McDonalds was in for a big shock earlier this month after Delhi High Court asked the fast food giant to vacate in 8 weeks its 3-storey restaurant at India's most expensive high street, Khan Market in Lutyens Delhi to vacate a restaurant it had been running for 13 years at India's most expensive high street Khan Market.
The penalty has caused a ripple in the realty circle. In what is being seen as a landmark judgment for lease renewals and the rental market at large, the Delhi High Court ruled against McDonalds, finding the multinational to have overstayed as an unwelcome tenant since February 2010 and ordered.
The High Court instructed McDonalds to retrospectively pay a rent nearly 200 percent higher from February 2010. McDonalds has been directed to pay Rs 11 lakh a month and 12.5 percent interest from February 2010, as against Rs 3.5 lakh it had been paying as monthly rent. The Court had taken the prevailing market rates to fix that amount.
McDonalds lost the case to a 92-year old widow Niamat Kaur Anand, who since the lease expiry in 2010 had been fighting to reclaim her property. Anand was represented by her son's childhood friend and legal eagle Harish Salve. McDonalds had moved the Delhi High Court after losing an arbitration, which had been awarded by former justice AP Shah. The Delhi High Court had upheld the arbitration award.
Experts say a precedent has been created not just over the penalty or mean profits that has been levied on multinational tenant but also on the basis of which a tenant and a landlord can interpret contract clauses to renew a lease deed. In this particular case the lease deed was for a period of nine years with rent to be increased after 5 years at 25 percent over the last rent paid.
Problems arose in 2009 when Anand indicated to McDonalds that it should pay a higher rent as per the market rates in case it wants to renew the lease. The company responded by signing a 'letter of intent' allegedly signed by Kaur in 2001, saying she had agreed to let out the premises for 18 years. The company also questioned the rationale behind her decision to increase the rent, saying such a steep hike isn't agreeable to it.
Justice Shah in the arbitration award, subsequently upheld by the Delhi HC, concluded that the registered lease deed dated February 12, 2001 was for nine years while a letter cited by McDonalds as an agreement to extend the lease by another nine years, "is merely an offer" and therefore, not a concluded legal contract.
In an interview to CNBC-TV18 Harish Salve shared views on how will this case impact lease deeds going forward and clauses that tenants and landlords must insist upon in a contract.
Below is the verbatim transcript of Harish Salve's interview on CNBC-TV18
Q: Landlords normally feel safer letting out properties to multinational companies (MNCs). Why has this McDonalds case according to you set an important precedent? Is it only because of the penalty or because there was an arbitration clause in the lease deed which is not a common practice?
A: It is good in the time scale that we have seen because there was a big problem which became exactly the reverse of the intention of the law makers. They exempted properties over three and half thousand per month from rent control because those kind of tenants who can afford to pay that is not what the rent control law is meant for.
Like in Mumbai if you are a company with a share capital of more than Rs 1 crore then you are not protected by the Rent Act. Now the problem is, the Rent Act courts actually were faster so one should file a suit for possession and the suit for possession takes forever in our legal system.
Therefore, landlords are always struggling to get their property back if the tenants turn around and set some kind of defence and say alright, I lose the case but at least I have the property for the next ten years. This is a good format that insists on a good arbitration clause when you are letting properties to large companies.
Q: Since land and property is normally seen as the state subject, can you explain whether this case creates a precedent only in New Delhi or Pan India? For instance, each state has its own rent act which will then have to be factored in all of these lease deeds?
A: No. Anywhere in India, a lease ultimately is a matter of contract. Even if you are writing a rent note and you don’t want to execute a formal lease, I would advice people to have an arbitration clause saying it will go to arbitration of an arbitrator to be appointed jointly by parties.
If the parties fail to appoint the court appoints arbitrator which is a short cut proceeding. An arbitrator is appointed and then the matter goes on. So, at least you get a degree from the arbitrator within a finite period of time. If one has a good arbitrator it is definitely finite period of time.
Q: According to you, what all should tenants insist upon while taking up a property?
A: Must have is a clear clause in which there must be, if there is a renewal clause it must provide the manner in which the renewal is to be exercised. Two, it should say that the lease is a complete contract and no other writing whether before or after shall constitute any contract for renewal save and accept in accordance with the lease. Third, which should be provided is an arbitration clause.
Q: While litigation is very popular in India, arbitration isn't, especially when we talk about landlords and tenants. So even if the two parties were to look at this, any clauses that they must include within the arbitration clause?
A: I had a clause in the arbitration clause saying the arbitrator shall award cost on well settled principles. In England if one ran a false defence, one would have to pay huge cost. I have seen cost orders in England running into millions of pounds for running a false case. We don’t do that in India and that is why litigation drags on and on and people carry on merrily. We must encourage such alternate dispute resolution clauses that have compact remedy.
Q: We have covered tenants, what about landlords? What is your advice for those looking to let out property?
A: When landlords are drawing up leases, unfortunately in India we have given up the practice of drawing up a proper lease deed. There are standard templates, one can virtually Google them and find out. There are standard templates with clauses for handing over possession, clauses for keeping the properties in good repair, properties clauses for paying rent rates and out goings, clauses for forfeiture, for misuse, renewal clauses.
These are in any template of a lease. Landlords, who want to be sensible, should not try and shortcut and save money on stamp duty. The biggest thing in our favour was a registered lease. Have a registered lease, it is worth the investment.
Q: According to you, a registered lease deed is a must. But is that ammunition enough for a landlord to reclaim property? It is never going to be quick, but can it help in speeding up the process?
A: There is nothing one can do to prevent a man who is staying in your house from not vacating. What one can and must do is, one must provide the mean profits will be paid on market value, which in any case is the law. So, once tenants realise that they are not going to get a free or a discounted ride for their period of overstay, they will end up paying current market values and there will be trouble.
Media can run a circular or a ready reckoner rate of properties. Landlords would benefit immensely from that and it will then become an acceptable evidence because the advantage of an arbitration is that one does not have to follow the strict rules of the law of evidence or strict rules of go to procedure to prove something.
If it has a good ready reckoner of property, it will be the other thing. In this case fortunately, the landlady had a quotation from another person who was interested in her property. We produced that person and they send somebody who flew down here and said here was our offer. She has actually got the rent she would have got from a back date.
Q: Are you saying that it should be an agreement to have mean profits and damages that must be agreed upon at the time of signing the lease deed?
A: One should agree in advance that if one overstay, you will pay me damages on the basis of market rate of this property as fixed in the ready reckoner published by X or Y. At least the landlord then does not have to go running around getting valuation reports, putting expert witnesses in the box and one can cross-examine a person and then it becomes chancellor’s foot. Should it be five, six, four, valuation is always this. This is a clause which can be put into the lease deeds. If there is a good ready reckoner that somebody takes on to publish, we will go by the average market quotation and so you can agree that in advance.
Q: If the two parties agree to ready reckoners, will it be fair for a tenant to go to a landlord during a property downcycle and say reduce my rent, the market is down, rentals have fallen?
A: One, you have to make a distinction between two periods – one is the currency of the lease, the other is post lease. During the currency of the lease it is a matter of contractual negotiation whether somebody wants a flexible rent or a fix rent. It is like if you want to take a mortgage, you have to take a call.
Do you want flexible rates of interest or fix rates of interest, sometime one loses, sometimes the other loses. Many times landlords want certainty of income. They are happy if they get this much income for a period of three years. So, you have a fixed lease during the currency of the lease. There has never been a problem about the currency of the lease, the problem arises post that.
It takes five years to get your premises back. How much will you be compensated in damages for that five years of overstay, becomes very difficult for a landlord to prove, what is the current market rate and you also know market rate is never really reflected in full cheque payments and so, it gets difficult to prove the current market rate.