Arbitration Clause In Lease Deed Cannot Be Rendered Functionless By Refusal Of Lessor To Renew Lease: SC

The Supreme Court has held that the arbitration clause in the lease deed cannot be rendered functionless if the lessor refuses to renew the lease. The Court has observed that the dispute arising out of non-renewal of the lease is arbitrable.

The Bench of Justice Indira Banerjee and Justice CT Ravikumar made this observation while adjudicating upon an issue pertaining to arbitration. The facts of this case are that by a registered deed of lease, the State of Sikkim had leased out its property to the Appellant on terms and conditions stipulated in the said deed of lease.

The lease was due to expire by efflux of time in 2021 therefore in 2020 the Appellant offered its terms and conditions for renewal of the lease of the said property, for a further period of 30 years.

However, the said offer was rejected by the state by stating that the State had decided to adopt a process to determine appropriate lease owner through a selection process.

The Appellant requested the state to refrain from taking steps to hand over the hotel to a third party until the disputes and differences were decided through arbitration.

The Appellant filed an application in the Commercial Court in respect of the same and the Commercial Court restrained the Respondent State from disturbing the Appellant's possession of the property in question, until the commencement of the arbitral proceedings.

The state filed an appeal against this decision and the Division Bench of the High Court set aside the order passed by the Commercial Court by holding that the arbitration clause could only be invoked if the proposal for renewal was accepted by the lessor. The Division Bench also dismissed Arbitration Petition filed by the Appellant for appointment of an Arbitrator.

Aggrieved by this decision the appellants approached Supreme Court.

Advocate Sahil Tagotra appeared for the appellant and Advocate Shashank Singh appeared for the State.

The Supreme Court observed thus "In our considered opinion, the Division Bench fell in error in arriving at the finding that the arbitration clause could only be invoked if the proposal for renewal was accepted by the lessor, but there was dispute with regard to the period of renewal or there was dispute with regard to the quantum of rent proposed to be paid by the lessee to the lessor."

The Court held that clauses in a lease deed cannot be read and construed in isolation and must be read as a whole.

The Court noted that "If the lessee offered its terms for renewal or extension of the lease within the time stipulated in the lease, prima facie the same would have to be accepted. However, if the quantum of rent or the period of lease could not be mutually agreed upon, the same would necessarily have to be referred to arbitration by an Arbitrator to be appointed by the Chief Justice of the Sikkim High Court."

The Court emphasized that all disputes between the parties to the lease with regard to renewal and/or non-renewal, the period of renewal and the quantum of rent would have to be decided by the Arbitrator.

Therefore, the Court set aside the judgment of the Division Bench and appointed Justice Bhaskar Bhattacharya, Former Chief Justice of Gujrat High Court and Former Chairman of the Sikkim Law Commission to adjudicate the disputes between the parties.

Cause Title- Brij Raj Oberoi v. The Secretary, Tourism And Civil Aviation Department & Anr.

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