There has been a long-standing debate in the courts regarding the balancing of interests of the financial creditors (banks) with that of the tenants of the defaulting landlords. In such a scenario the tenants cannot be blamed as they technically are a third party to this entire mishap, however, the tenants are the ones to suffer the wrath of the Banks too. This disharmony and uncertainty is due to the brawl between the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), and the varied state-oriented Rent Control legislations.

The SARFAESI Act was enacted on the suggestion of the Narasimham Committee –II. It was seen as a great relief and an efficacious remedy for the banks in the procurement of the secured assets given by the borrowers, upon any default. The basic aim of the legislation was to provide speedy recovery of defaulting loans and ergo, to control the level of NPAs. On the other hand, the main objective of the Rent Control legislations is that of providing a 'secured tenancy tenure'. Hence, the courts are often baffled with the question of whom to aid, the financial institutions, or the 'blameless tenants'.

This entire dilemma was pondered upon by analyzing the legislations in question. The courts have taken into consideration the 'non-obstante clause' present in section 35 of the SARFAESI Act, but have opined that it cannot be used arbitrarily to dispossess the tenants from the premises. The phrase "any other law for the time being in force" cannot extend to all the laws ever created. Furthermore, allowing the provisions of the SARFAESI Act to override the provisions of the Rent Control Acts would be akin to looking down upon the legislative competency of the State Legislature and in turn, question the entire Quasi-federal setup of the Country. This analysis was given in Vishal N Kalsaria v/s Bank of India & Ors.

In a view to balancing the interests of the two conflicting parties the court in Harsh Govardhan Sondgar v/s International Assets Reconstruction Company Limited & Ors, came up with a method of categorization of the leases granted by the borrowers:

Leases created prior to a mortgage which created the secured assets
Leases entered into after the creation of the mortgage in accordance with section 65A of the Transfer of Property Act, 1882 (TPA), but before the receipt of notice under section 13(2) of the SARFAESI Act

Leases entered into after the creation of the mortgage in accordance with section 65A of the TPA but after the receipt of notice under section 13(2) of the SARFAESI Act
Categories 1 and 2 are valid and binding on the bank. The leases would not stand automatically determined upon initiation of action under sections 13 and 14 of the SARFAESI.

Furthermore, the lessee cannot be evicted by the secured creditor with the assistance of the Chief Metropolitan Magistrate (CMM) or District Magistrate (DM). The tenant can be asked to leave only once the lease is validly terminated as per modes mentioned in section 111 of the TPA i.e. determination of the lease. Subsequently, category 3 being an invalid tenancy, the tenant can be immediately evicted by the Bank via section 13(13) of the SARFAESI.

Therefore, as stated in Indian Bank v/s M/s Nippon Enterprises South & Ors, the Hon'ble Supreme Court held that once the tenancy is created, the tenant can be evicted only after following due process of law as prescribed under the relevant Rent Control Act. Hence, the Banks (financial creditors) cannot arbitrarily and illegally drive out the oblivious tenants using provisions of the SARFAESI.

In addition, the introduction of the 2016 Amendment to the SARFAESI Act now allows tenants to file an application under section 17 of the Act to the Debt Recovery Tribunal (DRT) and further appeal to the Debt Recovery Appellate Tribunal (DRAT) under section 18 of the Act, to enforce their rights.