The Saga of commercial leases

The Saga of commercial leases

According to pundits, the world’s 10 most transparent commercial real estate markets attract 75% of direct global investments. Transparent, we are not. Our labyrinth of laws rivals a Persian tapestry.

Commercial real estate – the parched land of India is out of bounds of the salaried class and not always the first investment choice of high net worth individuals. Hopes of REITs deepening this segment are drying up as close to none has come forward. Last quarter, the only shower on the barren landscape, was Brookfield Asset Management Company’s $ 1 billion purchase of 4.5 million sq. ft. of prime office space in the Mumbai suburbs from the Hiranandani Group.

Let in a tenant and he is yours for life.  Not a happy marriage with exit impossible.Even squatters enjoy the right not to be disturbed of their settled possession. The fear of losing the underlying asset staves off genuine investors. Our extant statues fail to assuage this fear. Should the landlord use force, he risks grave consequences under our penal laws. Excessive it may seem, but no jurisdiction would permit any eviction without due process of law. For whatever reason, due process of law is painfully long in India. Here lies the nub of the problem.

In negotiations after negotiations, certain quirky solutions have found their way into lease transactions, especially in Mumbai. The Maharashtra Rent Control Act, 1999 grants statutory protection to tenants. Ouster from the security blanket of the Rent Act would mean greater control unto the owners. Here comes Section 3 of the Rent Act into its own. It lists out instances where the Rent Act is not applicable. Sub-Clause (b) stipulates that a private limited company having a paid up capital of Rs. One crore is exempt from the Rent Act.

Owners often insist that the lessee/ tenant company must raise its paid up share capital toRs.Onecrore (Rs.10 million). Most private companies maintain minimum paid-up capital. The subsidiaries of large conglomerates and multinationals can verily do business without holding such large amounts. Increasing the paid-up share capital is a bitter pill to swallow. But, it has come to be an idée fixeof the landlords. Their rationale lies in Sub-Clause (b) of Section 3.However, the same rationale may not be applicable in case of international agencies or multinational companies.In order to appreciate the nuances of Section 3(b), a new look at it may be necessary; the text as verbatim is:

“3. Exemption

(1) This Act shall not apply-

(b) to any premises let or sub-let to banks, or any Public Sector Undertakings or any Corporation established by or under any Central or State Act, or foreign missions, international agencies, multinational companies, and private limited companies and public limited companies having a paid up share capital of  rupees one crore or more.”

It is obvious that multinational companies, even if they are in the nature of private limited companies, do not fall under the purview of the Rent Act. They are denied protection as a statutory tenant. But consistently the landlords have obsessed over the Rs.One crorepaid-up capital stipulation. The separation of multinational companies and the stipulation, by a comma in Sub-Clause (b),has not made much headway. It is said that our ex-Finance MinisterP. Chidambaram, argued a comma, in the Supreme Court,over two days. If a comma puts a period on a festering question, that’s a good full stop.

However, whilst executing lease after lease, the landlord’s executive can’t see the forest for the trees. The clear provisions of the law go past them. Since the Rent Act does not define the term ‘multinational company’, their apprehension is not misplaced.

The omission to define multinational companies may have been deliberate. Straight-jacketed formulae limit the ability of the courts to interpret a statute. It is a fundamental rule of statutory interpretation that meanings of words and expressions used in an Act must derive their colour from the context in which they appear. When the context makes the meaning of a word quite clear, it is unnecessary to search for the esoteric. Justice Sonak’s eloquent judgment, delivered in 2015, given below, is the final authority on the issue.

In Eloff Hansson (India) Pvt. Ltd. Vs.Rahul I. Kadri and Ors.,Justice Sonak of theHon’ble Bombay High Court, arrived at the conclusion that the applicant company was a multinational company and upheld the eviction order passed by the lower court. The High Court was of the opinion that Eloff Hansson (India) Pvt. Ltd. was certainly a multinational company as (i) major part of shareholding in Eloff Hansson (India) Pvt. Ltd. was held by a foreign company, (ii) common management strategy was piloted by the foreign company, (iii) half of its directors were foreign nationals, and (iv) it was carrying on business by itself or with its sister companies across several countries.

The tongue-in-cheek definition of a ‘Multinational Corporation’, by Sir Arnold Hall of Hawker Siddeley, is simply irresistible, and quoted for sheer reading pleasure: “A multinational corporation is an American-registered company manufacturing its products where labor is cheapest, and channeling its profits to another country where taxation is lowest or preferably non-existent.” What would Trump have to say of this definition?

Substantial time and effort may be saved if we let the comma put a pause on the argument. The last word on the matter comes from the most revered head of any state, Nelson Mandela: “May your choices reflect your hopes, not your fears”.

 

Divya Malcolm is a Principal Associate with the Mumbai Office of Kochhar& Co. a full service law firm The views expressed are her own and not that of the firm. divya@mumbai.kochhar.com

About Shubham Singh

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