Rent Control Act implication on Demergers

As Demerger, Split-up, spin-off transactions generally involve transferring of assets & liabilities of Transferor Companies undertaking, on a going concern basis. This generally includes land, buildings, machinery, debtors, stock, workers, creditors, borrowings and so on.

In some cases assets transferred include Tenancy Rights, which are transferred to the resulting company by the transferor/ demerged company on a going concern basis. This can create some issues when there is assignment of tenancies, as part of the scheme in demerger/ arrangement transaction.

Implication of Assignment of Tenancies

Under the Indian Constitution, provision of housing is a state subject. Thus, the enactment and enforcement of rent control laws is the responsibility of the individual states.

Though the “National Company Law Tribunal (NCLT) ” order judgment in rem, but, the sanctioning of such transfer has no powers to override the provisions of the state laws relating to tenancy.

Therefore, tenancy rights cannot be transferred without the permission of the landlord. If such a transfer is made, the landlord may be legally entitled to evict the tenant.

Case Law: General Radio and Appliances Co Ltd vs MA Khader (1986) 60 Com Cases 1013 (SC)

But, at the same time “High Court” or “Company Law Tribunal” is not bound to hold back its sanction for the prior approval of the Landlord. This was observed in the scheme of merger before the Hon’ble High Court, which did not hold back sanction merely because the prior permission of the landlord was not obtained. It held was held that – so long there was no other problem, it will sanction it and thereafter, it would be a matter between the landlord and the transferee/ resulting  companies.

Case Law: Brooke Bond Lipton India Ltd, Re, (1998) 15 SCL 81 (Cal)

So, assignment of tenancy rights is not automatic but a deed of assignment of leasehold rights will have to be executed as Transferee entity (resulting company) will be different from Transferor entity.

Issues to be considered before filling scheme of demerger or arrangement

  • Whether the lease & license agreement provides for transfer of tenancy rights in case of demergers or arrangements?
  • Options & Alternatives available to the tenant, if the scheme of arrangement/ demerger is not ratified by the Land Lord or the Owner of the property?

You can consult us for solution addressing the above issues. And in addition to these we can help you secure business interests & objectives, considering not only the current requirements but also anticipating future business dynamics.