios (P) Ltd vs Navrang Studios & Anr 1981 SCR (2) 466

[3]  Booz Allen & Hamilton vs SBI Home finance ltd (2011) 5 SCC 532

[4] Manasa S Venkatachalam, Arbitrability of IPR in India: Have Courts Put a Snooze on Booz Allen?, INDIACORPLAW, (23 September, 2022) https://indiacorplaw.in/2021/02/arbitrability-of-ipr-in-india-have-courts-put-a-snooze-on-booz-allen.html.

[5] Ambuja Neotia Holdings Pvt. Ltd. v M/S Planet M Retial Ltd AP No. 9 of 2015

[6] Penumalli Sulochana vs Harish Rawtani C.R.P. NO. 4506 of 2012

[7] Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706.

[8] Vidya Drolia & Others v. Durga Trading Corporation, 2019 SCCOnLine SC 358.

[9] Supra note 11

[10] Shahezad Kazi and Gladwin Issac, Supreme Court of India Clarifies ‘What Is Arbitrable’ Under Indian Law And Provides Guidance To Forums In Addressing The Question, MONDAQ (September 21, 2022, 3:07 PM), https://www.mondaq.com/india/trials-appeals-compensation/1023030/supreme-court-of-india-clarifies-39what-is-arbitrable39-under-indian-law-and-provides-guidance-to-forums-in-addressing-the-question

[11] Marilyn M. Glynn, Arbitration of Landlord-Tenant Disputes, 27 AM. U. L. REV. 407 (1978).

[12] id.

[13] MCB Valley Properties v. Etter, No. A161159 (Cal. Ct. App. Jun. 30, 2021)

[14] Jason Grinnell and Hope Swantko, United States: Cannabis Company Denied Arbitration – Reminder to Avoid Conflicting Remedies In Lease Agreements, MONDAQ, (September 28, 2022, 3:10 PM) https://www.mondaq.com/unitedstates/landlord-tenant–leases/1097048/cannabis-company-denied-arbitration-reminder-to-avoid-conflicting-remedies-in-lease-agreements

[15] -, Arbitration of Landlord and Tenant Disputes, Business Bub (January 19, 2023, 4:01 PM), https://www.businesshub.london/resource/arbitration-of-landlord-and-tenant-disputes/#:~:text=If%20the%20lease%20doesn’t,arbitrator%2C%20when%2C%20and%20how. See also, -, Arbitration bodies selected to manage rent related disputes, GOV.UK, (January 19, 2023, 4:02 PM) https://www.gov.uk/government/publications/apply-for-role-of-arbitration-body-to-manage-rent-related-disputes-process-and-form.

[16] STEWART BOYD, MUSTILL & BOYD: INTERNATIONAL COMMERCIAL ARBITRATION THIRD EDITION, (LexiNexis 2022)

[17] GARY BOM, BORN ON INTERNATIONAL COMMERCIAL ARBITRATION, 768 (Wolters Kluwer 2009)

[18] Pittalis v Sherefettin [1986] QB 868,

[19] -, SIAC Commemorates 30th Anniversary in 2021 with High Caseload, Singapore International Arbitration Centre, (January 19, 2023 5:23 PM) https://siac.org.sg/siac-commemorates-30th-anniversary-in-2021-with-high-caseload

[20] -, ‘Fair wear and tear’ disputes over rental property: What can tenants and landlords do?, Chanel News Asia (CNA) (January 19, 2023 5:27 PM), https://www.channelnewsasia.com/singapore/fair-wear-and-tear-disputes-rental-property-tenants-landlords-1993706.

[21] Batshita International (Pte) Ltd v Lim Eng Hock Peter [1996] 3 SLR(R) 563

[22] PTI, Over 4.70 crore cases pending in various courts: Govt, The Economic Times (January 19, 2023) https://economictimes.indiatimes.com/news/india/over-4-70-crore-cases-pending-in-various-courts-govt/articleshow/90447554.cms