Arbitration Clause In Lease Agreement Invalidated By Subsequent Verbal Agreement: Delhi High Court

The bench noted that:

“….but since previous agreement was replaced and substituted by an oral agreement, defendant cannot be permitted to fall back upon any of the term contained in the earlier lease agreement, which has now ceased to exist.”

Brief Facts:

Rahul Chaudhary (Plaintiff) filed a suit seeking possession, recovery of arrears of rent, and damages/mesne profits with interest. The Plaintiff argued that he was the sole and absolute owner of the suit property. Mukesh Khurana (Defendant) approached the Plaintiff in 2012 and requested to lease the property for residential purposes. This unregistered lease deed included an arbitration clause. Upon the lease's expiration, Plaintiff, responding to Defendant's request, allowed Defendant to continue occupying the property at a revised rent of ₹3,25,000 per month, although no new written agreement was executed. Due to the Defendant's failure to pay rent, the Plaintiff issued a legal notice.

The Defendant filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 and argued that the lease agreement contained a clause mandating arbitration for dispute resolution. Defendant claimed that the parties verbally agreed to extend the lease twice: initially for three years and again in March 2022, extending it to March 31, 2025. The Defendant argued that these verbal extensions maintained the terms of the original written lease, including the arbitration clause. The Trial Court held that no valid written arbitration agreement existed between the parties and dismissed the Defendant's application. Feeling aggrieved, the Defendant approached the Delhi High Court.

Observations by the High Court:

The High Court noted that the original lease deed was executed in writing with a rent of Rs. 2,75,000/- per month for the period from February 1, 2013, to January 31, 2019. It noted that the lease deed contained a clause stating that the lease could be extended for three years at an increased rental, provided a new lease deed was signed. This clause indicated that any extension required a new written agreement.

The High Court held that an arbitration agreement within a lease could survive the termination of the lease itself. However, the Plaintiff's position was that the verbal understanding created a fresh tenancy which replaced the earlier written agreement.

The High Court noted that for an arbitration clause to survive the end of a lease, there should be no new agreement replacing the old one. It noted that since a new verbal agreement was made, the original lease agreement along with its arbitration clause ceased to exist.

The High Court rejected the Defendant's reliance on decisions such as Unique Décor (India) Private Limited Vs. Synchronized Supply Systems Limited and Ashapura Mine-Chem Limited Vs. Gujarat Mineral Development Corporation. The bench noted that these cases involved written agreements or circumstances where the arbitration clause was clearly meant to survive the end of the contract. Here, it noted that the lease terms were specific and that any extension required a new written agreement.

The High Court held that the new verbal tenancy created post-January 31, 2019, was separate from the original lease. As a result, the arbitration clause in the original lease did not apply. Therefore, it held that Plaintiff was justified in seeking possession and arrears of rent through the suit, and Defendant could not invoke the arbitration clause from the original lease agreement. Consequently, the appeal was dismissed.

Case Title: Mukesh Khurana Vs Rahul Chaudhary

Citation: 2024 LiveLaw (Del) 773

Case Number: FAO 200/2024 & CAV 286/2024 & CM APPL. 36461- 36462/2024

Advocate for the Appellant: Mr Tanmay Mehta, Mr Akshat Gupta, Mr Pranav Jain & Ms Sakshi Tikmany

Advocate for the Respondent: Mr Lalit Gupta, Ms Surbhi Mehta & Mr Ankit Singh

Date of Judgment: 09.07.2024

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