Introduction:

In a significant ruling aimed at strengthening the rights of secured creditors under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the Supreme Court of India has clarified that a tenant cannot resist eviction when the tenancy is not proved to have been established prior to the creation of a mortgage. This judgment came in the matter of PNB Housing Finance Limited versus Sh. Manoj Saha & Anr. [2025 LiveLaw (SC) 723], where the apex court allowed the appeal filed by PNB Housing Finance Ltd. against a decision of the Calcutta High Court which had directed restoration of possession to the respondent claiming tenancy rights. The bench comprising Justices P.S. Narasimha and Joymalya Bagchi held that lease agreements executed after a property has been mortgaged do not grant enforceable tenancy rights against secured creditors exercising powers under Section 13(4) of the SARFAESI Act. The case involved Respondent No.1, who alleged tenancy rights under an unregistered five-year lease dating back to 1987 but failed to produce rent receipts, tax records, or utility bills to prove possession prior to the mortgage. The Court underscored the necessity of clear documentation and reaffirmed that tenants seeking protection must show that their tenancy predated the mortgage and complied with statutory requirements. The judgment reiterated that oral or unregistered tenancies without evidence cannot obstruct the rights of secured creditors to enforce security interests under SARFAESI.

Arguments by the Appellant (PNB Housing Finance Ltd.):

The appellant, PNB Housing Finance Ltd., argued that Respondent No.1’s claim of tenancy was neither substantiated nor legally sustainable. It was contended that the alleged lease was unregistered and unsupported by rent receipts, tax records, or any utility bills to demonstrate actual possession before the mortgage was created in 2017. The appellant emphasized that under the SARFAESI Act, once a borrower defaults, the secured creditor is empowered to take possession of the secured asset, and any alleged tenancy created post-mortgage cannot frustrate these statutory rights. Counsel for the appellant relied heavily on the Supreme Court ruling in Bajarang Shyamsunder Agarwal v. Central Bank of India (2019) 9 SCC 94, which clarified that tenancies created after the mortgage, or those not duly established by evidence, cannot override SARFAESI provisions. It was further argued that Vishal Kalsaria v. Bank of India (2016) 3 SCC 762—which protected bona fide tenants—was distinguishable, as that protection was conditional on tenancy being proven and predating the mortgage. In the present case, Respondent No.1 failed to discharge the burden of proof, making the Calcutta High Court’s restoration order unsustainable. The appellant asserted that allowing such unproven tenancies to impede enforcement under SARFAESI would defeat the object of expeditious recovery of debts and embolden borrowers to create sham tenancies to frustrate creditors’ rights.

Arguments by the Respondent (Claimed Tenant):

Respondent No.1, represented by senior counsel, argued that he had been in possession of the property as a tenant since 1987 under an oral lease agreement for five years, which was subsequently continued by mutual consent. He submitted that his possession was long-standing and independent of the borrower’s mortgage transaction with PNB Housing. The respondent relied on the West Bengal Premises Tenancy Act, 1997, to contend that tenants enjoy statutory protection against eviction except on specific grounds enumerated under the Act. He claimed that the SARFAESI Act does not automatically override state tenancy laws and that Section 35 of SARFAESI, which gives the Act an overriding effect, should not be read to extinguish bona fide tenancy rights. The respondent further relied on Vishal Kalsaria v. Bank of India, where the Supreme Court held that secured creditors cannot evict bona fide tenants without following due process under rent control laws. It was argued that his tenancy was genuine and continued even after the mortgage was created, making it incumbent upon the appellant to establish grounds for eviction under tenancy law rather than invoking SARFAESI powers. The respondent also contended that procedural fairness required the restoration of possession as ordered by the High Court, as dispossession was effected without proper adjudication of his tenancy claim by the Debt Recovery Tribunal.

Supreme Court’s Judgment:

The Supreme Court, in its detailed judgment authored by Justice Joymalya Bagchi, allowed the appeal filed by PNB Housing Finance Ltd., setting aside the Calcutta High Court’s direction to restore possession to Respondent No.1. The Court observed that the respondent had failed to establish his tenancy claim with credible evidence such as rent receipts, electricity bills, or municipal tax payments to prove possession prior to the mortgage creation in 2017. The bench emphasized that “a mandatory order restoring status quo ante necessitates a compelling, cast-iron case, which the first respondent has failed to establish.” The Court underscored that oral or unregistered tenancies, without supporting documentary proof, cannot be relied upon to restrain secured creditors from exercising rights under SARFAESI. Referring to the precedents, the Court clarified that the protection granted in Vishal Kalsaria applies only to bona fide tenants with valid and documented tenancy predating the mortgage. On the other hand, the ruling in Bajarang Shyamsunder Agarwal governs cases where oral or informal tenancies are asserted; in such cases, tenants bear the burden of proving tenancy through documentary evidence. The Court reiterated that even if such tenancies are assumed to exist, under Section 106 of the Transfer of Property Act and the framework of SARFAESI, these tenancies cannot survive beyond one year after issuance of a demand notice under Section 13(2) of the SARFAESI Act, and post that period, the occupant becomes a tenant-in-sufferance with no enforceable rights. In conclusion, the Court held that the respondent’s claim was unsubstantiated and that granting restoration would undermine the objectives of SARFAESI, which seeks speedy recovery of debts and enforcement of security interests without prolonged litigation. Accordingly, the appeal was allowed, and the High Court’s order was quashed.

Key Legal Principles Affirmed by the Court:

• Primacy of SARFAESI over State Rent Laws: SARFAESI Act has overriding effect under Section 35, but bona fide tenants with valid tenancy agreements predating mortgage may still be protected subject to evidence.
• Burden of Proof on Tenant: Tenants claiming tenancy rights against a secured creditor must produce documentary proof such as rent receipts, utility bills, or tax records to establish the tenancy.
• Oral/Unregistered Tenancies: Such tenancies without evidence cannot frustrate SARFAESI proceedings and, even if presumed, do not survive beyond one year after demand notice under Section 13(2).
• Limits of Vishal Kalsaria Protection: Applicable only to well-documented tenancies existing before mortgage creation; not available for oral or post-mortgage leases.

Implications of the Judgment:

This decision significantly fortifies the rights of secured creditors, reducing the scope for borrowers or occupants to use unsubstantiated tenancy claims as a tactic to delay SARFAESI enforcement. It reinforces the necessity of maintaining written, registered lease agreements supported by rent receipts and other documents to claim legal protection. For financial institutions, the ruling provides clarity and assurance that recovery proceedings under SARFAESI will not be derailed by dubious tenancy claims, thereby expediting the debt recovery process. For tenants, the judgment serves as a cautionary tale to ensure compliance with legal formalities and maintain evidence of their tenancy to safeguard their rights.