Case Note & Summary
The appeal by special leave arose from a suit for redemption of a mortgage and recovery of possession of a shop. The appellant was the defendant, a lessee carrying on bakery business in the premises since 1965. The respondent plaintiff later executed a usufructuary mortgage in favour of the defendant on 18 July 1974 for a consideration of Rs.13,000. On expiry of the mortgage period, the plaintiff filed a suit for redemption and recovery of possession. The defendant contested the claim for recovery of possession on the ground that his possession was that of a lessee independent of the mortgage and that even after redemption he was entitled to continue under the lease. The Trial Court passed a preliminary decree granting redemption and directing recovery of possession from the defendant. The defendant's first appeal was dismissed by the High Court, which held that there was surrender of the prior lease by the defendant on execution of the mortgage and that the defendant's possession was only as mortgagee, bound to restore possession on redemption. The Supreme Court examined the legal principles. In Shah Mathuradas Maganlal & Co. v. Nagappa Sankarappa Malage & Ors., (1976) 3 SCC 660, it was held that surrender of a lease takes effect like a contract by mutual consent on the lessor's acceptance of the act of the lessee, and there must be a taking of possession, not necessarily physical but something amounting to a virtual taking; whether this occurred is a question of fact. The mere fact that the owner creates a mortgage in favour of the lessee is not by itself decisive to hold that the prior lease was surrendered. In Gambangi Appalaswamy Naidu & Ors. v. Behara Venkataramanayya Patro & Ors., (1984) 4 SCC 382, it was reiterated that the answer depends upon whether there was surrender of the lessee's right when the usufructuary mortgage was executed in his favour, which depends on the intention of the parties at the time of execution of the mortgage deed. Recently in Narayan Vishnu Hendre & Ors. v. Baburao Savalaram Kothawale, (1995) 6 SCC 608, these decisions were followed, holding that the doctrine of merger does not apply where tenanted premises are mortgaged in favour of the lessee; implied surrender would not be readily inferred, and unless surrender was proved, the only effect of the mortgage was that the lessee's rights were kept in abeyance and would revive upon redemption. The High Court in the present case proceeded on the erroneous assumption in law that surrender of the lease by the lessee must be implied from the fact of execution of the usufructuary mortgage in his favour. Since there was no other evidence of surrender, the court examined the mortgage deed (Annexure A-1) dated 18 July 1974 read with the release deed of the same date and found nothing to prove either an express or an implied surrender of the lease by the defendant in favour of the plaintiff on execution of the mortgage deed. Therefore, there was no automatic merger of the interest of a lessee with that of a mortgagee, and in absence of proof of surrender, on redemption of the mortgage the plaintiff was not entitled automatically to recover possession of the leased premises. The defendant's right to continue in possession as a lessee continued to subsist. Accordingly, the appeal was allowed, the judgments and decrees of the courts below to the extent they directed restoration of possession by the defendant to the plaintiffs were set aside, and the defendant appellant was awarded costs throughout from the plaintiff-respondents.
Headnote
A) Property Law - Lease and Mortgage - Surrender of Lease Not Inferred from Mortgage to Lessee - Not mentioned - The court considered whether execution of an usufructuary mortgage by a lessor in favour of a sitting lessee resulted in surrender of the lease. Relying on Shah Mathuradas, the court reiterated that surrender requires mutual consent and an act amounting to virtual taking of possession, which is a question of fact. Held that mere creation of mortgage in favour of lessee is not decisive to infer surrender. (Paras 1-8) B) Property Law - Merger of Interests - Doctrine of Merger Not Applicable to Tenant-Mortgagee - Not mentioned - Following Gambangi Appalaswamy and Narayan Vishnu Hendre, the court held that the doctrine of merger does not apply where tenanted premises are mortgaged in favour of the lessee. Implied surrender of lease would not be readily inferred, and the lessee's rights are kept in abeyance, reviving upon redemption. (Paras 1-8) C) Property Law - Redemption - Right to Physical Possession Depends on Proof of Surrender - Not mentioned - The mortgagor seeking physical possession upon redemption must prove surrender of the lessee's rights at the time of mortgage execution; otherwise the tenant-mortgagee continues as lessee. The onus is on the lessor-mortgagor to establish surrender from the deed or other evidence. (Paras 1-8) D) Procedural Law - Appellate Review - High Court Erroneously Assumed Implied Surrender - Not mentioned - The High Court proceeded on erroneous assumption in law that surrender must be implied from execution of mortgage. Since no such inference arises automatically, the Supreme Court set aside the direction for restoration of possession and allowed the defendant lessee to continue possession. (Paras 1-8)
Issue of Consideration
Whether upon redemption of an usufructuary mortgage executed by a lessor in favour of a sitting lessee, the mortgagor is entitled to recover physical possession, or the tenant-mortgagee may continue as a lessee absent proof of surrender of the lease.
Final Decision
Appeal allowed; judgments and decrees of courts below to the extent directing restoration of possession by defendant to plaintiffs set aside; defendant appellant entitled to continue in possession as lessee; defendant awarded costs throughout from plaintiff-respondents.
Law Points
- Surrender of lease not inferred from mortgage to lessee
- doctrine of merger does not apply to tenant-mortgagee
- lease rights revive on redemption unless surrender proved
- question of fact on intention from deed and evidence
