Mortgage vs. Local Tenancy & Third-Party Rights: Bona Fide Tenants, Rent Control Protections & Defending Possession under Harshad Govardhan

Interlocking Mortgage with Local Tenancy & Third-Party Rights: Section 17(4A) Inquiries & Tenant Protection Mechanisms

Published by: Sumanjari & Co. Advocates

Section 1: Executive Overview & Practical Reality

The creation of an institutional equitable mortgage over real estate in India is rarely an unencumbered, single-ownership affair. In the complex socio-economic landscape of Indian property ownership—especially across the commercial and residential hubs of Uttar Pradesh like Lucknow, Kanpur, Prayagraj, and Western UP—real estate is densely interwoven with pre-existing tenancy agreements, long-term commercial leases, unpartitioned coparcenary shares, and informal family arrangements. When a primary borrower defaults, institutional lenders routinely treat the mortgaged property as a vacant, clean asset ready for immediate seizure and e-auction, completely disregarding the subsisting legal rights of third-party occupants, bona fide tenants, and innocent co-owners.

In practical recovery litigation before Debt Recovery Tribunals (DRT Lucknow and DRT Allahabad), this clash of rights represents one of the most fiercely contested battlegrounds. Authorized officers frequently attempt to paint every tenant, lessee, or co-sharer as a "fraudulent plant" introduced by the defaulting borrower to stall recovery. Conversely, unscrupulous borrowers often attempt to manufacture backdated, unregistered tenancy agreements on non-judicial stamp paper in the names of domestic servants or distant relatives to defeat bank auctions. The introduction of Section 17(4A) into the SARFAESI Act by the 2016 legislative amendment provided a structured judicial forum for the DRT to conduct substantive, evidence-based inquiries to separate authentic third-party property rights from collusive shams.

For legal strategists and third-party rights holders, navigating a Section 17(4A) inquiry requires a clinical mastery of documentary and statutory thresholds. Demonstrating the validity of a lease under Section 65A of the Transfer of Property Act, 1882, establishing undivided co-ownership under Section 44 of the Transfer of Property Act, and proving continuous possession through electronic banking trails and municipal records enables legitimate occupants to restrain bank dispossession and preserve their substantive legal estate.

Section 2: Statutory & Regulatory Framework

The substantive and procedural rules governing third-party rights and tenancy disputes under securitisation law are codified across multiple statutes:

• Section 17(4A) of the SARFAESI Act, 2002 (Legislative Mandate): Added by Parliament pursuant to the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (Act 44 of 2016). It vests the Debt Recovery Tribunal with exclusive jurisdiction to examine and decide claims of tenancy or leasehold rights over secured assets:"Where— (i) any person, in an application under sub-section (1), claims any tenancy or leasehold rights upon the secured asset, the Debts Recovery Tribunal, after examining the facts of the case and evidence produced by the parties in relation to such claims shall, for the purpose of deciding such application, consider whether any leasehold rights have been acquired in accordance with section 65A of the Transfer of Property Act, 1882 (4 of 1882) or any other law for the time being in force..."If the DRT determines that the tenancy claim is lawful and valid, it is statutorily empowered under Section 17(4A)(b) to pass an order declaring that the tenant shall not be dispossessed, or directing that the secured asset shall be auctioned subject to the rights of the lawful lessee.
• Section 65A of the Transfer of Property Act, 1882 (Mortgagor's Power to Lease): Governs the validity of leases created by a mortgagor during the subsistence of a mortgage. Unless a contrary intention is expressed in the mortgage deed, a mortgagor in lawful possession has statutory authority to create leases that bind the mortgagee, provided:
• The lease is made in the ordinary course of property management;
• It reserves the best rent that can reasonably be obtained, with no fine or premium paid or promised;
• No rent is paid in advance for more than one month;
• It contains no covenant for renewal; and
• The duration of the lease does not exceed three years.
• Section 17 and Section 49 of the Registration Act, 1908: Under Section 17(1)(d), leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent, are compulsorily registrable. Under Section 49, an unregistered lease document cannot affect any immovable property comprised therein or be received as evidence of any transaction affecting such property, other than as collateral evidence of the character of possession under the proviso to Section 49.
• Section 44 of the Transfer of Property Act, 1882 (Transfer by Co-owner): Where one of two or more co-owners of immovable property legally transfers his share of such property or any interest therein, the transferee acquires the transferor's share, but does not acquire the right to joint possession or other common enjoyment of a dwelling-house belonging to an undivided family. Where a borrower mortgages an undivided share in a family home, the bank cannot take physical possession of the entire house under Section 13(4) or Section 14; its remedy is strictly confined to filing a civil suit for partition.
• Section 34 of the SARFAESI Act, 2002 (Bar of Civil Court Jurisdiction): Extinguishes civil court jurisdiction in respect of matters which the DRT is empowered to determine under the Act. Consequently, third-party tenants and co-owners cannot file civil injunction suits against the bank; their exclusive, mandatory statutory forum is the DRT under Section 17(1) read with Section 17(4A).

Section 3: Landmark Judicial Precedents

Judicial jurisprudence establishing the boundaries of Section 17(4A) inquiries has been settled by the Supreme Court of India:

• Bajarang Shyamsunder Agarwal v. Central Bank of India & Anr. (2019) 9 SCC 94 (3-Judge Bench): The definitive three-judge bench authority synthesizing the clash between the SARFAESI Act and the Transfer of Property Act. The Supreme Court laid down:"The newly inserted Section 17(4A) of the SARFAESI Act clothes the DRT with express jurisdiction to evaluate the existence and validity of tenancy claims. In adjudicating such claims, the DRT must apply a rigorous standard: (i) If the lease was created prior to the mortgage, the tenant's rights are paramount and the bank cannot dispossess him without following due process under tenancy laws; (ii) If the lease was created after the mortgage in strict compliance with Section 65A of the Transfer of Property Act, the tenant is protected for the duration of the three-year term; (iii) If the lease is created post-mortgage in breach of Section 65A or an express negative covenant, it is not binding on the bank, but the occupant cannot be thrown out without reasonable notice."
• Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd. (2014) 6 SCC 1: The Supreme Court authoritatively held that the right to property under Article 300A encompasses leasehold interests. A lawful tenant cannot be summarily evicted by an executive order under Section 14 without an adjudication of his rights. The Court held that even during an auction under Section 13(4), the bank can only sell the landlord's reversionary interest, and the purchaser takes the property subject to the lawful tenant's leasehold rights.
• Indian Bank v. Nippon Enterprises South & Ors. (2016) 13 SCC 597: The Supreme Court held that where a tenancy is created on the strength of an unregistered lease deed for a period exceeding one year, such lease is void under Section 107 TPA and Section 17 of the Registration Act. The tenant becomes a month-to-month tenant whose tenancy can be terminated by a fifteen-day notice under Section 106 TPA. Consequently, an unregistered multi-year lease deed cannot shield a tenant from SARFAESI possession.
• P.M. Associates v. IFCI Ltd. & Ors. (Supreme Court of India / Madras High Court): Affirmed that while Section 34 bars civil court suits, Section 17(4A) provides an expansive, complete statutory remedy for any third party whose civil rights are jeopardized by bank recovery. The DRT possesses all the powers of a civil court to record evidence, inspect original title deeds, and protect third-party rights.
• Gautam Gupta v. State of U.P. & Ors. (Allahabad High Court, Lucknow Bench): The High Court ruled that where a borrower mortgaged an undivided co-parcenary property without the consent of non-borrowing co-owners, the bank's Authorized Officer cannot execute physical eviction against the non-borrowing family members residing in the dwelling-house. The bank must seek partition before taking physical custody.

Section 4: Stage-by-Stage Procedural Roadmap

To successfully prosecute a third-party or tenancy claim in a Section 17(4A) inquiry before the DRT, litigants must execute a precise evidentiary roadmap:

• Step 1: Forensic Verification of Tenancy & Co-Ownership Title (Days 1 to 5):
• Examine the Title Deed and registered Memorandum of Deposit of Title Deeds (MODTD). Determine whether the borrower was the sole owner or merely a co-sharer in undivided joint family property.
• If claiming tenancy, determine the exact date of mortgage creation from the Bank's CERSAI registry report. Compare the CERSAI date against the execution and registration date of the Lease Deed.
• Verify registration compliance under Section 17 of the Registration Act, 1908. Ensure that proper stamp duty under the Indian Stamp Act, 1899 (as applicable in Uttar Pradesh) was paid on the lease document.
• Step 2: Collation of Objective Financial & Possession Evidence (Days 6 to 12):
• Obtain certified bank ledger statements of the tenant showing regular monthly rent deductions via NEFT/RTGS/Cheque directly into the landlord's account spanning at least twelve (12) months prior to the date of NPA.
• Gather statutory business registrations: GST registration certificate, MSME Udyam registration, Shops and Establishment Act license, Factory License, and Food Safety (FSSAI) license reflecting the secured asset address.
• Collate utility bills: electricity connection, broadband service accounts, and municipal water tax receipts in the name of the tenant or third party.
• Step 3: Drafting & Filing the Section 17(4A) Securitisation Application (Days 13 to 25):
• Draft a comprehensive application under Section 17(1) read with Section 17(4A) of the SARFAESI Act before the jurisdictional Debt Recovery Tribunal (DRT Lucknow or DRT Allahabad).
• Frame specific prayers: (a) Declare that the Applicant has lawful, subsisting leasehold rights under Section 65A TPA / prior to mortgage; (b) Set aside any Section 13(4) possession notice or Section 14 eviction order to the extent of the Applicant's demised premises; and (c) In the alternative, direct that if any auction is conducted under Rule 8 and 9, it must be conducted strictly "as is where is, subject to the lawful subsisting lease of the Applicant".
• Step 4: Moving Urgent Application for Interim Injunction (Immediate):
• Move an urgent application under Rule 12 of the DRT (Procedure) Rules, 1993 seeking an immediate ad-interim injunction restraining the Bank, its Authorized Officer, the District Magistrate, and the executing Tehsildar from dispossessing the Applicant or sealing the premises.
• Offer to deposit future monthly rent into an escrow account or pay it directly to the secured creditor to extinguish any allegation of collusion.
• Step 5: Conducting the Section 17(4A) Evidentiary Trial:
• Lead evidence on affidavit. If the bank alleges that the lease is a collusive sham, move an application for the cross-examination of the bank's inspecting valuer or branch manager to prove that the tenant was openly occupying the premises during pre-sanction site inspections.

Section 5: Tactical Offenses, Defenses & Critical Pitfalls to Avoid

Litigating interlocking mortgages and third-party rights requires acute awareness of procedural traps and tactical maneuvers:

• Tactical Offenses:
• The CERSAI Search Report Weapon: Under Section 26D of the SARFAESI Act, no secured creditor can exercise enforcement powers under Chapter III unless the security interest is registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI). If the bank delayed CERSAI registration and the lease was registered prior to the CERSAI registration date, the tenant's registered rights take precedence.
• Escrow Attornment Strategy: Formally offering to pay contractual rent to the bank under Section 13(4)(d) turns the tenant into a source of debt servicing rather than a recovery obstacle. This significantly shifts the balance of convenience in favor of an interim stay before the DRT Presiding Officer.
• Co-Owner's Section 44 TPA Shield: Where an undivided coparcenary property was mortgaged by one brother without partition, the non-borrowing brothers residing in the home can halt physical eviction. Under Section 44 TPA, a bank cannot take joint possession of a family dwelling-house; it must buy out the share and sue for partition in a civil court.
• Lender Defenses to Anticipate: Bank counsel will aggressively cite Hemraj Salian and Nippon Enterprises to argue that the lease is an unregistered sham executed on backdated stamp paper without bank consent. They will argue that the rent is grossly below market rates, proving a collusive attempt to siphon property value. Defeat this by producing unassailable banking records, tax filings, and third-party business transactions.
• Critical Pitfalls to Avoid:
• Relying on Backdated Unregistered Rent Slips: Producing unregistered rent agreements executed on Rs. 100 stamp paper for multi-year tenancies is fatal before the DRT. The Tribunal will reject them under Section 49 of the Registration Act.
• Filing Civil Suits in District Courts: Filing a suit for permanent injunction before a Civil Judge against bank recovery is barred under Section 34 of the SARFAESI Act. The suit will be dismissed under Order VII Rule 11 CPC, resulting in wasted time while the bank executes physical possession. Always approach the DRT under Section 17(4A).
• Failure to Challenge the Underlying 13(4) Notice: Even if you are a third-party tenant, your Section 17(4A) petition must be instituted within forty-five (45) days of the date of knowledge of the Section 13(4) possession notice or Section 14 order. Delay without condonation can lead to dismissal on limitation.

Section 6: Ready-to-Use Court Drafting Template

Below is an unabridged, practical model legal pleading specifically drafted as a Securitisation Application under Section 17(1) read with Section 17(4A) of the SARFAESI Act, 2002, filed before the Debts Recovery Tribunal, Lucknow, on behalf of a bona fide commercial tenant defending a 9-year registered leasehold interest against coercive recovery by Indian Bank.

IN THE DEBTS RECOVERY TRIBUNAL AT LUCKNOW

SECURITISATION APPLICATION NO. _______ OF 2026

(UNDER SECTION 17(1) READ WITH SECTION 17(4A) OF THE SARFAESI ACT, 2002)

IN THE MATTER OF:

M/s Awadh Health Diagnostics Private Limited

Having its Registered Diagnostic Center at: Ground & First Floor, Commercial Building No. 24, Rana Pratap Marg, Hazratganj, Lucknow - 226001

Through its Director, Dr. Prashant Shekhar ... APPLICANT / BONA FIDE LESSEE

VERSUS

1. Indian Bank

(Erstwhile Allahabad Bank), Stressed Assets Recovery Branch, Main Branch Building, Hazratganj, Lucknow - 226001

Through its Chief Manager & Authorized Officer ... RESPONDENT NO. 1 / SECURED CREDITOR

2. M/s Awadh Commercial Infrastructure Private Limited

Through its Managing Director, Shri Samar Bahadur Singh

Having Registered Office at: Hazratganj, Lucknow ... RESPONDENT NO. 2 / BORROWER / LESSOR

SECURITISATION APPLICATION UNDER SECTION 17(1) READ WITH SECTION 17(4A) OF THE SARFAESI ACT, 2002 PRAYING FOR ADJUDICATION AND PROTECTION OF REGISTERED LEASEHOLD RIGHTS OVER THE DEMISED PREMISES AND STAY OF POSSESSION NOTICE DATED 8TH SEPTEMBER 2026 AND SECTION 14 PROCEEDINGS.

MOST RESPECTFULLY SHOWETH:

1. That the Applicant is a premier medical diagnostic healthcare company operating an advanced multi-specialty diagnostic and imaging center (MRI, CT Scan, Pathology) at Ground & First Floor, Commercial Building No. 24, Rana Pratap Marg, Hazratganj, Lucknow, catering to over three hundred (300) patients daily.

2. That the Applicant is the lawful, bona fide registered lessee in peaceful physical and continuous possession of the demised premises by virtue of a duly Registered Lease Deed dated 15th October 2020, executed by Respondent No. 2 (Landlord/Mortgagor) in favor of the Applicant, registered in Book No. 1, Volume No. 4920, Pages 112 to 145 at Serial No. 7412 of 2020 in the Office of the Sub-Registrar-I, Lucknow. The lease was granted for a fixed term of nine (9) years, commencing from 1st November 2020 and subsisting up to 31st October 2029. A certified copy of the Registered Lease Deed is annexed hereto as ANNEXURE A-1.

3. That the Applicant is aggrieved by the unlawful actions of Respondent No. 1 Bank, which has issued a purported Possession Notice dated 8th September 2026 under Section 13(4) of the SARFAESI Act, and has further instituted proceedings under Section 14 before the District Magistrate, Lucknow, seeking summary police deployment to seal the diagnostic center and throw out life-saving medical imaging equipment.

4. APPLICANT'S REGISTERED LEASEHOLD INTEREST IS PRIOR IN TIME TO THE MORTGAGE:

(a) That the Applicant entered into lawful registered possession on 15th October 2020. As per the recitals in the Bank's own Section 13(2) notice, the equitable mortgage over the building was created by Respondent No. 2 in favor of Respondent No. 1 only on 24th December 2021, i.e., more than fourteen (14) months subsequent to the Applicant's registered lease.

(b) That at the time of sanctioning the loan, Respondent No. 1 Bank was fully aware of the Applicant's open, active, and registered commercial occupation. The pre-sanction inspection report and valuation report prepared by the Bank's approved valuer explicitly record: "Ground and First Floor occupied by Awadh Health Diagnostics under registered lease."

5. STATUTORY MANDATE UNDER SECTION 17(4A) OF THE SARFAESI ACT:

(a) That under Section 17(4A) of the SARFAESI Act, 2002, this Hon'ble Tribunal is vested with exclusive jurisdiction to examine tenancy claims and determine whether leasehold rights have been lawfully acquired.

(b) That in the landmark three-judge bench judgment of the Hon'ble Supreme Court in Bajarang Shyamsunder Agarwal v. Central Bank of India (2019) 9 SCC 94 and Harshad Govardhan Sondagar v. International Assets Reconstruction Co. Ltd. (2014) 6 SCC 1, it was authoritatively held that where a registered lease was executed prior to the creation of the mortgage, the tenant's possession is inviolable. The secured creditor has no authority under Section 13(4) or Section 14 to dispossess the tenant prior to the lawful expiry of the lease period.

6. AUTHENTICITY OF COMMERCIAL TURNOVER & REGULAR RENT TRANSMISSION:

(a) That the Applicant has been scrupulously paying a monthly contractual rent of Rs. 3,50,000/- plus applicable GST directly to Respondent No. 2 via RTGS banking transfers from its current account maintained with State Bank of India, Main Branch, Hazratganj, Lucknow.

(b) That the certified bank ledger statements for the last forty-eight (48) months, along with TDS (Tax Deducted at Source) Certificates (Form 16A) deposited under Section 194-I of the Income Tax Act, 1961 with the Central Government, are annexed hereto as ANNEXURE A-2 (COLLY). These unassailable public tax records conclusively disprove any allegation of collusion.

7. IRREPARABLE INJURY TO PUBLIC HEALTHCARE & HEAVY MEDICAL CHATTELS:

(a) That the demised premises house specialized superconductive MRI machines and CT Scanners valued at over Rs. 14,00,00,000/- (Rupees Fourteen Crores Only), operating with supercooled liquid helium. Any sudden disconnection of electrical power or forceful physical sealing of the building will cause catastrophic quenching of the magnetic coils, destroying the imaging equipment and disrupting critical diagnostic reports of hundreds of ICU patients across Lucknow hospitals.

(b) That the medical machinery and diagnostic equipment are the exclusive, unencumbered commercial property of the Applicant, over which Respondent No. 1 Bank has no security interest or lien whatsoever.

8. OFFER OF DIRECT ATTORNMENT OF RENT UNDER SECTION 13(4)(d):

(a) That the Applicant hereby makes an unconditional, solemn offer to this Hon'ble Tribunal to attorn its tenancy in favor of Respondent No. 1 Bank and deposit the entire monthly rent of Rs. 3,50,000/- directly into the loan recovery account of Respondent No. 2 from October 2026 onwards until the recovery claim is satisfied or the lease expires on 31st October 2029.

PRAYER:

Wherefore, in light of the aforesaid facts and legal grounds, the Applicant respectfully prays that this Hon'ble Tribunal may graciously be pleased to:

(a) Exercise jurisdiction under Section 17(4A) of the SARFAESI Act, 2002 and declare that the Applicant is a lawful, bona fide registered lessee in physical possession of Ground & First Floor of Commercial Building No. 24, Rana Pratap Marg, Hazratganj, Lucknow under the subsisting Registered Lease Deed dated 15th October 2020, valid up to 31st October 2029;

(b) Set aside and quash the impugned Possession Notice dated 8th September 2026 issued by Respondent No. 1 under Section 13(4) in so far as it pertains to the demised leasehold premises of the Applicant;

(c) Issue a permanent direction restraining Respondent No. 1, its officers, recovery agents, the District Magistrate, Lucknow, and local police from dispossessing the Applicant, sealing the diagnostic premises, or interfering with patient care and clinical operations until 31st October 2029;

(d) Direct that any auction sale of the subject commercial property conducted by Respondent No. 1 shall be strictly conducted "subject to the subsisting registered leasehold rights of the Applicant" in terms of Section 17(4A)(b) of the Act;

(e) Permit the Applicant to deposit the monthly contractual rent of Rs. 3,50,000/- directly with Respondent No. 1 Bank; and

(f) Grant an ex-parte ad-interim stay in terms of Prayers (b) and (c) during the pendency of the present Securitisation Application.

Dated: 22nd September 2026

Place: Lucknow

APPLICANT

THROUGH

SUMANJARI & CO. ADVOCATES

Counsel for the Applicant

Chamber No. D-311, Block D, Allahabad High Court, Lucknow Bench

Section 7: Practical FAQs

• If an auction purchaser buys a mortgaged property in an e-auction, can they immediately evict a lawful pre-mortgage tenant?Answer: No. Under the Supreme Court's ruling in Harshad Govardhan Sondagar (2014) 6 SCC 1 and Section 17(4A) of the SARFAESI Act, an auction purchaser acquires only the reversionary rights and title of the borrower/landlord. If a valid registered lease was created prior to the mortgage, the auction purchaser steps into the shoes of the landlord and is entitled to receive the contractual rent, but cannot physically dispossess the tenant until the lawful contractual term of the lease expires, or unless eviction is obtained under the applicable state rent control laws on specific statutory grounds (e.g., non-payment of rent or bona fide personal need).
• What is the legal standing of an unregistered 11-month rent agreement during a Section 17(4A) inquiry?Answer: An unregistered rent agreement for 11 months is legally valid under the Transfer of Property Act and the Registration Act, as only leases exceeding one year are compulsorily registrable under Section 17(1)(d). However, during a Section 17(4A) inquiry, the DRT treats unregistered 11-month agreements with extreme skepticism because they are easily manufactured and backdated. To succeed, the occupant must substantiate the unregistered agreement with overwhelming independent proof: continuous bank rent transfers, GST/trade tax registrations at the address, electricity connection in the tenant's name, and third-party delivery proofs existing prior to the date of the Section 13(2) notice. If established, the tenant is protected, at minimum, as a month-to-month tenant entitled to a 15-day notice under Section 106 TPA.
• Can a non-borrowing co-owner prevent the bank from taking possession of an undivided residential property?Answer: Yes. Where a property is joint Hindu family property or owned jointly by co-owners, and only one co-owner mortgages their undivided share to the bank, the bank does not acquire exclusive proprietary rights over the entire physical structure. Under Section 44 of the Transfer of Property Act, 1882, the transferee of an undivided share in a family dwelling-house is not entitled to joint physical possession or common enjoyment. The bank's Authorized Officer cannot evict the non-borrowing co-owners under Section 13(4) or Section 14. The bank's lawful remedy is to take symbolic possession of the undivided fractional share and file a civil partition suit in a competent civil court to demarcate and separate the debtor's portion.
• Can the Debt Recovery Tribunal order an oral evidentiary trial with witness cross-examination under Section 17(4A)?Answer: Yes. While DRT proceedings are generally summary and conducted on affidavits under the Debts Recovery Tribunal (Procedure) Rules, 1993, Section 17(4A) specifically commands the Tribunal to "examine the facts of the case and evidence produced by the parties in relation to such claims". Where serious disputed questions of fact arise—such as allegations by the bank that a lease is fabricated or counter-allegations that the bank's valuer inspected the tenant's premises prior to loan sanction—the DRT Presiding Officer has full judicial power to permit oral evidence, summon witness records, and permit cross-examination to arrive at a conclusive finding of bona fide tenancy.

Sumanjari & Co. Advocates

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