Arbitrability of Lease rentals and Security Deposits

 

As per the lease deed dated 28.5.2018 for ten years, there was security deposit of Rs.7.71 crores. During pandemic, the disputes arose between the parties in respect of the lease rentals.   The rentals were appropriated from the security deposit and the respondent was called upon to replenish the security deposit to the original contracted amount.  The respondent objected to appropriation of rentals from security deposit and contended that no replenishment was necessary.

In Section 9 petition, the Arbitral Tribunal was constituted. The respondent filed section 16 application that the disputes under the lease deed are not arbitrable.   The Arbitral Tribunal held that appropriation from Security Deposit amounted to recovery of lease rentals and therefore, replenishment of security deposit is related to the lease rentals.  Therefore, the Small Causes Court has exclusive jurisdiction.

HELD that the protection envisaged by section 41 of the Small Causes Courts Act can be seen as not being applicable for in personam disputes between parties to a lease deed purely covered by the Transfer of Property Act.   Consequently in view of Vidya Drolia judgment, there is no public policy impediment for parties to a lease deed to contract arbitration agreements.

Disputes over in personam obligations flowing from lease deeds covered just by the Transfer of Property Act without any special statutory protection being enjoyed by the lessee, in relation to any property situated in Greater Mumbai would e amenable to arbitration.

For such lease deeds the phrase “any other law” under Section 41(2) of the Small Cause Courts Act would include the Arbitration Act, thereby making Section 41(1) of that legislation applicable.