Can government lessor demand unearned increase in value from perpetual lessee when lessee merges with another company?

M/s. Jaiprakash Associates Pvt Ltd and M/s. Jaypee Rewa Cement Ltd made a joint application before the High Court of Judicature at Allahabad, praying for an amalgamation, which was sanctioned by the High Court. The scheme of amalgamation included four plots which were perpetually leased to M/s. Jaiprakash Associates Pvt Ltd. In the order approving the amalgamation, the High Court held that the said leased properties were now vested in the transferee company (M/s. Jaypee Rewa Cement Ltd). 

After the amalgamation, the name of M/s. Jaypee Rewa Cement Ltd was changed to M/s. Jaiprakash Industries Ltd and which was once again changed to M/s. Jaiprakash Associates Ltd, the appellant before the Supreme Court.

Thereafter, the appellant made an application to the respondent-Delhi Development Authority (for short, ‘DDA’), who had stepped into the shoes of the lessor, for the grant of permission to mortgage the said plots in favour of the Industrial Finance Corporation of India. The respondent-DDA demanded an unearned increase in value (i.e. the difference between the premium paid and the market value) from the appellant. 

The appellants raised rigorous objections to the demand, which were rejected by the respondent. Thereafter, the appellant filed a writ petition before the learned single judge of the High Court of Delhi, who dismissed the petition. Being aggrieved by the decision of the learned single judge, the appellant preferred an appeal before the Division Bench of the High Court of Delhi.  By the impugned judgment, the said appeal had also been dismissed.

The appellant then approached the Supreme Court.

It was the appellants' case that the lease deed executed between the parties enshrined an embargo on the appellants from selling, transferring, assigning or otherwise parting with the possession of the whole or any part of the said plots without the previous written consent of the respondents.

The respondents were entitled to demand the payment of a portion of the unearned increase in the value (i.e. the difference between the premium paid and the market value) at time of granting permission to sell, transfer, assign etc. However, the amalgamation or merger of the two companies, under orders of the Court, would not involve any transfer within the meaning of Section 5 of the Transfer of Property Act, 1882 (for short, ‘TPA’). The appellants submitted that only the assets and liabilities of the lessee had merged and devolved on the appellant. The appellants urged that the order sanctioning the scheme of amalgamation was an order in rem, and binding on everyone. There was no element of sale consideration or consideration for transfer. The appellant submitted that in the scheme subject matter of this appeal, the transferor personality ceased to exist and merged with the transferee.

The respondents relied on the order of amalgamation passed by the High Court and responded that the company's properties, rights and powers in respect of the property were to be transferred without any further act or deed to the transferee company and thus, the demand for the unearned increase was lawful.

The Court perused the four perpetual lease agreements and noted that all the agreements had identical clauses putting an embargo on the lessee selling, transferring, assigning or otherwise parting with the possession of the whole or any part of the commercial plots without the previous written consent of the lessor.

The court also observed that the respondent-DDA,  is entitled to recover a portion of the unearned increase in the value.

The issue before the court was : Whether the amalgamation will amount to transfer of the said plots?

The Court perused the order of the High Court sanctioning the scheme of amalgamation between the companies and answered this question in positive.  

The Court observed that in the order sanctioning the amalgamation, M/s. Jaiprakash Associates Private Ltd (the erstwhile company) was shown as the ‘transferor company’ and M/s. Jaypee Rewa Cement Ltd was shown as the ‘transferee company’ and the plots leased from the respondents herein, were specifically mentioned in the schedule to the amalgamation as being transferred to the transferee company.  

The Court was of the view that the embargo in the lease deeds covers the said transfer also as it covers all the categories of transfers including by way of sale, transfer, assignment or otherwise part with the possession in any manner, of the whole or any part of the commercial plots without the written consent of the lessor, including involuntary transfers.

The Court rejected the submission of the appellants that the transfer in this case is not covered by the transfer defined under Section 5 of the TPA.

Section 5 of the Transfer of Property Act clarified that nothing contained therein shall affect any law for the time being in force in relation to the transfer of property to or by companies and therefore, Section 5 of the TPA was not applicable to the present case.

The Court opined that the relevant clause in the perpetual leases, which were the subject matter of the appeal, was very wide. It not only covers transfers but also parting with possession. 

The Court found nothing illegal about the impugned judgment and dismissed the appeal.

This judgment is particularly relevant given how many companies lease plots from the government for commercial use. The clarification that the amalgamation of companies and the resultant transfer of assets will attract unearned increase in value for the government lessor is an aspect that will have to be factored into the commercials, while deciding on any merger.

About the authors: Mahua Roy Chowdhury is the Managing Partner of Royzz & Co. Sanjay Visen is a Litigation Partner at the Firm.