Can a Bank Evict Your Tenant Under SARFAESI? The Bajarang Agarwal Three-Tier Tenancy Test

The Statutory Question

When a borrower defaults and a bank invokes Section 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), it may take possession of the mortgaged property "without the intervention of the court". But a great many mortgaged flats and shops are not empty; they are occupied by tenants. The question the Supreme Court settled on 11 September 2019 in Bajarang Shyamsunder Agarwal v. Central Bank of India, reported at 2019 (9) SCC 94 (AIR 2019 SC 5017), was deceptively simple: when the bank walks in to enforce its security, does the tenant walk out with the defaulting landlord, or does the lease survive?

The conflict is structural. On one side stands Section 35 of the SARFAESI Act, 2002, a non-obstante clause that gives the Act overriding effect over other inconsistent laws. On the other side stand two protective regimes that pre-date SARFAESI by decades: the various State Rent Control Acts, some tracing to the 1940s, and the Transfer of Property Act, 1882, whose Section 65A governs a mortgagor's power to grant leases. A tenant paying rent under a Rent Control statute believes the law shields him from eviction; the bank, having issued a 60-day demand notice under Section 13(2) SARFAESI, believes Parliament handed it a fast-track remedy in 2002 precisely to cut through such delays.

Justice N.V. Ramana, writing for the Bench, refused to let either side win outright. Instead the judgement of 11 September 2019 built a three-tier test that turns on two facts: the date the tenancy was created relative to the mortgage, and whether the tenant holds a registered instrument. This article explains that test, the reasoning behind it, and what it means in practice for tenants, borrowers and lenders.

Why does this recur so often? A loan account becomes a non-performing asset once instalments are overdue for 90 days under the RBI's income-recognition and asset-classification norms, and only after that classification can a bank issue the Section 13(2) notice and move toward possession. By the time the 60-day notice period expires, the property has frequently been let out, sometimes lawfully and sometimes as a stalling tactic, so the collision between a 2002 recovery statute and an occupant claiming rent-control shelter is not a rare edge case but the ordinary texture of SARFAESI enforcement.

What the Court Held

The holding in Bajarang Agarwal reconciles tenant protection with secured-creditor rights through three distinct rules, each attaching to a different factual situation. The 2019 Bench did not create a blanket rule that all tenants lose or all tenants stay; it graded protection by documentation and timing.

Tier one: a valid tenancy created before the mortgage is protected and cannot be disturbed by the secured creditor. The logic is that the bank's security interest attaches to the property as it stood on the date of the mortgage, and if a lawful tenant was already in occupation, the mortgagee took its security subject to that lease.

Tier two: a tenancy created after the mortgage binds the bank only if it satisfies Section 65A of the Transfer of Property Act, 1882. A mortgagor in possession may grant a lease, but only within the statutory limits of Section 65A; a lease that exceeds those limits or prejudices the mortgagee does not bind the secured creditor.

Tier three: a tenant claiming possession beyond one year must produce a registered lease instrument. An unregistered or oral tenancy cannot extend beyond the statutory one-year period as against the secured creditor, and here Section 35 SARFAESI operates to override inconsistent laws, including Rent Control Acts, where the tenancy is undocumented or arose after the Section 13(2) demand notice.

The table below distils the 11 September 2019 holding into its operative parts.

Reasoning

The Court's reasoning in the 2019 judgement moved along three connected lines: the primacy of the non-obstante clause, the disciplining role of registration, and the limits placed on a mortgagor by Section 65A. Each deserves separate treatment because each answers a different objection a tenant might raise.

The non-obstante clause and Rent Control

Section 35 SARFAESI states that the Act has effect notwithstanding anything inconsistent contained in any other law. The tenant in Bajarang Agarwal leaned on Rent Control protection, arguing that a statute of the 1940s vintage shielded him regardless of the mortgage. The Court held that Section 35 allows SARFAESI, a 2002 enactment, to prevail over inconsistent provisions of a Rent Control Act, but crucially only where the tenancy is undocumented or arose after the Section 13(2) demand notice. This is the hinge: the non-obstante clause is not a bulldozer that flattens every lease. It bites where the tenant cannot show a lawful, documented tenancy that predates the bank's rights. A genuine, provable pre-mortgage tenant is not "inconsistent" with SARFAESI at all, because the bank never acquired rights over that occupancy in the first place.

Registration as the test of good faith

The second strand of reasoning is evidentiary. Indian property law has long insisted, under Section 107 of the Transfer of Property Act, 1882, that a lease from year to year or for any term exceeding one year be made by a registered instrument. The Court used this pre-existing rule to prevent a common abuse: a defaulting borrower, on receiving the Section 13(2) notice, manufacturing a backdated or oral "tenancy" to a friend or relative to stall the bank. By insisting that any claim to possession beyond one year rest on a registered lease, the 2019 Bench made documentation the gatekeeper. An oral or unregistered tenancy simply cannot be stretched past the one-year statutory ceiling to defeat a Section 13(4) enforcement. Registration, in other words, becomes the proxy for good faith.

Section 65A and the mortgagor's limited power to lease

The third line addresses the awkward middle case: a real tenant who moved in after the mortgage was created. Here the Court invoked Section 65A of the Transfer of Property Act, 1882, which permits a mortgagor in lawful possession to grant leases, but only on the conditions the section lays down, including restrictions on the duration of leases of non-agricultural property and a prohibition on terms that prejudice the mortgagee. A post-mortgage lease that complies with Section 65A binds the bank; one that does not, cannot be set up against the secured creditor. This is the doctrinal engine behind tier two: the mortgagor cannot, by his own act of leasing after pledging the property, defeat the very security he created after the mortgage deed was executed.

Read together, the three strands produce a coherent rule of priority. A tenant who can prove a lawful tenancy predating the mortgage keeps the protection that existed before SARFAESI ever touched the asset; a post-mortgage tenant survives only within the narrow lane Section 65A of the 1882 Act allows; and anyone claiming possession beyond one year without a registered instrument under Section 107 falls to the overriding force of Section 35 SARFAESI. The 2019 Bench thus preserved genuine tenancy rights while closing the door on the manufactured, post-notice lease that had, for years, blunted the fast-track remedy Parliament designed in 2002.

Practical Takeaways

The 11 September 2019 ruling is not academic. It changes how tenants, borrowers and lenders should paper their arrangements from day one. Below are the concrete lessons, grouped by who you are.

If you are a tenant in a mortgaged property:

• Get your lease registered if it runs beyond one year. Under Section 107 of the Transfer of Property Act, 1882, an unregistered lease will not help you resist a Section 13(4) SARFAESI possession, however long you have actually lived there.
• Establish the date. If your tenancy pre-dates the mortgage, preserve documentary proof (the registered lease, municipal records, rent receipts spanning years) so you can invoke tier one of the Bajarang Agarwal test.
• If your tenancy began after the mortgage, check whether it complies with Section 65A of the Transfer of Property Act, 1882; a term that prejudices the mortgagee will not bind the bank.
• Your forum is the Debts Recovery Tribunal under Section 17 SARFAESI, not a civil court. Read our glossary note on the DRT before you file.

If you are a borrower who has mortgaged a tenanted property:

• Do not attempt to create a fresh tenancy after the Section 13(2) demand notice. Post-notice tenancies fall squarely into tier three and are overridden by Section 35 SARFAESI.
• Understand the timeline: the bank must give 60 days under Section 13(2), and you have a right of representation under Section 13(3A), to which the creditor must reply with reasons within 15 days.

If you are a lender or auction purchaser:

• Conduct tenancy due diligence as on the mortgage date, not just the auction date. A pre-mortgage registered tenant survives and reduces the realisable value of the asset.
• Where occupancy is oral, undocumented, or post-notice, Section 35 SARFAESI read with the 2019 judgement supports proceeding under Section 14 for physical possession.

The table below maps the SARFAESI enforcement timeline that frames every one of these situations.

Because a SARFAESI action almost always begins with a home or property loan gone bad, borrowers weighing their exposure should first understand their own repayment maths; our home loan EMI calculator shows exactly how a missed-instalment slide toward NPA classification builds over the 90-day window RBI norms prescribe. Non-resident landlords whose Indian property is mortgaged face an added layer, because rental income and any eventual sale proceeds carry tax and remittance consequences; the NRI tax calculator and the repatriation calculator help you model those flows before a dispute crystallises. For the statutory backbone itself, keep our SARFAESI glossary entry open as you read the sections.

FAQ

Can a bank evict my tenant if my tenancy started before the mortgage?

No. Under tier one of the Bajarang Agarwal test (2019 (9) SCC 94), a valid tenancy created before the mortgage is protected and cannot be disturbed by the secured creditor. The bank's security interest attaches to the property as it stood on the mortgage date, so it takes the asset subject to your pre-existing lease. Keep documentary proof that the tenancy predates the mortgage.

What does Section 65A of the Transfer of Property Act require?

Section 65A of the Transfer of Property Act, 1882 governs a mortgagor's power to grant leases while in lawful possession. Under tier two of the 11 September 2019 ruling, a tenancy created after the mortgage binds the bank only if it satisfies Section 65A, which restricts the mortgagor from granting leases that prejudice the mortgagee, including limits on the duration of leases of non-agricultural property.

Do I need a registered lease to resist a SARFAESI possession?

For any occupation beyond one year, yes. The Court held that a tenant claiming possession beyond one year must produce a registered lease instrument, consistent with Section 107 of the Transfer of Property Act, 1882. An unregistered or oral tenancy cannot be extended past the one-year statutory period against a secured creditor enforcing Section 13(4) SARFAESI.

How does Section 35 SARFAESI affect Rent Control protection?

Section 35 SARFAESI is a non-obstante clause that gives the 2002 Act overriding effect over inconsistent laws. In Bajarang Agarwal the Court held that where a tenancy is undocumented or arose after the Section 13(2) demand notice, Section 35 allows SARFAESI to prevail over Rent Control Acts, so a tenant cannot use rent-control protection to defeat the bank's possession in those circumstances.

Where does a tenant go to challenge a SARFAESI eviction?

A person aggrieved by a secured creditor's action under Section 13(4) may file an application before the Debts Recovery Tribunal under Section 17 SARFAESI. A tenant asserting a protected lease should approach the DRT rather than a civil court, and can rely on Bajarang Agarwal (2019 (9) SCC 94) to establish which of the three tiers of protection applies to the facts.

Does the bank need a court order to take physical possession?

Section 13(4) SARFAESI permits enforcement without the intervention of the court, but for physical possession the secured creditor usually applies under Section 14 to the Chief Metropolitan Magistrate or District Magistrate for assistance. The Bajarang Agarwal three-tier test is applied at that stage to decide whether an occupant is a protected tenant or must vacate the premises.