Advocate Arjun Makuny

INTRODUCTION

Recently, the Supreme Court in the decision of Embassy Developments vs. State of Karnataka[1] had held that a Corporate Debtor could not avail the benefit of Mortarium under Section 14 of the Code to seek for deemed extension of lease agreement. In the present case, the IRP had sought for a deemed extension of the mining lease held by the Corporate Debtor. The rationale given by the Court in rejecting the extension was that Mortarium under the Code only preserves the status quo and cannot be invoked by the Corporate Debtor to create and hold a new right. While the said decision had become a precedent for the moot point on when the High Court can intervene in proceedings under the Code, a critical issue in this ruling in relation to extension of lease has gone unnoticed.

EXTENSION- A NEW RIGHT?

It is critical to note that there is a distinct difference in nature between “Extension” and “Renewal” of lease.

Extension Clauses are clauses which are present in a lease deed which entitle a lessee to opt for continuation of the original lease deed on similar terms and conditions previously agreed to. It is only in exceptional situations where an extension of lease which is validly sought by the lessee is denied, since the lessor has already agreed to the total duration for lease of property (including extension) in the original lease deed.[2] Thus, the lessee’s action of exercising the option of extension of lease would not factor on obtaining the lessor’s assent.

The differencing factor between a Lease Deed containing a renewal clause and a Lease Deed containing an extension clause is that the original lease deed will not terminate on expiry of the same if the extension clause is duly exercised by either party as per the terms and conditions of the original lease deed.

In order to give effect to a renewal clause in the lease deed, a new lease deed has to be drawn up and executed by the concerned parties and registered and stamped. There is expiry of the original lease deed. Thus, in this case there brings about the existence of a new lease deed and therefore a new right is brought in place for the lessee.

However, if the extension clause is activated within the stipulated time by the lessee by adherence to the conditions and terms of the original lease deed, the lease does not expire and it gets extended. There is no requirement by law to draw up a new lease deed and get it registered and stamped to give effect of extension of lease deed. Therefore, in this case there is no new lease deed brought into the picture and a new right does not arise for the lessee. The existing right of the lessee is merely extended.

EXTENSION vs RENEWAL- AN INSIGHT INTO PAST DECISIONS

In Provash Chandra Dulai v. Bishwanath Banerjee[3],  it was held by the Hon’ble Supreme Court that there is no requirement to execute a fresh lease deed in order to give effect to an extension of the original lease and the original Lease Deed continues in force during the extended lease term, since an extension of lease is only a prolongation of the original lease.

In State of Uttar Pradesh & Others v Lalji Tandon[4], the hon’ble Supreme Court held a similar view. The Court opined that the original lease deed would continue to be in force for the additional lease period agreed by the Parties.

In Delhi Development Authority v Durga Chand Kaushish[5], the Hon’ble Supreme Court held that a ‘renewal’ of lease is called so because it postulates the existence of a prior lease which generally contains a clause for renewal. In all other respects, a renewal is essentially a ‘fresh’ grant of lease by the lessor.

These judicial decisions offer an authoritative source to signify and highlight the difference in nature between “renewal” and “extension” of a lease deed. These cases enable us to highlight the differencing factor between a Lease Deed containing a renewal clause and a Lease Deed containing an extension clause, i.e. the original lease deed will not terminate on expiry of the same if the extension clause is duly exercised by either party as per the terms and conditions of the original lease deed thereby giving a conclusion that a new right is not created but merely an existing right be prolonged.

CONCLUSION

From the above judgements of the Supreme Court, it can be clearly understood that there exists a clear conceptual difference and nature between the term’s “extension” and “renewal” of lease deed.

In the present case, what was sought by the IRP in view of the moratorium imposed under the Code was an extension of the mining lease, which is technically a prolongation in duration of the original lease. There is no clearly no new right created in favour of the Corporate Debtor by granting such an extension.

The Supreme Court was not right in holding that the scope of moratorium grants only a right of not to be dispossessed of property of the Corporate Debtor. During the Insolvency Resolution Process, it is to be ensured that the Corporate Debtor remains a going concern as such is the objective of the Code itself. The scope and objective of Moratorium should be defined and interpreted in a broad manner by the Courts to ensure that the Corporate Debtor is not revoked of any license or any intangible right held prior to the insolvency resolution process, as most of today’s commercial enterprises are dependent on such rights to generate revenue.

The very purpose behind enactment of the Code is to ensure value maximisation of assets of the Corporate Debtor so as to serve the interests of all stakeholders of the Corporate Debtor. In pursuance of such a goal, it is essential to interpret the Code in a broad manner to ensure that the Corporate Debtor remains in existence as a going concern entity.

[1] Embassy Developments vs. State of Karnataka, 19 (IBC) 19/2020.

[2] See India: Consequences of Expiry of Lease, By Sunil Tyagi and Anu Chowdhury. Accessed on   https://www.mondaq.com/india/Real-Estate-and-Construction/370288/Consequences-Of-Expiry-Of-Lease

[3] Provash Chandra Dulai v. Bishwanath Banerjee , 1989 AIR 1834, 1989 SCR (2) 401.

[4] State of Uttar Pradesh & Others v Lalji Tandon, Appeal (civil) 4698-4700 of 1994.

[5] Delhi Development Authority v Durga Chand Kaushish, 1973 AIR 2609, 1974 SCR (1) 535.

Author Bio

Qualification: LL.B / Advocate
Company: King & Partridge Advocates & Solicitors
Location: Chennai, Tamil Nadu, IN
Member Since: 07 Apr 2020 | Total Posts: 3

My Published Posts

More Under Corporate Law

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

October 2020
M T W T F S S
 1234
567891011
12131415161718
19202122232425
262728293031