Allowing Group Company To Use Part Of Company's Premises Does Not Create Third-Party Rights: Bombay High Court

The Bombay High Court has recently held that permitting another company within the same business group to use part of a company's premises does not amount to induction of a third party merely because money changes hands between the two entities.

The court observed that payments between group companies may merely be internal accounting arrangements and do not, by themselves, create a presumption of tenancy or a commercial licence.

Justice Sandeep V. Marne dismissed a revision application filed by tenants challenging an appellate decree directing their eviction from an industrial shed on the ground of the landlord's bona fide requirement.

"...if the parent group decides to use part of the premises in possession of another group company, it cannot be assumed that there is induction of third party in the premises. Even if there is transmission of some amount between the two group entities, the same may be for accounting purposes and the same ipso facto does not create presumption of creation of tenancy or a commercial license in favour of the third party.", it ruled. 

The landlord, an automobile dealer, had sought eviction of its tenant from one of four industrial sheds in Goregaon, claiming it required additional space to expand its business.

Although the trial court accepted that the business was growing and genuinely required more space, it dismissed the suit after concluding that the landlord had inducted Automart India Ltd. into another shed for consideration, which defeated its claim of bona fide requirement.

The appellate court reversed that finding after holding that Automart India Ltd. formed part of the same Sah and Sanghi business group as the landlord and that its occupation did not amount to the induction of a third party.

Before the High Court, the tenants argued that the landlord had granted a licence over one of its sheds to Automart India Ltd. for consideration, demonstrating that its claim of requiring the premises for business expansion was not genuine.

They also contended that licenses granted to other entities during the pendency of the litigation had extinguished the landlord's bona fide requirement.

Rejecting those submissions, the court noted that the landlord had led uncontroverted evidence showing that both it and Automart India Ltd. belonged to the Sah and Sanghi Group and that the latter had been temporarily permitted to occupy part of the premises for the group's second-hand car business.

The witness who gave this evidence was not cross-examined on those aspects. The High Court held that the trial court ignored this evidence and wrongly relied on the payment made between the two entities to conclude that Automart India Ltd. had been inducted as a third party.

The court further held that the appellate court rightly treated the payment as an internal economic arrangement between group companies rather than evidence of a tenancy or commercial license.

On the tenants' reliance on subsequent events, the court held that the landlord's bona fide requirement had not ceased merely because it commercially utilised portions of its property during the prolonged litigation.

It observed that a landlord cannot be expected to keep available premises vacant while litigation remains pending and is entitled to make economic use of them until it recovers possession of the premises required for expansion.

"It is incomprehensible that the Defendant makes the landlord take additional premises on rent and continue occupying the premises owned by the landlord.", the court opined. 

The court also noted that the landlord had consistently established that it required about 20,000 square feet for expanding its business and that the requirement remained unmet even after it recovered possession of another shed.

Finding no error in the appellate court's conclusions, the High Court dismissed the revision application and granted the tenants three months to hand over vacant possession of the premises.