N. Vajrapani Naidu And Another vs The New Theatre Carnatic Talkies Ltd.

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 264 of 1962

Decision Date: 04/03/1964

Coram: J.C. Shah, P.B. Gajendragadkar, K.N. Wanchoo, N. Rajagopala Ayyangar, S.M. Sikri

In this case, the Court recorded that the petitioners, N. Vajrapani Naidu and another, together with their mother as lessors, had executed a registered deed on 19 September 1934 granting a lease of an open site in Coimbatore to a lessee named Abirama Chettiar. The lease required the lessee to pay an annual rent of Rs 10‑80 for a term of twenty years and stipulated that the land was to be used for the construction of buildings intended for cinema, drama and similar purposes. The agreement further required that, upon the expiry of the lease term, the lessee would demolish any buildings he had erected and return vacant possession of the site to the lessor. During the lease period Abirama Chettiar constructed a theatre on the premises and later assigned his leasehold rights to the respondent company, The New Theatre Carnatic Talkies Ltd. The lessors instituted suit against the company seeking a decree for ejectment and mesne profits. The trial court granted a decree of possession in favour of the lessors along with mesne profits. The respondent appealed the decree to the District Court, and the appeal was transferred for trial to the High Court.

While the appeal was pending, the State of Madras extended the provisions of the Madras City Tenants’ Protection Act, 1922 (Act 3 of 1922), as amended by Madras Act 19 of 1955, to the municipal town of Coimbatore. The respondent subsequently filed an application under section 9 of the Act. Upon consideration of that application, the High Court directed that the lessors sell the disputed site to the respondent company in accordance with section 9 of the Madras City Tenants’ Protection Act, 1922, and that the purchase price be the full market value of the land as determined on the date of the order. The High Court’s order was affirmed on appeal under the Letters Patent.

The Court then turned to the question of whether the statutory provisions, particularly sections 9 and 12 of the Madras City Tenants’ Protection Act, 1922, infringed upon the landlord’s fundamental rights under Articles 19(1)(f) and 31 of the Constitution of India. The Court observed that section 12 was enacted to safeguard tenants from any contractual arrangements, whether express or implied, that might wholly or partially deprive them of the protection intended by the statute. The only circumstance in which the protection of the Act would become ineffective, the Court noted, is where the tenant has entered into a written, registered stipulation concerning the erection of buildings after the lease contract’s date. Such stipulations, not protected by section 12, are limited to those that are written, registered and relate specifically to the construction of buildings, including restrictions on the size, nature, materials, and purpose of the building.

Further, the Court explained that section 9(1) of the Act was manifestly intended to serve the public interest by promoting a mutual understanding between landlords and tenants regarding the duration of tenancies and by conserving building materials through the maintenance of existing structures for the purposes for which the leases were granted. Accordingly, any restriction imposed on the landlord’s right to obtain possession of the demised premises in accordance with the lease terms would not be regarded as an unreasonable limitation on the exercise of that right.

In this case the Court explained that the protection granted by the statute becomes ineffective only when a tenant has entered into a written and registered stipulation concerning the erection of buildings after the lease contract was made. The only stipulations that s. 12 does not protect are those that are in writing, are registered, and specifically relate to the construction of buildings, such as clauses that restrict the size or nature of the building, dictate the materials to be used, or specify the purpose for which the building may be employed. The Court further observed that s. 9(1) of the Act is clearly intended to serve the public interest by fostering a mutual understanding between landlords and tenants about the length of tenancies and by conserving building materials through the preservation of existing structures for the purposes for which the leases were granted. Consequently, any restriction placed on the landlord’s right to regain possession of the premises in accordance with the lease terms is not regarded as an unreasonable limitation on the right guaranteed under Art. 19(1) of the Constitution, because the restriction advances a general public purpose. The Court held that s. 9 does not aim to deprive the landlord of his property or to transfer his rights, but rather to give effect to the genuine agreement that induced the tenant to construct a building on the leased plot. The Court added that if the provision is not invalid as a violation of Art. 19(1)(f), then no separate infringement of Art. 31(1) can be established. The dissenting judges noted that the preamble of the Act indicates that it does not apply where a registered lease deed contains an express term by which the tenant agrees to surrender the site, demolish any building, and deliver vacant possession at the end of the tenancy. Interpreting the proviso to s. 12 in light of the preamble, they argued that a tenant who entered into such a contract could not be said to have built on another’s land “in the hope that he would not be evicted so long as he pays rent”. They concluded that the High Court had erred in its interpretation of the proviso to s. 12. Moreover, they explained that the phrase “as to the erection of buildings” refers to any stipulation that bears on or relates to the construction of buildings. This construction reconciles the proviso with the preamble, which sets out the object of the Act. Accordingly, if a lease deed contains no stipulation whatsoever concerning the erection of buildings, the tenant who erects a building ex‑concessis without breaching any undertaking obtains protection under the Act.

In the situation of many leases that had been created in the city of Madras before the Madras City Tenants’ Protection Act of 1922 came into force, a tenant who erected a building on the leased land without violating any undertaking on his part was still entitled to the protection offered by the Act. The Court explained that the appropriate test was to determine whether the parties had contemplated and intended that the tenant would erect buildings on the leased premises. If the parties had indeed thought about such a possibility and had incorporated a provision dealing with the rights of the parties in the event of building erection into a solemn, registered instrument, that stipulation would continue to have effect even though the Act applied. In such a circumstance the tenant would not have built the structures merely in the hope of remaining undisturbed in possession as long as he paid the agreed rent.

The appeal concerned a civil matter designated as Appeal No. 264 of 1962, which was filed against a judgment and order dated 24 April 1959 of the Madras High Court in L.P.A. No. 75 of 1958. Counsel for the appellants and counsel for the respondent were instructed, and the judgment was delivered on 4 March 1964 by the Chief Justice and two other judges, with a dissenting opinion delivered by another judge. The appellants, identified as Vajrapani Naidu and his mother Bangarammal and collectively described as “the lessors,” had executed a registered lease deed on 19 September 1934 granting an open site in Coimbatore to Abirama Chettiar for a period of twenty years at an annual rent of Rs 1,080. The lease required the lessee to put up a building suitable for use as a theatre. Abirama Chettiar constructed such a theatre and later assigned his rights under the lease to New Theatre Carnatic Talkies Ltd., hereinafter referred to as “the Company.” The Company took the lease from the lessors and was recognized as the tenant under the same 1934 deed.

On 9 March 1954 the lessors issued a notice to the Company demanding that it vacate the premises and surrender vacant possession of the site. The Company failed to comply with this demand, prompting the lessors to commence suit for ejectment and for mesne profits at a rate of Rs 1,000 per month, calculated from 19 September 1954. The Subordinate Judge at Coimbatore granted the lessors a decree for possession and awarded mesne profits at a reduced rate of Rs 350 per month, together with costs of the suit. The Company appealed the decree to the District Court at Coimbatore, and the appeal was subsequently transferred for trial to the Madras High Court.

During the pendency of this appeal, the State of Madras issued Government Order No. 608 dated 10 February 1958, extending the Madras City Tenants’ Protection Act of 1922, as amended by Madras Act 19 of 1955, to the municipal town of Coimbatore. In response to this extension, the Company filed an application under section 9 of the Act seeking an order directing the lessors to convey the demised site to the Company for a price to be fixed by the Court.

The Court ordered that the lessors convey the site leased to the Company for a price to be determined by the Court. Justice Panchapakesa Iyer directed that, pursuant to section 9 of the Madras City Tenants’ Protection Act 1922, the lessors must sell the disputed site to the Company upon receipt of the full market value of the land as of the date of the order. He further directed that the trial Court appoint a Commissioner to assess the value of the site based on the market value prevailing on 28 July 1958. An appeal filed under clause 15 of the Letters Patent of the High Court against Justice Iyer’s order was dismissed. Subsequently, with a certificate granted by the High Court of Madras, the lessors instituted a further appeal. The appeal presented two questions for determination: first, whether the Company is entitled, notwithstanding the lease terms, to an order under section 9 of the Madras City Tenants’ Protection Act 1922 requiring the lessors to sell the land demised by the deed dated 19 September 1934; and second, whether the provisions of section 9 infringe the fundamental rights guaranteed by articles 19(1)(f) and 31(1) of the Constitution, thereby rendering section 9 invalid. To address these issues, the Court first examined the essential terms of the lease. The lease conveyed a vacant site located in the municipal town of Coimbatore, with an annual rent of Rs 1,080 and a term of twenty years measured from the date possession was delivered. The lease required that the site be used for constructing buildings for “purposes of Cinema, drama, etc.” Upon the expiry of the initial twenty‑year term, the lessee held an option to renew the lease for an additional twenty years on new terms and conditions. The deed contained a clause stating that if, after the stipulated period, the lessee fails to pay any rent arrears due up to that date and fails to surrender possession of the site after dismantling the erected structures and demolishing the walls, then, in addition to recovering the rent arrears as provided by law, the lessors shall be entitled, by Court order, to take possession of the site after the demolition of the buildings. The remaining covenants of the lease were deemed immaterial. The judgment noted that prior to 1922, many tenants in the town of Madras had erected constructions on lands obtained under periodic leases, hoping to avoid eviction by paying reasonable rent. However, inflationary pressures following the First World War caused a sharp increase in land values and rents, leading landlords to seek eviction of such tenants.

In the period described, rising land values and increasing rents caused many landlords to attempt to evict tenants who had erected buildings on leased land. The legislature responded to the potential hardship faced by such tenants by enacting the Madras City Tenants’ Protection Act 3 of 1922, which was intended to mitigate loss that could arise from the strict operation of the Transfer of Property Act. The Act provides that whenever a tenant is subject to an ejectment proceeding, he is entitled to receive compensation equal to the value of any building he or his predecessors‑in‑interest have constructed, provided that no compensation for that building has previously been paid. In an ejectment suit where the landlord obtains a decree for possession, the court must first determine the amount of compensation. This amount is to be measured as the value of the buildings, any trees planted, and other improvements made by the tenant as of the date on which the decree is issued. The decree must then state the sum that is payable and must order that, upon the landlord depositing the determined amount into court within three months of the decree, the tenant shall surrender possession of the land and the building to the landlord. These provisions were intended to balance the landlord’s right to recover possession with the tenant’s right to receive a fair value for the capital he had invested in the premises.

Section 9 of the Act further allows any tenant who is entitled to compensation and against whom an ejectment suit has been instituted to apply to the court, within the time limit prescribed, for an order directing the landlord to sell the whole or part of the land. The court is empowered to fix a sale price. When the Act was first enacted, that price was to be the market value of the land on the date of the order; however, an amendment made in 1926 altered the basis of valuation to the lowest market price that had prevailed during the seven‑year period preceding the order. Once the court fixes the price, the tenant may, within a period not less than three months and not exceeding three years from the date of the order, pay the price either in full or in installments, with or without interest as directed by the court. The provision therefore gives the tenant a mechanism to avoid physical eviction by instead acquiring ownership of the land through payment of the court‑determined price. Upon receipt of the payment, the court must pass a final order conveying the land from the landlord to the tenant, thereby dismissing the ejectment proceeding and vacating any unexecuted decree or order of ejectment.

Section 12 of the Act contains a protective clause stating that no contract entered into by a tenant may diminish or restrict the rights granted by the Act, except that the provision does not affect any written, registered stipulations made by the tenant concerning the erection of buildings that relate only to structures erected after the date of such contract. The original enactment applied solely to lands situated within the City of Madras that had been let before the commencement of the Act for the purpose of constructing non‑residential buildings. Consequently, the Act created a statutory safeguard that prevented arbitrary dispossession of tenants and ensured that any displacement was accompanied by monetary compensation reflecting the tenant’s investment.

In this case the Court explained that the original legislation, which applied only to land in the City of Madras let for the construction of both non‑residential and residential buildings, was later expanded by Madras Act 19 of 1955. That Act gave the State Government authority to extend the provisions of Act 3 of 1922, by way of a notification, to tenancies of land that were created before the date on which the extension took effect, to any other municipal town and to any specified village within five miles of the City of Madras or such municipal town. The Government of Madras exercised this power by issuing a notification dated February 10, 1958, which extended the provisions of the 1922 Act to the municipal town of Coimbatore. Under the scheme created by the extended Act, when a tenancy of open land within a municipal town that was created before the extension date results in the tenant constructing a building, and the landlord subsequently sues the tenant for ejectment, the tenant is entitled, upon ejectment, either to receive compensation equal to the value of the building and any trees planted as of the date of the ejectment order, or alternatively to obtain a court order directing the landlord to sell the demised land to the tenant at a price fixed by the court in accordance with the statutory terms. Section 12 of the Act provides that the rights conferred by the Act cannot be taken away or restricted by any contract between landlord and tenant, except that any stipulations made in writing by the tenant, and registered, concerning the erection of buildings, insofar as they relate to buildings erected after the date of the lease, are excluded from this protection. The lease granted by the lessors in the present dispute was executed before the Act was extended to Coimbatore, and it is established that the buildings in question were erected after the lease date. On its face, therefore, the Company, as lessee, possessed the option, at the time an ejectment order was made, either to claim compensation for the value of the structure or to demand that the lessors sell the land to it. The lessors, however, argued that because the deed of lease—registered under the prevailing law governing the registration of assurances—contained a clause obligating the tenant, upon expiry of the lease, to deliver vacant possession of the land after dismantling the constructions, the Company had, by virtue of section 12, waived its entitlement to the benefit of section 9 of the Act. They submitted that the clause requiring delivery of vacant possession after removal of the buildings constituted a stipulation “as to the erection of buildings” within the meaning of section 12, and consequently the restriction on the contractual liberty imposed by the opening clause of section 12 should apply, depriving the Company of the benefit of section 9.

In the present case the Court observed that the argument that the opening clause of section twelve removed the contract between landlord and tenant, thereby binding the Company to the lease terms and depriving it of the benefit of section nine, could not be sustained. Section twelve of the Act was explained as comprising two distinct parts. The first part legislates that the rights granted to a tenant under the Act may not be taken away or limited by any contract entered into by the tenant. Among those rights are the entitlement to claim compensation under sections three and four and the right to purchase the land from the lessor by order of the Court under section nine. The second part of section twelve provides an exception to the protection of the first part. It states that if a tenant, in a writing that is duly registered, makes a stipulation “as to the erection of buildings” concerning buildings erected after the date of the lease contract, the protection afforded by the first part will not apply. The Court noted that a covenant in a lease, which is properly registered, requiring the tenant at the expiry of the lease to dismantle the building he constructed and to deliver vacant possession, is undeniably a stipulation relating to the building. However, the Court held that such a covenant is not a stipulation “as to the erection of building”. Section twelve was described as having been enacted to give effect to the object of the Act set out in its preamble, namely to give protection to tenants who have constructed buildings on another’s land in the hope of not being evicted provided they pay a fair rent. The Legislature, therefore, intended to shield tenants from any contractual arrangements, whether express or implied, that might wholly or partially deprive them of the statutory protection. Accordingly, the only category of cases in which the statutory protection becomes ineffective is where the tenant has entered into a written, registered stipulation concerning the erection of buildings that were constructed after the lease was executed. The restriction in section twelve therefore applies solely to a narrowly defined class of cases that expressly fall within the description of stipulations “as to the erection of buildings”. Considering the purpose of the Act and the language employed by the Legislature, the Court held that the exception must be strictly interpreted, and that the ordinary meaning of the words does not extend to a stipulation requiring the tenant to vacate and deliver possession of the land at the end of the lease without seeking to enforce the statutory rights under section nine. The stipulations not protected by section twelve are limited to those that are written, registered and relate to the erection of buildings such as

The provision in question enumerates restrictions concerning the size and nature of the building that may be constructed, the materials that must be used, and the purpose for which the building is intended. The operative portion of section twelve shields the tenant from any deprivation or limitation of the rights granted by the Act, and those rights do not directly relate to covenants dealing with the erection of buildings. Consequently, the phrase “as to the erection of buildings” cannot be given an expanded meaning that would allow a stipulation concerning the erection of buildings to also cover a requirement to remove the buildings when the lease ends. The literal meaning of the expression does not render the statutory exception ineffective. Indeed, stipulations in a registered lease, or in contracts entered into after the lease, that impose forfeiture for failure to obey terms relating to the erection of buildings may clearly involve a limitation or deprivation of the tenant’s statutory rights, and to that extent the protection afforded by section twelve in favour of the landlord may be lost.

The appellant’s argument attempts to strip the words “as to the erection of buildings” of any meaning, treating them as superfluous, an approach that would materially affect the scope of the relief that the Act extends to protected tenants. Section nine, sub‑section one, which permits a tenant, upon determination of the lease, to purchase the landlord’s land, is somewhat unusual but it does not impose an unreasonable restriction on the landlord’s constitutional right to hold and dispose of property under Article 19(1)(f). The Act applies only to a limited class of lands—specifically, lands that were granted on lease for the purpose of constructing buildings before the date on which the Act was extended to the relevant town or village. The legislation was enacted to protect tenants who, despite the ordinary covenants that allow determination of tenancies, obtained leased lands in the belief that, as long as they paid fair rent, they would not be evicted. After the War, changes such as appreciation in land values and higher rents led many tenants to face ejectment actions that sought to dismantle their constructed properties. The protection under the Act becomes operative only when a landlord, contrary to the mutual understanding, attempts to gain the unearned increment in land value by instituting an ejectment suit. Maintaining the mutual understanding regarding tenancy duration and preserving existing buildings for their intended purposes serves the general public interest, and the restriction placed on the landlord’s right to recover possession therefore does not amount to an unreasonable limitation.

The Court observed that preventing a landlord from taking possession of premises that were leased according to the lease terms did not constitute an unreasonable limitation on the landlord’s right under Article 19(1)(f) of the Constitution, because such a limitation served the public interest. The Court emphasized that Section 9 of the Act was not intended primarily to deprive the landlord of his property or to acquire his rights, but rather to give effect to the actual agreement between landlord and tenant that encouraged the tenant to erect a building on the leased plot. Accordingly, the Court held that if the provision was not invalid for contravening Article 19(1)(f), then no separate violation of Article 31(1) could be established. The parties argued that, under the statute as amended by the Madras City Tenants’ Protection (Amendment) Act VI of 1926 (prior to its amendment by Act 13 of 1960), the court could fix a purchase price for the land at the lowest market value prevailing during the seven years preceding the order, and that this requirement was unreasonable. The Court noted that it was unnecessary to resolve that issue because the Company had offered to pay the market value of the land as determined on the date of the order pronounced by Justice Panchapakesa Iyer. Consequently, the Court was relieved of the need to assess the reasonableness of the compensation provisions prescribed by the 1926 amendment. The Court further observed that the 1960 Amending Act had introduced several changes affecting the extent of a tenant’s entitlement to compel a landlord to sell land and the price to be paid. Under the 1960 amendment, the court could direct the sale of only the minimum area of land required for the tenant’s convenient enjoyment of the house he had built, and the price was to be the average market value recorded in the three years immediately preceding the order. Considering these amendments and the special circumstance that the Company, notwithstanding the statutory provisions, was willing to pay the current market value, the Court declined to engage in an academic examination of the validity of the provision (found in sections 134 to 159 of the State Code, page 65) that fixed compensation at the lowest market value prevailing within seven years before the order. The Court stated that, assuming such a compensation provision were unreasonable and therefore invalid, it could be severed from the remainder of the statute without affecting the validity of the provision that permitted a tenant to acquire the demised land by purchase.

The Court observed that, at most, the landlord could claim compensation equal to the market value of the land, which the Company had undertaken to pay; however, the Court expressly declined to express any opinion on that question. Accordingly, the appeal was found to fail and was dismissed, and no order as to costs was made. Justice Ayyangar then stated regret at being unable to concur with the order dismissing the appeal. He noted that the factual background of the dispute had already been fully set out in the earlier judgment of Justice Shah, and therefore needed no repetition. Justice Ayyangar identified two principal issues that required consideration for the disposition of the appeal. The first issue concerned the proper construction of section 12 of the Madras City Tenants Protection Act (Madras Act III of 1922). The second issue concerned the constitutional validity of section 9 of the same enactment. Section 12 provides that “Nothing in any contract made by a tenant shall take away or limit his rights under this Act, provided that nothing herein contained shall affect any stipulations made by the tenant in writing registered as to the erection of buildings, in so far as they relate to buildings erected after the date of the contract.” The Court indicated that the initial task was to determine the correct meaning and effect of the proviso contained in this provision. Before analysing the wording of the section, the Court found it useful to examine the preamble and other relevant provisions of the Act, as these would guide the interpretation of the proviso. The preamble declares that the Act was enacted because it was deemed necessary to protect tenants in municipal towns and adjoining areas of the State of Madras who had erected buildings on land belonging to others, with the expectation that they would not be evicted so long as they paid a fair rent for the land. Section 1(3) defines the scope of tenancies to which the Act applies, stating that the Act applies only to tenancies of land created before the commencement of the Madras City Tenants Protection (Amendment) Act, 1955, and, in any municipal town or village to which the Act is extended by notification under subsection (2), only to tenancies created before the date on which the extension takes effect. From these provisions the Court drew two clear conclusions: first, that the purpose of the Act was to preserve the expectation of tenants who had built on another’s land that they would not be evicted provided they paid a fair rent; and second, that the Act’s operation is limited to tenancies that were already subsisting at the moment the Act, or its extension, came into force in the relevant area.

In this case the tenancy that brought the respondent onto the land where he erected buildings originated in 1934, which is long before the year 1958 when, by a notification issued under section 1(2) of the Madras City Tenants Protection Act, the provisions of the Act were extended to the municipal town of Coimbatore, the location of the land in dispute. Because the tenancy existed prior to that extension, it fell within the scope of the Act. The lease under which the respondent occupied the land was a written instrument that had been registered; consequently the sole issue for consideration was whether the terms contained in that lease were covered by the proviso to section 12 of the Act. Section 12 consists of two parts: first, a general saving that protects tenants who come within the Act, giving them the rights conferred by its operative terms notwithstanding any contractual provision; second, a proviso that qualifies that general saving by exempting certain contractual stipulations from the operation of the statutory rights created by the Act. The present controversy therefore revolved around the nature, scope and extent of the saving created by the proviso. It was not in dispute that, had section 12 terminated after its first part, the respondent would have been entitled to every right granted to tenants by the Act. The proviso, however, was conceded to be intended to narrow that saving. In other words, while the Act barred any contractual term that limited the rights conferred on tenants, the proviso carved out an exception to that prohibition. Both parties agreed on the existence of this exception, but they differed on its precise scope and limits. The proviso sets out four conditions that must be satisfied for a contractual stipulation to fall within the exception: first, the stipulation must appear in a written contract that is registered; second, the stipulation must relate to “the erection of buildings”; third, it must concern buildings erected after the date of the contract; and fourth, if a stipulation meets these three conditions, it will have effect notwithstanding any provision of the earlier part of section 12 that would otherwise deprive the tenant of rights under the Act. The parties concurred that conditions one and three were satisfied in the present lease, and the only matter in dispute was whether the second condition—relating to “the erection of buildings”—was satisfied so as to trigger the operation of the fourth condition. The High Court had interpreted the words “as to the erection of buildings” in the proviso to be equivalent to a stipulation concerning the manner in which the building might be constructed, the materials to be used, the area to be covered and other construction details, and not to include a stipulation whereby the tenant agreed to remove the buildings upon termination of the tenancy. The Supreme Court, with due respect to the High Court’s interpretation, indicated its disagreement with that construction and proceeded to examine the lease terms to determine whether the stipulation fell within the words “stipulations as to the erection of buildings”.

The respondent contended that the provision referred only to the manner in which a building may be erected, the materials to be used, the area the building should cover and other details relating to construction, and that it did not extend to a stipulation whereby the tenant undertakes to remove the buildings he constructed on termination of the tenancy. This contention was presented by counsel for the respondent. The Court, while expressing the highest respect for the learned Judges of the High Court, indicated that it could not accept this construction of the proviso. Before examining the propriety of that construction, the Court found it both convenient and necessary to refer to the terms of the lease deed under which the appellant became a tenant, so as to decide whether the clause in question fell within the expression “stipulations as to the erection of buildings.” The lease deed, marked as Exhibit B‑1 in the record, is a registered instrument dated 19 September 1934. It provided that the demised premises would be let for a period of twenty years measured from the date of delivery of possession, and that the annual rent would be Rs 1,080. The lease expressly stated that the purpose of the lease was “to construct buildings thereon as the lessee requires on the aforesaid site for the purpose of cinema, drama etc. at his own expense and also further constructions necessary for the same.” Following this statement, the lease contained two clauses of particular relevance to the matter before the Court.

The first relevant clause provided that, notwithstanding the fixed term of twenty years, the lessee could surrender the lease if he determined that the business venture for which the lease was taken was not profitable. In such an event, the lessee would be entitled to terminate the tenancy provided that he dismantled the buildings he had constructed at his own expense and paid the lessor one year’s rent as compensation for the loss suffered by the lessor due to the premature termination of the lease. The second clause stipulated that if the lessee failed to remove the buildings as required, the lessor would be authorised to take possession of the vacant site and to dismantle the constructions and demolish the walls. Additionally, on the expiry of the stipulated twenty‑year term, the lease required the lessee to dismantle the constructions by demolishing the walls and other structures and to deliver vacant possession of the site to the lessor. The central question for the Court to consider, therefore, was whether this stipulation contained in the registered lease deed—that the lessee would demolish the buildings he had erected and deliver vacant possession at the end of the term—qualified as a “stipulation as to the erection of buildings” that would be saved by the proviso to section 12. The Court observed that if the scope of the proviso were to be interpreted in light of the preamble, it would be evident that a tenant who entered into a contract containing such a stipulation could not be said to have constructed the

The Court observed that the pre‑amble of the Act makes clear that the legislation was not intended to give protection to a tenant who, by an express clause in a registered lease, agreed to surrender the land on which he had constructed a building, with the explicit condition that he would demolish the building and hand over vacant possession at the end of his tenancy. The Court noted that the tenancies covered by the Act are those that existed before the Act was enacted or before it became operative in the relevant locality. Consequently, the parties to a lease entered into before the Act could not have used the precise language of the Act in their agreement, because the Act and its provisions were not contemplated by them at the time they contracted. The Court therefore held that the mere difference in wording between a lease provision concerning the erection of buildings and the language used in the Act does not justify refusing to give effect to that provision.

The Court further explained that the proviso to section 12 saves only those rights that are created in favour of tenants by the Act, and therefore the inquiry must be directed to the rights conferred by the Act. In general, the Act creates two distinct rights for lessees whose tenancies fall within its scope. The first right, provided by section 3, is the entitlement to compensation for any building erected by the tenant on the leased land before the tenant is evicted. The second right, available as an alternative, is the tenant’s option to require the landlord to sell the leased land to the tenant at a price determined in accordance with section 9. The Court observed that, given the period when the lease was originally executed, it would be impossible for a deed to contain a clause that defeats the tenant’s option to purchase the land, and that this point was self‑evident and required no further argument.

Consequently, the Court concluded that the proviso to section 12 can only preserve a stipulation that relates to the tenant’s right to claim compensation for buildings erected after the commencement of the tenancy. In other words, although the proviso is expressed in a way that seems to allow the saving of any stipulation in a registered deed, the only relevant stipulations are those that affect the tenant’s compensation right under section 3, or the tenant’s right under section 9 to demand the sale of the land. The Court clarified that the latter right— the right to require the sale of the leased land—cannot be nullified by an express clause in the lease; only the right to compensation for buildings can be altered or excluded by a contractual stipulation.

When a tenancy ends and the tenant is required to vacate, the right to be evicted does not fall within the scope of an express stipulation. However, the tenant’s inability to obtain compensation can be produced only by a clause that relates to the tenant’s entitlement to compensation under section 3 for buildings erected during the tenancy. The Court therefore turned to identify the type of stipulation that could affect the compensation right granted by section 3. That provision states that every tenant, upon ejectment, is entitled to receive as compensation the value of any building that may have been erected by him, by any of his predecessors in interest, or by any person not in occupation at the time of the ejectment who derived title from either of them, provided that compensation for that building has not already been paid. The provision further provides that a tenant who is entitled to compensation for the value of any building shall also be paid for the value of trees that he may have planted on the land and for any improvements that he may have made. The Court acknowledged that a stipulation, if it were effective, which limited the amount of compensation payable for buildings constructed by a tenant as contemplated by section 3, falls within the proviso to section 12 as a stipulation concerning the “erection of buildings.” The effect of this acknowledgement on the meaning of the proviso would be considered later. The remaining issue, however, was whether those words could, on any reasonable construction, be confined solely to that contingency.

To illustrate the point, the Court considered a lease of a fixed term, for example twenty years, that contains a clause stating that the tenant shall not build on the land and that, if any buildings are erected, the tenant must remove those structures and deliver vacant possession at the termination of the tenancy. Such a clause clearly indicates that the tenant cannot claim any compensation for structures that he, contrary to his undertaking, has erected. The Court did not understand Mr Setalvad’s argument, raised during the hearing, that a tenant who constructs buildings under a lease containing such a clause could still obtain compensation under section 3 together with the rights conferred by section 9. That argument could be sustained only if a clause forbidding the erection of buildings by the lessee were treated as a stipulation “in respect of erection of buildings,” even though the clause also obliges the tenant to demolish any buildings he constructs. If a clause that prohibits construction and requires demolition before surrendering possession is accepted as a stipulation “in respect of erection of buildings,” as must be conceded, then it is untenable to accept a construction that a clause requiring removal of buildings is anything other than a stipulation concerning the erection of buildings.

The Court explained that a clause permitting the lessee to erect and retain buildings on the premises solely for the period of the tenancy still qualified as a stipulation “in respect of erection of buildings.” The expression was understood to denote any provision that related to, or had an impact on, the construction of buildings. This interpretation allowed the proviso to be read in harmony with the pre‑amble of the Act, which set out the purpose to be achieved by the legislation. The Court further observed that where a lease deed contained no provision at all concerning the erection of buildings – as was the case with many leases in Madras that were executed before the Act came into force in 1922 – a tenant who built a structure without violating any covenant on his part was entitled to the protection afforded by the Act. Similarly, where a lease did include a restriction on building but the lease was not executed by a registered instrument – a situation that also occurred with several leases in the city – the statutory rights to compensation and to purchase were still safeguarded. However, the Court held that if the parties used a formal, registered instrument to record the transaction and that deed contained a clause expressly forbidding the erection of buildings, or forbidding the continued existence of such buildings at the end of the tenancy, or any provision equivalent to denying the tenant any compensation for buildings erected during the lease, then that clause would control the parties’ rights notwithstanding the provisions of the Act. In the Court’s view this was the correct construction of the proviso to section twelve. The appropriate test, therefore, was whether the parties had contemplated and addressed the possibility of the tenant constructing buildings on the leased land. If they had, and they incorporated a solemn registered provision affecting the parties’ relative rights in such an event, the stipulation would prevail over the statute, because the tenant would not have built structures on the land with the expectation of retaining possession merely by paying the agreed rent.

The Court then considered how far the narrow meaning attached to the phrase “as to the erection of buildings” could be sustained. It examined a situation where a registered deed contained a clause under which, in consideration of a favourable rent, the lessee agreed to construct buildings of a specified type and to deliver both the site and the erected building back to the landlord at the expiry of the term, while expressly renouncing any claim to compensation. According to the respondent’s construction, such a clause would be saved by the proviso because it dealt with the construction of buildings rather than their removal, even though it eliminated the lessee’s entitlement to compensation under section three. The Court noted that a stipulation of this character would be valid and enforceable; consequently, in a suit for ejectment, the tenant would have no right to compensation and would fall outside the operation of section nine, which applied only where compensation was due. The Court further observed that there was no sensible distinction between a clause that required removal of the buildings without compensation and one that simply barred construction, because both fell within the ambit of a stipulation “in respect of erection of buildings.” This analysis set the stage for the Court’s further examination of similar restrictive provisions.

In the Court’s view, a stipulation that was valid and enforceable and that prohibited the tenant from receiving compensation would place the tenant outside the operation of section 9, because section 9 applies only in cases where the tenant is entitled to compensation. The Court then examined whether any distinction arose if the deed required the tenant to remove the buildings he had erected and provided that no compensation would be payable in case of failure to remove those buildings. The Court found no sensible difference between that situation and the earlier one, observing that a clause dealing with “erection of buildings” is essentially the same as one dealing with the removal of those buildings. The Court next turned to the case urged by the respondent as the precise example intended to be covered by the proviso. That case involved a stipulation that the lessee was not permitted to construct a building that exceeded a specified plinth area, went above the ground floor, or contained more rooms than a predetermined number (see report pages 134‑159, S.C.-66). The Court noted that the question of the proviso’s applicability would arise only if the tenant breached the covenant; consequently the Court assumed that the tenant, in breach of the stipulation, proceeded to erect buildings contrary to his contractual undertaking.

When the tenant breaches the covenant, the Court explained that the compensation calculated under section 3 would be limited to the amount the tenant would have received had he complied with the contract. However, the Court stressed that this approach ignored the fundamental feature of the Act, which provides that any tenant who is entitled to compensation under section 3 – even the limited compensation that may be awarded after a breach – remains entitled to purchase the leased land under section 9. Accordingly, the Court held that although the proviso to section 12 may allow stipulations that reduce the quantum of compensation payable under section 3, no stipulation—other than a covenant that entirely forbids any erection of buildings, which had already been considered—can deprive a tenant of the right conferred by section 9. The Court further reasoned that, since the first limb of section 12 saves the statutory rights of tenants under sections 3 and 9 from being overridden by any contract, the proviso that saves contractual rights from the Act must be read as co‑extensive with, and operating in the same field as, the opening portion of section 12. On that basis, the Court concluded that the learned judges of the High Court had erred in construing the proviso to section 12. Because the Court’s construction avoided the need to decide on the constitutional validity of section 9, it expressed no opinion on that issue. Finally, the Court allowed the appeal, decreed the suit for ejectment filed by the appellant, and ordered the decree to be issued in accordance with its findings.

In this case the Court rendered its decision by a majority of the Judges. The majority concluded that the appeal could not be allowed and therefore ordered that the appeal be dismissed. The judgment further stated that the Court would not make any order as to the allocation of costs between the parties, and consequently no costs order was made. As a result of the majority’s ruling the appeal was dismissed in its entirety. The record of the judgment includes the reference number GMGIPND‑L‑134‑59 and the citation S. C. of India (6021‑46)‑18‑10‑65‑2,500, which identifies the specific case file and the reporting details of the decision.