Holding

There is no automatic merger of lease and mortgage interests; surrender of the lease must be proved, and in its absence the lessee retains possession after redemption.

Summary

The appellant, a lessee of a shop, was granted a mortgage by the lessor in his favour on 18 July 1974 for Rs.13,000. After the mortgage period expired, the lessor filed a suit for redemption of the mortgage and recovery of possession. The trial court granted a preliminary decree for redemption and possession, and the High Court dismissed the appellant's appeal, holding that the lease was surrendered by virtue of the mortgage. The Supreme Court held that the mere execution of a mortgage in favour of the lessee does not automatically surrender the lease; surrender must be proved by express or implied evidence. Since the mortgage deed contained no such surrender, the appellant's lease rights continued after redemption, and the plaintiff was not entitled to possession. Consequently, the appeal was allowed and the orders directing restoration of possession were set aside.

Issues considered

The execution of a mortgage in favour of a lessee automatically surrenders the prior lease and merges the lease and mortgage interests.
Whether the plaintiff is entitled to possession of the premises upon redemption of the mortgage in the absence of a proven surrender of the lease.

Subjects

mortgageleasesurrendermerger doctrineredemptionpossessionusufructuary mortgagelesseelessor

Judgment

GOPALAN KRISHNAN KUTTY A
.. v.
KUNJAMMA PILLAI SAROJINI AMMA & ORS.

MARCH 13, 1996

(J. S, VERMA, S.P. BHARUCHA AND K. VENKATASWAMI, JJ.] B

Mo1tgage:

M01tgage in favour of Lessee-Lease not sun-endered7-0n expi1y of
Mortgage suit for redemption and recovery of possession-Allowed by Trial C
Cowt and A/finned by High Cowt-011 appeal-Held, No automatic merger
of interest in the absence of proof of swrender-Not entitled to recover
possession of leased lands-Restoration order set aside.

The Defendant (appellant) was a lessee. The Respondent (Plaintill)
executed a mortgage in favour of defendant (appellant). On expiry of the D
period of mortgage, the defendant filed a suit for redemption and rec~very
-,; of possession of the premises. The Trial court passed preliminary decree
• granting redemption and directing recovery of possession from the defen ..
dant. The High Court dismissed the appeal of the defendant. Hence the
present appeal.
E
Allowing the appeal, this Court

HELD : 1. The mere fact that the owner creates a mortgage in favour
of the lessee is not by itself decisive to hold that the prior lease was
surrendered and the possession of the earlier lease is only that of a
mortgai,~ on creation of the mortgage. TI1e nature of possession is a F
question of fact in each case. [357-E]

2. Unless there was a surrender of the lessor's rights at the time of
execution of the mortgage, the mortgagor would not be entitled to obtain
delivery of physical possession upon redemption. The question whether G
there was surrender of the lease by the lessee at the time of execution of
~ - the mortgage in his favour by the lessor • mortgager is a question of fact
to be answered on the evidence. [357-G; 358-B]

3.1 The High Court proceeded on the erroneous assumption that
surrender of the Lease by the lessee (defendant) must be implied from the H
355
i '·

356 SUPREME COURT REPORTS (1996] 3 S.C.R.

A fact of execution of the usufructuary mortgage in his favour by the lessor
(plaintill). It has to be decided on the contents of the deed since there is
no other evidence of surrender of the lease by the defendant on execution . ..
of the mortgage. There is nothing in the mortgage to prove either an
express or implied surrender of the lease by the defendant in favour of the
plaintiff on execution of the mortgage deed. [358-C-D]
B
3.2. There is no automatic merger of the interest of the lessee with
that of the mortgagee when the same person is a lessee as well as the
mortgagee, in absence of proof of surrender of the lease by the defendant,
on redemption of the mortgage the plaintiff is not entitled automatically
c to recover possession of the leased premises. The defendant's right to
continue as a lessee therefore continued to subsist. [358-E)

Shah Mathuradas Magan/a/ & Co. v. Nagappa Shankarappa Ma/age &
Ors., [1976) 3 SCC 660; Gambangi Appalaswamy Naidu & Ors. v. Behara
Venkataramanayya Patro & Ors., [1984) 4 SCC 382 and Narayan Vishnu
D Hendre & Ors. v. Baburao Savalaram Kothawale, [1995) 6 SCC 608, referred
to.
••
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4192 of
1994.

E From the Judgment and Order dated 30.9.86 of the Kerala High
Court in AS. No. 100 of 1981.

S. Balakrishnan and S. Prasad for the Appellants.

P.S. Poti, Ms. Malini Poduval and K.M.K. Nair for the Respondents. )"
F •
The Judgment of the Court was delivered by

J.S. VERMA, J. This appeal by special leave is by the defendant and
it arises out of a suit for redemption of a mortgage. The appellant was the
...
lessee in the premises which is a shop in which he was carrying on his
G bakery business from 1965. The plaintiff later executed a mortgage in
favour of the defendant on 18.7.1974 for a consideration of Rs. 13,000. On
expiry of the period of mortgage, the plaintiff ftled a suit for redemption - -A
and recovery pf possession of the premises. The defendant contested the
claim for recovery of possession, inter a/ia, on the ground that his posses-
H• sion was that of a lessee, independent of the mortgage and even after
G.KRISHNANKU'!TYv. KP.S.AMMA [VERMA,J.] 357

redemption of the mortgage the defendant was entitled to continue in A
possession under the lease. The Trial Court passed a preliminary decree
.-J • granting redemption and directing recovery of possession from the defen-
dant. The first appeal by the defendant has been dismissed by the High
Court. Hence, this appeal by the defendant.

The High Court has held that there was surrender of the prior lease B
by the defendant on execution of the mortgage by the plaintiff in his favour;
and that the defendant's possession of the premises al the time of mortgage
being only as mortgagee, the defendant was bound to restore possession to.
the plaintiff on redemption of the mortgage. '

In Shah Mathuradas Magan/al& Co. v. Nagappa Shankarappa Malage
c
& Ors., [1976] 3 SCC 660, the distinction between the rights of a lessee and
a mortgagee was pointed out and the conditions for the merger of the two
rights were indicated. It was held that surrender of a lease takes effect like
a contract by mutual consent on the lessor's acceptance of the act of the
lessee; and that there must be a taking of possession, not necessarily a D
physical taking, but something amounting to a virtual taking of possession.
Whether this has occurred is a question of fact. Thus, the mere fact that
the owner creates a mortgage in favour of the lessee is not by itself decisive
to hold that the prior lease was surrendered and the possession of the
earlier lessee is only that of a mortgagee on creation of the mortgage. The E
nature of possession, is a question of fact in each case.

In · Gambangi Appalaswamy Naidu & Ors. v. Behara
Venkataramanayya Petro & Ors., [1984] 4 SCC 382, it was reiterated that
the answer to the question whether upon redemption of usufructuary
mortgage a tenant-mortgagee was required to deliver actual or physical F
possession of the mortgage property to the lessor-mortgagor must depend
upon whether there was surrender of the lessee's right when the usufruc-
tuary mortgage was executed in his favour by the lessor-mortgagor; and this
depends upon the intention of the parties at the time of execution of the
mortgage deed in favour of the sitting tenant. Thus, unless there was a. G
surrender of the lessor's rights at the time of execution of the mortgage,
the mortgagor would not be entitled to obtain delivery of physical posses-
sion upon redemption.

Recently in Narayan Vishnu Hendre & Ors. v. Baburao Savalaram
Kothawale, (1995] 6 sec 608, these decisions have been followed and it has H
358 SUPREME COURT REPORTS [1996] 3 S.C.R.

A been held that the doctrine of merger does not apply where tenanted
premises are mortgaged in favour of the lessee. It has been held that
implied surrender of the lease would not be readily inferred. It was . ~
reiterated that unless surrender of the lease was proved, the only effect of
the mortgage was that the lessee's rights were kept in abeyance and it
B would revive upon redemption of the mortgage. It is, therefore, clear that
in a case like this, the question whether there was surrender of the lease
by the lessee at the time of execution of the mortgage in his favour by the
lessor-mortgagor is a question of fact to be answered on the evidence.

The High Co&rt, in the present case, proceeded on the erroneous
C assumption in law that surrender of the lease by the lessee_ (defendant)
must be implied from the fact of .execution of the usufructuary mortgage
in his favour by the lessor (plaintiff). As indicated, this is an erroneous
assumption in law. This question has to be decided on the contents of the
deed since there is no other evidence of surrender of the lease by the
defendant on execution of the mortgage. We find nothing in the mortgage
D deed (Annexure A-1) dated 18th July, 1974 read with the release deed of
the same date to prove either an express or an implied surrender of the
lease by the defendant in favour of the plaintiff on execution of the
mortgage deed. Since there is no automatic merger of the interest of a
lessee with that of a mortgagee when the same person is the lessee as well
E as the mortgagee, in absence of proof of surrender of the lease by the
defendant, on redemption of the mortgagee, the plaintiff is not entitled
automatically to recover possession of the leased premises. The defendant's
right to continue in possession as a lessee, therefore, continues to subsist.

Accordingly, the appeal is allowed. The judgments and decrees of
F the Courts below to the extent they directe restoration of possession by the •
defendant to the plaintiffs are set aside. The defendant-appellant would
get his corresponding costs throughout from the·plaintiff-respondents.

S.V.K. Iyer. Appeal allowed.