How to ascertain whether a transaction is lease or mortgage?

The guidelines for deciding - whether a transaction is a lease or a mortgage contemplate that the name given to the document is not conclusive. The question has to be decided with reference to the predominant intention of the parties as gathered from the recitals and the terms of the documents and the surrounding circumstances including conduct of the parties. In the case of a mortgage, there is a transfer of interest to secure repayment of debt and in the case of a lease, there is a transfer of a right to enjoy the property [See: T.P. Act by Mulla - 9th Edn. Page 621]. In the case of Fuzhakkal Kuttappu v. C. Bhargavi and Ors.MANU/SC/0366/1976 : [1977]1SCR696 , it has been observed that the nomenclature given to a document by the writer or even by the parties is not always conclusive. In construing a document, it is necessary to find out the intention of the parties executing such document. Such intention has to be gathered from the recital, the terms in the document and from surrounding circumstances. When there is a document of a composite character disclosing features of mortgage and lease, the Court will have to find out the pre-dominant intention of the parties executing the document viewed from the essential aspect of the reality of the transaction. In that case, it was further observed that the mortgages are not always simple, English, usufructuary as defined in T.P. Act. They may be anomalous. Even so, the essential feature of a mortgage, which is not there in a lease, is that the property transferred is a security for repayment of a debt in a mortgage whereas in a lease, it is transfer of a right to enjoy the property. In the instant case, the suit property is a shop; the transferee was put in possession as he was to carry on his business; however, he had no power to lease or sell; no rate of interest was fixed; there is nothing to indicate as to how Rs. 16,200/- was to be appropriated. In the present matter there is no evidence to show that Ex.P5 was executed as security for the alleged loan. As slated above, the tenancy of the respondent continued even after 1969 and in the above circumstances the High Court was right in holding that Ex.P5 was a device to defeat the said Act.

IN THE SUPREME COURT OF INDIA

Civil Appeal No. 4122 of 1999

Decided On: 22.07.2004

Kaveripatnam Subbaraya Setty Annaiah Setty Charities Trust

Vs. S.K. Viswanatha Setty

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Procedure to be followed by court when contract is partly valid and partly invalid

In BOI Finance Ltd. Vs. Custodian 1, the Supreme court has held that in the case of a composite agreement consisting of diverse reciprocal promises, the Court has to see whether the contract is such that the illegal or void part of the transaction can be severed from the legal and valid part and such severing does not amount to rewriting or rearranging the contract. The Supreme Court, in that case, was dealing with a ready forward contract. The Court held that there was one agreement, but it contained two sale transactions, the execution of each of which envisaged a transfer of title in the securities. The valid part (the ready leg) of the transaction was allowed whilst the invalid part (the forward leg) was ignored. Even in Canbank Financial Services Ltd. Vs. Custodian 2, the Supreme Court, relying on BOI Finance Ltd., laid down the law on the subject in the following words :

"79. A contract may be unlawful or partly lawful or partly unlawful. If it is lawful, it will be given effect to whereas in case it is wholly unlawful being opposed to the public policy, it would not be. In case a transaction is partly lawful and partly unlawful, if they are severable, the lawful part shall be given effect to."

1 (1997) 10 Supreme Court Cases 488 2 (2004) 8 Supreme Court Cases 355 These observations squarely apply to the facts of our case. We are concerned here with a Deed of Guarantee - one part of the guarantee dealing with an Indian Rupee Loan by an Indian entity to an Indian party and the other part dealing with FDI by a foreign investor in an Indian company, with securities of the common borrower being shared pari passu. Even if the foreign part, namely, FDI, cannot be permitted in law due to infringement with FEMA regulations or FDI policy of the country, that is no reason to refuse enforcement of the Indian part, namely, guarantee for a loan between two Indian parties. The latter part is clearly severable from the former and can be enforced independently of the former.

Bombay High Court

Idbi Trusteeship Services Ltd vs Hubtown Limited on 6 June, 2016

Bench: S.C. Gupte

Citation:AIR 2016 Bom243,(2017)1SCC568

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What is doctrine of severability of contract as per S 57 of Indian contract Act?

Explaining the doctrine of severability contained in Section
57 of Indian Contract Act, 1872, in B.O.I. Finance Ltd., v.
Custodian and others
, a three Judge Bench of this Court has
held that question of severance arises only in the case of a
composite agreement consisting of reciprocal promises. In Shin
Satellite Public Co. Ltd. V. Jain Studios Ltd.
, this Court has
observed that the proper test for deciding validity or otherwise of
an order or agreement is “substantial severability” and not
“textual divisibility”. It was further held by this Court that it is
the duty of the Court to sever and separate trivial and technical
parts by retaining the main or substantial part and by giving
effect to the latter if it is legal, lawful and otherwise enforceable.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 9151-9152 OF 2015
(Arising out of S.L.P. (Civil) Nos. 34129-34130 of 2014)
Elektron Lighting Systems 
Pvt. Ltd. and Anr.
V
Shah Investments Financial Developments
and Consultants Pvt. Ltd and Ors. Etc.
Dated:November 20, 2015.
Prafulla C. Pant, J.

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