Arbitration Clause In Lease Agreement Voided By Subsequent Verbal Agreement: Delhi High Court
Justice Manoj Jain of the Delhi High Court bench has ruled that the arbitration clause in a lease agreement becomes void
Arbitration Clause In Lease Agreement Voided By Subsequent Verbal Agreement: Delhi High Court
Justice Manoj Jain of the Delhi High Court bench has ruled that the arbitration clause in a lease agreement becomes void once the lease terminates and a new verbal tenancy agreement is formed.
The bench noted that:
“But since the previous agreement was replaced and substituted by an oral agreement, the defendant cannot be permitted to fall back on any of the terms contained in the earlier lease agreement, which has now ceased to exist.”
Rahul Chaudhary (plaintiff) filed a lawsuit seeking possession, recovery of rent arrears, and damages/mesne profits with interest, asserting sole ownership of the suit property. Mukesh Khurana (the defendant) approached the plaintiff in 2012 to lease the property for residential use under an unregistered lease agreement containing an arbitration clause. After the lease expired, the plaintiff allowed the defendant to continue occupying the property at a revised monthly rent of ₹3,25,000, despite no new written agreement being executed. Following the defendant's rent defaults, the plaintiff issued a legal notice.
The defendant invoked Section 8 of the Arbitration and Conciliation Act, 1996, arguing that the original lease agreement included an arbitration clause for resolving disputes. The defendant claimed that the parties verbally extended the lease twice: initially for three years and later in March 2022, extending it to March 31, 2025. According to the defendant, these verbal extensions maintained the terms of the original lease, including the arbitration clause. However, the trial court ruled that no valid written arbitration agreement existed between the parties and dismissed the defendant's application. Dissatisfied, the defendant appealed to the Delhi High Court.
The Delhi High Court noted that a provision in the original written lease deed, which stipulated a rent of Rs. 2,75,000 per month from February 1, 2013, to January 31, 2019, required the signing of a new lease deed for any extension beyond this period. This clause explicitly stipulates that extensions must be documented in writing.
In a case titled "Specific Reference to Arbitration Clause Needed In 'Two-Contract Case' For Incorporation," the High Court clarified that an arbitration agreement within a lease could endure beyond the lease's termination. However, the plaintiff argued that a new verbal arrangement established a fresh tenancy, superseding the original written agreement.
The High Court emphasized that for an arbitration clause to persist beyond the lease's end, there must be no new agreement replacing the old one. Since a new verbal agreement was established, the original lease along with its arbitration clause ceased to apply.
The Court dismissed the defendant's reliance on precedents like Unique Décor (India) Private Limited v. Synchronized Supply Systems Limited and Ashapura Mine-Chem Limited v. Gujarat Mineral Development Corporation, noting that these involved clear provisions or circumstances where the arbitration clause was intended to survive the contract's termination. In contrast, the current lease terms were specific, requiring any extension to be formalized in writing.
Consequently, the High Court concluded that the verbal tenancy established after January 31, 2019, constituted a distinct agreement from the original lease. Therefore, the arbitration clause in the original lease did not govern the dispute, affirming the plaintiff's right to seek possession and rent arrears through the lawsuit and dismissing the defendant's appeal.