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Jul 19, 2013, 02.00 PM IST | Source: CNBC-TV18

McDonalds vs Niamat Anand case: What landlords can learn

According to Harish Salve, one should agree in advance that if one overstays, they will pay for damages on the basis of market rate of the property as fixed in the ready reckoner which will save the landlord from running around getting valuation reports, putting expert witnesses.

We must encourage alternate dispute resolution clauses that have compact remedy

Harish Salve

Sr Advocate

Supreme Court

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.

Also Read: Chennai real estate market growing steadily: Indiaproperty

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.

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